Monthly Archives: December 2016

Blog, Tax Planning and Investments

Tax Planning through Deductions Under Section 80C

All of us engage in some economic activity and work hard to make a living. But as you start doing so you tend to attract the attention of the Income Tax Department, as they too are doing their task of taxing your income, as you earn. Our Government earns its revenue from the direct and indirect taxes we pay. Without which they will not be able to spend on infrastructure, education, health care etc.

And thus as responsible citizens it’s our duty to pay our taxes on time and also as we work hard to make a living, it becomes imperative for us to work a little more harder and smarter to save our taxes (the legal way-Government has given us enough incentives to save on taxes and invest in order to create wealth for ourselves ), so that it can help us make our dreams come true.

This is the time of the year when you start getting mails and calls from your Human Resource Department, a department you thought did not exist 😉 The threatening mails and calls make you scramble here and there.The task you’ve been avoiding now stares at you. It’s tax saving time and your deadline is approaching.

Amazing coincidence, your Banker happens to call just then. Luck, by chance. And you find yourself signing a new policy document. One more policy to keep with the several others you already own. But did you know that there are several other—non-insurance—products that can get the same tax benefit that an insurance policy does. Even within insurance, there are plans that get tax deduction and work better as a life cover. But these remain the financial world’s best kept secrets.

Here’s a run-down of products that get you the Rs1.5 lakh deduction u/s of 80 C of the Income Tax Act 1961.(Under section 80C, a deduction of Rs 1,50,000 can be claimed from your total income. In simple terms, you can reduce up to Rs 1,50,000 from your total taxable income through section 80C. This deduction is allowed to an Individual or a HUF?

Zero Risk Products for you Tax Planning

These carries either a government guarantee or have a fixed interest payout. The first two products should form the core of your 80C investments. And if you exhaust the entire limit in this, no need to buy more.

1. Employees’ Provident Fund (EPF): The first scheme that you get to buy the minute you begin work as an employee. Under this,12% of your basic (including dearness allowance and retaining allowance, if any) goes to this fund and your employer matches this by 12% of his contribution. From your employer’s contribution, 8.33% goes towards the Employees’ Pension Scheme (EPS) and 3.67% to EPF.

PF is automatically deducted from your salary. Both you and your employer contribute to it. While employer’s contribution is exempt from tax, your contribution is counted towards section 80 C investments.

Return:8.65%
Duration: Working Life
Safety: Zero Risk

2. Public Provident Fund (PPF): A 15-year cumulative recurring deposit that is fairly illiquid and is good to use as a long-term corpus building tool. Risk- and tax-free today, maximize your contribution to this.

Return 8.7%
Duration 15 years
Safety: Zero risk

3. National Savings Certificate (NSC): NSC is a tax-saving instrument with a maturity period of five years. A person can purchase an NSC for as low as Rs 100. Any investments in NSC are eligible for deduction under Section 80C. At present, the interest rate is 8.10 per cent p.a. This interest is compounded half yearly and is taxable. However, this being a cumulative scheme (i.e., interest is not paid to the investor but instead accumulates in the account), each year’s interest is considered reinvested in the NSC.  One of the preferred tax planning tool being recommended by financial advisors.

4. Fixed deposits for a duration of five years with banks and post offices. Though not very popular but these are mostly picked in the urgent tax planning schemes for people who do not set timely financial goals.

5. Senior Citizens Savings Scheme (SCSS): This scheme, as the name suggests, is meant only for senior citizens.

Any individual in the 60 or above age group can open an account under this scheme. An individual above 55 but less than 60, and having retired under a Voluntary Retirement Scheme or a Special Voluntary Retirement Scheme, can also open an account under this scheme, but such an account must be opened within three months of the retirement date.

If you are retired defense personnel, then you can open this account without any age limit, provided you fulfill other specified conditions.

Any investment in this account would be eligible as deduction under Section 80C. The current annual rate of interest offered under this scheme is 8.6 per cent payable quarterly. Please note that the interest is payable quarterly instead of compounded quarterly. Thus, unclaimed interest on these deposits won’t earn any further interest.

