Nine things to do this financial year
It is a brand new financial year and time for a brand new start. Yes, the financial climate remains inclement with the West in the middle of a recession and the rest of the world struggling to cope with the collateral damage. The effect on the stock market, considered the barometer of the economy, has been nothing less than brutal. And investors, risk spooked as they are, don’t know which way to turn. Well, all I will say is that it is important that one doesn’t get carried away and continues life with feet firmly on the ground. Therefore, in an effort to keep things in perspective I have compiled a list of some basic financial doctrines that one should follow no matter how much the panic (or in good times, the exuberance) all around.
PPF — a sine qua non
I will go to the extent of saying that without exception, every Indian, male or female, whether employed or having a business, married or unmarried, should have a Public Provident Fund (PPF) account ticking for them. Leave aside the tax deduction, leave aside the 8% tax-free interest —- this is your social security. Over 16 years, an annual contribution of Rs 70,000 grows to over Rs 21 lakh, which is almost 30 times the annual investment.
This capital, built over time, can serve multiple purposes such as catering to the education of children, medical emergencies and even retirement. Have an account in the name of each and every adult member of the family, even if not a taxpayer at present. Invest as much as you can up to the maximum limit of Rs 70,000 per annum. Remember, Rs 70,000 can be invested in each account separately. Invest at the beginning of the year. Do not shy away from PPF under the mistaken notion that funds are locked up for 16 long years. Yes, the term of PPF is 16 years, but the average lock-in is just six years. However, do not use the premature withdrawal facility, unless there is an emergency.
Arrangement between you & your spouse
Agreed, husband and wife have one mind and one soul. But not for income tax. It is crucial to have separate joint accounts, one for husband and wife and the other for wife and husband, even if one of them is not assessed to tax. Payment of EMIs, credit card bills and even investments, etc should be from the account of the person who is actually liable to pay for the expense or investment. This will help tremendously, especially while filing your tax return in the new ITR form which requires individual disclosures of high value transactions.
Buying a house
I find that very often, property is bought in the name of his wife by the husband using his own funds. Do not buy any housing property, residential or otherwise, in the name of the spouse with your funds. Do not do so even if you already possess a house. This creates insurmountable difficulties later on, especially when the house is to be sold.
Housing finance
In fact, even if you have the wherewithal to purchase your own house, it is better to opt for housing finance. Tax breaks are available only on borrowed funds and not on the use of owner’s equity. Moreover, in most cases, you will find that the direct cost of borrowing is much lesser than the tax saved. Real estate can be co-owned. Buy the property with both husband and wife having an equal share. The loan should also be taken equally and the interest and principal payments for the same should be made separately by each from their respective bank account.
If the above is carried out, each is entitled to an interest deduction of up to Rs 1.5 lakh under Sec. 24 and a principal deduction of Rs 1 lakh under Sec 80C. So, between the two of you, up to Rs 5 lakh of income will escape tax.
Life insurance
Life insurance is a necessity, if and only if, the demise of the bread winner would put immense financial pressure on the family members left behind. If that is not the case, leave insurance alone. Every product has its cost and so does insurance. Do not buy a product you do not need or buy excessive insurance which injures your financial health. In your effort to provide for the future of your family, do not rob it of its present. Insurance is like a life saving pill that is to be administered only when you need it. Otherwise, the side-effects of the pill may be worse than the imaginary disease. In any case, do not buy life insurance only because it forces compulsory savings or it saves taxes.
Do not buy insurance for your child. The child’s death, howsoever devastating on your emotional health, would make no difference to your financial status. If you are so inclined, make investments in the name of the child such that by the time he/she becomes a major, the funds would come in handy for needs such as marriage, further education, setting up of a business, etc.
If you do need a life cover, go in for low-premium, high-risk cover policy such as term insurance. In general, avoid high cost endowment and Ulips.
Mediclaim
Mediclaim is a must for all, taxpayers or otherwise, rich or poor, young or old, in view of the high cost of hospitalisation. If you haven’t bought a Mediclaim policy so far, do so now. There is a tax break of Rs 15,000 available, but that is not the point. Mediclaim is for the good of you and your family members —- the tax cut is just an added benefit.
Invest in equity mutual funds which have a track record
It is next to impossible to build wealth without equity exposure. Note that I use the word “wealth” and not capital. Wealth is when your capital brings a smile to your face. Saving a part of your salary in bonds or FDs is not going to do that.
Do not invest in equity directly unless you know what you are doing
This is more of a corollary to the above point. Mutual funds exist to cut stock market risk. People do more research and homework on the next cell phone they intend to buy than the next stock. Hard-earned money is invested in a ‘hot stock’ based on the recommendation of a friend, acquaintance or a stock market guru. I know of a friend who bought a stock based on a conversation between two strangers in the gym he went to. Needless to say, he is still waiting for the stock to move up. Remember, the only way to double your money quickly is to fold it into two. Otherwise, invest with a quality mutual fund, regularly, as much as you can, whenever you can.
Budget your spends
Last but not the least, budget your monthly expenses and make your investments at the beginning of the month, each month, month in month out. This way, there is no way that you can overspend and defer savings to the next month. Someone I know used to do this but then end up overspending on her credit card. I actually advised her to take a pair of scissors and cut the card into two. It took six months to get her finances back into shape. But today, she is debt free and financially much better off than what she was a year ago.
To conclude
You will appreciate that the abovementioned points really do not need much of one’s time and effort to put into practice. They also do not depend upon the level of the Sensex. In other words, whether the index reaches 5,000 or 25,000, these small things make all the difference between financial health or the lack of it.
The writer is director, Wonderland Consultants, a tax and financial planning firm.
--Sandeep Shanbhag / DNA
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