tax-saving Archives - GetRicher.in

Many salaried employees suddenly wake up in January and begin investing in various assets for tax planning for the financial year (which in India is from April to March of next year). They rush to take numerous insurance policies (usually from some LIC agent in their office) and by March they are pretty pissed out.

Reason: Almost all their salary for the three months (Jan/Feb/Mar) has gone to these unwanted tax savings and this is one of the main reason they begin to hate Income Tax.

It need not be like that. There is a reason it is called “tax planning“. The best time to begin planning your tax savings is in April – the beginning of the new financial year. Here’s why:

Easy on your pocket

If you split your investments into 12 months instead of trying to cram it all up in 3 months, the total outgo on your salary becomes manageable. Lets say your salary is Rs.50,000 per month and you have to invest Rs.1,00,000 in 80C. Investing Rs. 1 Lakh in 3 months is more than Rs.33,000 per month. While spread in 12 months is slightly above Rs.8300.

Which is easy? Taking home Rs.41700 per month for the entire year? or Rs. 16000 per month in the last 3 months? What would you do if you need some money for an emergency in February?

Which would you like? The first image? Or the second image?

Last Minute Tax Saving — Salary affected maximum in last 3 months

Regular Tax Planning — Salary affected minimum per month

Easy on your mind

Last minute rush can be taxing on your brain and you don’t want to be running all around the place to get your finance right. Especially if your Annual Performance Review is around the corner, you better spend all your creative power on your work and get a better pay raise than fighting the tax headache. Getting that higher salary can be much easier and more beneficial to the growth of your investments than you trying to save few hundreds of rupees here and there.

Investing Early

There is a saying “The best time to invest was Yesterday (or last year or 34 years back). The second best time to invest in today.” I have already shown you examples of how starting your investments early can make a significant difference to your retirement corpus. By beginning to invest today, your investments would be growing at a much faster rate than 90% of others around you. Remember this site is about getting richer than what you were yesterday, also richer than your friends/colleagues around you.

Investing in the correct products

Investment decisions cannot and should not be taken in a split second. You need to spend lot of time thinking about the various investments products and assets before putting your hard-earned money. Whatever asset classes you invest in, there will be a lot of volatility in the price – be in stocks, bonds, gold, real estate. Even your bank FD interest rates can change any day. When you have the time to think, you can invest your money in the correct products at the right time.

Systematic Investment

If you are young, majority of your investments should be equities. And equities is one of the most volatile asset. So what is the best method to invest in such products? Systematically. That is why mutual funds have monthly mode as the most common SIP (Systematic Investment Plan) option. If you put in your money every month, you are going to get on average much higher number of units than doing a lump sum payment.

Also if the markets are at the peak like in January 2008 you made a lump sum investment you would have gotten back your money only recently (after this election rally). You would have lost 6 whole years and that is a risk no one should take.

Conclusion

Remember these reasons when you think about tax planning or any investment for that matter. It is not that difficult as you can set almost everything up as automatic investments and you wouldn’t even have to think about it at all for the rest of the year.

I have talked about Public Provident Funds and how they are a safe form of investment. Salaried people would have also heard about EPF or Employees Provident Fund. Many have doubts about the difference between the two – whether both are necessary or can we have just one. Lets see what and how each scheme works and how they are different or similar to each other.

Provident Funds

Provident funds are Retirement Savings Scheme. Depending on the scheme you have the choice to regularly deposit money in your provident fund account. There are three advantages:

money deposited in this is exempted for income tax under section 80C.
any interest or returns you earn during the accumulation phase is also exempted from income tax
during withdrawal (after maturity) the money you get is also exempted from income tax.

This is what is referred to as EEE (Exempt-Exempt-Exempt) in income tax jargon. Most long-term savings or investments come under EEE. Both EPF and PPF enjoy the EEE status, so any money you put in helps you save taxes and any money you earn & take out is also tax-free.

Employee Provident Fund

This is a retirement benefit scheme available to salaried employees. Every month 12% of your basic salary + dearness allowance is deposited by the company into a EPF account held in your name. The company also needs to make an equal contribution to your account.

The employee can choose to contribute more than 12% of his salary (say 15% or 18%) if the scheme allows, but the employer is not obligated to match beyond the minimum 12%.

Some of the features:

Currently the rate of interest you earn on the money you have in your account is 8.75%. This rate is periodically adjusted for the entire financial year.
If you urgently require some money, you can take a loan against your EPF.
Premature withdrawal is not allowed unless there is a strong case for it – like buying a plot or house, education, wedding, medical treatment, etc. Each reason has specific rules and limits for withdrawal.
When you switch jobs, you can transfer the account to your new employer. This makes sure your compounded interest isn’t lost by closing and opening new account.
Withdrawal immediately after you quit your job is illegal, unless you couldn’t get a job for over 2 months.

The best part I personally like about EPF: You don’t even get to see the money deposited in your salary account, which means you can never spend this to buy anything unwanted. Many people fail to understand the amount of money they need at retirement. This is why the government has set up the rules so that your money automatically gets saved and taken care of. Don’t you love it when someone else takes care of your money problems?

Public Provident Fund

The Public Provident Fund is a retirement scheme run by the central government. Unlike EPF, any citizen can open a PPF account in his name. You can have your own business, be a consultant, work in a small company (which doesn’t come under EPF laws), even open a PPF account under your children’s names.

Anyone can open PPF account in any nationalised banks or post office branches. However each person can have only one PPF account in his name – across all banks and post offices. You can’t open an account in SBI and then goto ICICI bank to create another account – that is illegal.

You can deposit a maximum of Rs.1,00,000 per financial year in your PPF account and a minimum of Rs.500 is required every year to keep the account active. Your account is locked in for a period of 15 years, but you can extend it in blocks of 5 years every time.

Like EPF, you can take a loan against your PPF account, but only from the 3rd year of your account. If you open an account in this financial year (2014-15), you can take a loan from 2016-17. That too only up to a maximum of 25% of your balance at the end of first year. You can make withdrawals, but there are also lot of rules and limitations on how much you can withdraw and from which year.

I would suggest to never touch your money in Provident Funds as the compounded effect would be phenomenal when you get your check when you retire. PPF accounts earn interest at the rate of 8.7% (compounded annually) as of now and this rate is also updated occasionally. But the best part of PPF is, if you are bankrupt or involved in some legal dispute, a court cannot attach or ask for the money you have in your PPF account. That money is yours whatever happens.

Safety vs Returns

Since provident funds are run by and has the backing of the Government of India, it is the safest form of savings you can do for your retirement. Of course with higher safety your potential for growth is also reduced. If a person just uses provident funds for his retirement, he would be losing money with the current prevailing inflation rate. There needs to be a balance between safe investments and high return investments for better growth.

5 reasons to start your tax planning today