6. Sukanya Samriddhi Account: In this scheme, you can open an account on behalf of your minor daughter. Any amount deposited in this account would be eligible for deduction under Section 80C. Further, this account can be opened for a maximum of two girls and in case of twins this facility will be extended to the third child as well.

The amount has to be deposited in this account for 15 years. The account will be mature after 21 years, which means that you don’t have to deposit anything between the 16th and 21st year.

The minimum annual deposit is Rs. 1000, which can go up to Rs. 150000.

Interest rates on the deposit keep on changing every year. For FY2014-15 it was 9.1 per cent per annum, for FY2015-16 it was 9.2 per cent p.a. and for FY2016-17 it is 8.6 per cent p.a. The interest earned here is also tax-free.

7. Life Insurance Premiums Any amount that you pay towards life insurance premium for yourself, your spouse or your children can also be included in Section 80C deduction. Please note that the premium paid by you for your parents (father/ mother/ both) or your in-laws is not eligible for deduction under Section 80C. If you are paying premium for more than one insurance policy, all the premiums can be included.

Market-linked products

8. Equity-linked savings schemes (ELSS): These are diversified equity mutual funds that allow investors with risk taking ability to target a higher return. You are locked into the investment for three years, but the long-term capital gains are zero tax. You can choose a lump sum investment route or a systematic investment plan.

This is one of the best ways to grow your money and enjoy tax benefit simultaneously as the return generated by ELSS is much more than those generated by other investment products.

9. Unit linked Insurance Plan (ULIP) An insurance product which covers life insurance and also provides the benefits of equity investments, ULIPs have attracted the attention of investors and tax-savers because of their multiple advantages -life cover, tax-saving and also helping you grow your money by giving decent returns in the long-term.

10. New Pension System (NPS): This is relatively new, market linked vehicle for those who do not have an EPF facility to target long-term retirement planning.

Other Deductions

Tuition fee: School fees of up to two kids. This is one deduction which will make you feel good about having kids. Pay by cheque and keep the receipts to file along with your return.

Home loan: The Equated Monthly Installment (EMI) that you pay to repay your home loan consists of two components – Principal and Interest. The principal qualifies for deduction under Section 80C. Even the interest can save you significant income tax, but that would be under Section 24 and section 80EE of the Income Tax Act.

So if you have an outstanding home loan in your name, then the repayment of the principal amount made by you in a financial year can be claimed as deduction under Section 80C and you need not invest in other products specifically to avail tax benefits.

Further, any payment made to development authorities like Delhi Development Authority (DDA) in order to purchase a house (which has been allotted to you in a scheme made in this regard) also qualifies as deduction under section 80C.

“All men make mistakes, but only wise men learn from their mistakes.”- Sir Winston Churchill. The above proverb is very much relevant to our daily lives – be it handling finances or even in
any other facets of life.

Moreover, the famous author John C. Maxwell has also quoted “A man must be big enough to admit his mistakes, smart enough to profit from them, and strong enough to correct them.” But again this is conveniently forgotten by most, which often leads to failure to learn from mistakes, the arrogance to admit it and which thus leads you to repeat the same mistakes again.

While undertaking your tax planning exercise too, you tend to repeat the same mistake of waiting till the eleventh hour and are arrogant enough to admit it. As the financial year draws to a close, we all start feeling the heat and realize that yes, now we have to invest in order to save tax. But have you ever wondered whether it is the prudent way for tax planning?

Remember, waiting till the eleventh hour to undertake your tax planning exercise will often drive it towards mere “tax saving” rather than “tax planning”; which in our opinion is a sub optimal way to undertake a tax planning exercise.

Unlike “tax saving” which is generally done through investments in tax saving instruments/products, under “tax planning” we take into consideration one’s larger financial plan after accounting for one’s age, financial goals, ability to take risk and investment horizon (including nearness to financial goals). And by adapting to such a method of “tax planning”, you not only ensure long-term wealth creation but also protection of capital.

Hence, please remember to commence your “tax planning” exercise well in advance by complementing it with your overall investment planning exercise.

Above mentioned are few options on investments under section 80C. However, which one applies best to you depends on your financial goals and investment plan. If you find any of the mentioned products/schemes beneficial for your tax planning give us a shout and we are happy to help. You can write to contact@sbsfin.com

Source: Economic Times, Mint, PersonalFn

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Health Insurance-If you are in the pink of health

If you are in the pink of health, it is difficult to imagine an illness, could make you pauper. The escalating cost of medical treatment is becoming beyond the reach of common man. The oft quoted rate of inflation in health care is between 15-20% per annum, as compared to overall inflation of 6-7%, making medical treatment very expenses for common man.

The idea of making/earning money can make a man move mountains. If you tell a man to stop smoking because it will damage his lungs, he will not stop. But offer him a rupee for every cigarette, he will give up and get cured for life. So, it’s no wonder that when well-wishers ask you to take medical insurance you ‘ll smile and ignore them as if there were insane.

My father too was living in such a dream world. He thought he or my Mom will never get sick. Newly retired from a PSU where medical reimbursement was actuals my father was spoilt and as a result he did not buy health insurance during his younger days… till my Uncle threatened and cajoled him to buy one for my Mom and himself.

Within 6 months of buying health insurance at the age of 59 my mom had emergency hernia surgery late in the night. Blissfully unaware of pre-existing disease clause in the policy my father cried fouled when Mom’s claim was rejected as hernia is not covered in the first year of policy. He had never bothered to read policy document. Substantial sum of money was spent on Mom’s 8-day hospitalization and after care. It dented my father’s savings at a time when he was still grappling with his post retirement issues of regular income etc.

All this taught me few lessons on importance of health insurance and care to be taken while buying health cover. Using my own personal experiences, I will try to decode and simplify health insurance in this blog by answering some common questions and myths which more than often deters us from buying health cover.

Why do I need?

Health care is a serious concern for majority of us. Escalating costs accompanied by increase in life style diseases, dreaded disease like cancer becoming common make us want to run for cover. This is where Mediclaim steps in. It is an insurance that takes care of your medical expenses or treatment expenses.

Remember: Healthcare costs are ‘inelastic’ because demand doesn’t go down as prices go up.

The icing on the cake is tax benefit u/s 80 D of Income Tax Act,1961

I am too young and healthy

At times, certain ailments remain unknown to us until their symptoms are visible. As per regulations, such pre-existing ailments are covered after at least 48 months of holding a health policy. Therefore, buying early, before one develops any diseases, would help ensure that one’s health is insured without any such exclusions.

By and large, a health insurance policy bought at an early age and renewed regularly for several years without any claim should lead to a better claim experience.

Remember: The best time to get enough health insurance is when you need it the least

In my experience with people over 45 I have seen insurance companies refusing cover or loading premium because client is taking medicine for BP/Thyroid or is overweight or has anxiety problem which is so common for us, in this cut throat competitive world.

Remember: The more you delay and the older you get, the heftier will be your premium.

I have a group cover by my employers,so I don’t need a separate policy

If your employer provides an option for group health coverage, grab it even if you have to pay a portion of the premium. The coverage amount may be restrictive so check if it is sufficient. Also, remember, especially if you are in the private sector that this group cover will continue only as long as you are in the job. The period between switching jobs may leave you unprotected. Moreover, few insurers are calling off their contract with employers and thus leaving several employees stranded with.

How much Mediclaim do I need?

This depends on several factors such as age, health condition, lifestyle, family history, etc. Ideally,you should cover the cost of big surgeries and operations. Give due consideration to your medical history, family health history before deciding on the amount of cover. We get use to certain standard of living, this also plays a very imp factor while deciding on the amount of cover.

Bottom line: Affordability of the premium. One must consider the amount of premium which is to be paid by him. The amount of premium is directly proportional to the sum assured.

Should I go for individual or family floater?

If you have a family and are looking to buy health insurance, the common dilemma is between buying an individual health insurance policy and a family floater policy. Individual policies, as the name suggests, cover a single person. Whereas, the floater policy covers the entire family under a single policy.

Keep the following points into consideration in order to choose between the two:

PRICE

If your family is young or the age gap between the spouses is not much, then a floater plan will be cheaper.

Floater: good

Individual: bad

HIGHER COVER

Being cheaper than the individual health plan, the floater health insurance plan makes a higher value cover more affordable.

Floater: good

Individual: bad

BAD YEAR

However, the flip side is that while in an individual plan each individual has a dedicated sum insured, in a floater plan the insurance cover is shared. So if one family member makes a claim, the cover reduces on the rest by that much. In the event of a bad year, when all members need to use the policy, the floater may not be sufficient.

Floater: bad

Individual: good

(But please note that there are products available in the market, where your health cover is automatically restored in the event of one family members using the entire cover in 1 year)

AGE GAP

Individual plans are expensive compared to a floater policy. But the cost advantage of a family floater insurance plan diminishes if the age gap between the spouses, or the eldest member, is huge. It could also become financially unviable if one individual is not in good health and poses the risk of using up the entire sum insured.

Floater: bad

Individual: good

Affordability

Bottom line is if you can afford have separate covers.

What are the benefits of Mediclaim?

Medical insurance covers almost everything right from the time you step into the hospital till the time you are discharged including Ambulance charges. The normal costs that are covered are room and boarding expenses, nursing expenses, fees for the surgeon, anesthetist, medical practitioner, consultant, fees for specialists, blood, oxygen and the operation theatre, charges for surgical appliances, medicines, diagnostics materials and charges for X-rays, dialysis, chemotherapy and so on. Even medicines are covered.

(Please read the product brochure and policy wordings carefully)

What are the limitations of Mediclaim?

*Most important limitation is pre-existing health conditions. If a person has had a heart attack previously or has been operated upon for some other condition, then cover will not be available for those conditions.

*Some day care medical procedures are not covered (refer to product brochure or policy wordings)

*Dental surgeries, cosmetic surgeries for aesthetic purpose, HIV related conditions etc. are not covered.

*There is a waiting/cooling period of 30 days to 90 days from the date of inception of the policy, when you take the policy for the first time

*Disease wise capping in many cases. For example, cataract surgeries there is a sub-limit of Rs. 40,000

*High premium with age. Premium tends to jump when there is a change in age band.The cost can sometimes so expensive that the person may not able to pay the premiums

Health insurance is very useful and everyone should have adequate cover.Hospital bills for very small to considerably large ailments can be a pain. It’s difficult to meet such costs on our own without burning a hole in our savings. Also, with medical costs escalating, we may have to compromise on quality healthcare, because of affordability. It is then that the importance of health insurance comes into the picture. Health Insurance provides us with the ability to afford better healthcare facilities for ourselves and our loved ones. What’s more, Govt give us tax benefits. That’s enough incentive to gift ourselves and our loved ones a peaceful sleep this Christmas.

For please feel free to call/write for more details on Health Insurance. You can write to, contact@sbsfin.com

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How to Pick Winning Mutual Funds?

Stephen Covey says.’ Begin with an end to mind’-a principle that cannot be emphasized enough, especially investing.

Why do you want to invest? Is it because of exuberance in the Equity Markets or colleagues in Office making investments so you don’t want to left behind. Once we answer this WHY, our job is half done.

So, the first question we need to ask yourself is Why are we investing?

1. I want to save up for my higher education
2. I want to save for my marriage
3. I want to travel around the world on 80 days
4. I want to save to buy home
5. I want to save for my children’s education
6. I want to be financially free by 50 years of age

mutual-fund-smart-goals-in-financial-planningGet Set Goal

Like any other goals, Financial goals need to be SMART

S- Specific
M-Measurable
A- Achievable
R- Realistic
T- Time Based

While listing down your goals, aspire for goals that are well within your means (realistic too). Don’t expect your money to double in a year. Wishful thinking and unrealistic goals will not help our cause. Also, remember that all of us are unique individuals and our needs and aspirations are different from our friends/peers. So, our goals are not same as our friends.

Financial goals are important and significant for financial planning. A good investment plan is the one which has got products against each goal and which doesn’t lead to any sort of present or future confusion for the investor.

Mutual Fund offers something for every kind of investor. Investment is a function of the time horizon and risk tolerance of an individual.

One must know if a mutual fund investment is being done for higher education, retirement which will essentially be long term or if some liquidity concerns are anticipated.

On line risk profiling tools are available-It will be good if before investing we could use them and find what type of investor we are. Are we the ones who will constantly be worried about our Principal money, or are we risk takers or we love the S-safety part of the investment that we don’t mind ignoring L-Liquidity and R-Return

Once we are clear with our financial goals, time horizon, risk appetite the next step is to pick the right mutual fund which fits in our Investment Plan. There is plethora of options with more than 1000 plus MF schemes to choose from. So how so we choose the right fund?

Many a times we just look at the top performing funds or go by references our friends/colleagues have given and we go ahead with the investments. Is that the way? ‘No’. Investing in mutual funds requires as much strategic inputs as any other investment option.

Identify funds whose investment objectives match your financial goals and asset allocation

Just as you would buy a car that fits your needs and budget, you should choose a mutual fund that meets your investing objectives. So, if your financial goal like children’s higher education is more than 10 years away you could look at an equity fund.

Fund House Pedigree

Even Before zeroing down on a scheme, you must select the fund houses on which you have enough faith to invest your money. Try to identify fund houses that have a strong presence in the financial world and provide funds that have a reasonably long and consistent track records.

A strong parentage would ensure efficient processes and the capability to build a strong business. In turn, these processes, which are a combination of investment processes, risk measures and operational efficiency, would ensure a sustained performance over a longer period.

Evaluate past performance, look for consistency

Although past performance is no guarantee for the future, it is a useful reference point to assess how well or badly a fund has performed in comparison.

Consistency is key: Will you invest in an equity fund that gave over 100% returns at a time when the equity markets were witnessing a secular bull run but showed a sharp drop in net asset value (NAV) when the markets were volatile? You don’t want a fair-weather friend, do you? A good mutual fund scheme is one that consistently manages to outperform its benchmark over 3-5 years.

Look for consistency in performance over longer tenures like 3, 5 and 10 years, if that is available, rather than the short-term returns. Select schemes that have consistently beaten their benchmark indices (index to which a fund’s returns are compared) and compare reasonably with their peer set over the above time frames.

Risk-Return Trade-Off

Investments in financial products come with a degree of risk and if returns are not in proportion to the risks taken, it is not worth going for such investments

A good mutual fund is one which gives better returns than others for the same kind of risk taken.

Risk-adjusted returns are evaluated against return given by a risk-free instrument- usually government-backed debt papers or term deposits of banks.

Portfolio Diversification

By its very nature, mutual funds are supposed to provide diversification across different asset classes, stocks, sectors and even geographies. A diversified portfolio has lower risk than a portfolio biased towards a particular stock, an asset class or a sector.

You can check the portfolio history of a particular scheme and see if the fund has been historically maintaining a well-diversified portfolio. Look at the monthly portfolio of a particular scheme on the website of a fund house.

Expense Ratio

The cost of investing through a mutual fund is not insignificant and warrants our due attention.

The ratio is the annual expenses incurred by the funds expressed in percentage of their average net asset. To make the choice between two similar funds, you should consider the expenses charged by them. Lower expenses benefit you in the longer term. Usually, schemes with higher assets have lower expense ratio than that of a smallsized fund.

As the funds grow larger in size, the fixed expenses associated with the fund get spread out over more investors, reducing the expenses and leaving more funds for investment.

Mutual Fund and Financial Planning

There is a Mutual Fund for all your Financial Goals

• For contingencies, liquid funds will meet our objective since they don’t have no lock-in period
• For goals, which are 1 to 3 years away, and we are looking for low risk option, income funds will be more suited
• For goals, which are 5 years away, and where we are okay with slightly higher risk, invest in hybrid funds
• For goals, which are likely to happen between 3-6 years, combination of debt and equity funds can be chosen
• When goals are long term and risk taking, ability is highest, equity based fund is one of the best options. Over the long-term, equity has usually outperformed all other asset classes.

Many a times, we find our investors perplexed with little or half information. They find financial markets complex as the clarity on funds is not available and that which is there is complex to understand and comprehend. However, at SBS Fin, we follow due diligence in selecting a fund for a particular portfolio as it should be as per the financial goals and shall be adherent to the investment plan of an investor.

If you are looking for a mutual fund and need an expert opinion on the same, feel free to write to us on contact@sbsfin.com