Tax Savings and how you can save taxes legally ?

Tax Savings and how you can save taxes legally?

There are various legal ways to save taxes in India, yet a lot of people don’t take advantage of tax saving benefits.

Listed below are some options you can explore.

1.) Saving taxes under sections 80C, 80CCC and 80CCD

To promote the culture of savings the Income Tax Department provides various incentives to taxpayers in India. If a taxpayer invests in financial instruments as specified under sections 80C, 80CCC and 80CCD, then the taxpayer can claim a deduction for those investments from their taxable income.

The maximum deduction allowed under these sections is Rs 1,50,000 per year.

This means that if you invest Rs 1.5 lacs in the instruments as specified in u/s 80C, 80CCC and 80CCD, you can save between Rs 7,500 to Rs 45000 per year depending upon your income tax bracket.

Example: Let’s assume an individual’s income is Rs 5 lakhs. There is a standard deduction of Rs 2.5 lakhs so your effective taxable income is Rs 2.5 lakhs.

If you don’t make any tax saving investments, you are liable to pay tax on the entire taxable income of Rs 2.5 lakhs. At 5% tax rate, you will pay taxes of Rs 12,500.

If you invest Rs 1.5 lakhs, then your net taxable income now reduces from Rs 2.5 lakhs to just 1 lakhs. Now, you are liable to pay tax only on Rs 1 lakhs. At 5% tax rate, you will now pay a tax of Rs 5,000.

This has two advantages:

  1. You have saved Rs 7,500 in taxes.
  2. You also have a forced savings of Rs 1.5 lakhs, which will grow in the future.

There are many investment options, which are specified by the Income Tax Department that can be used to claim this deduction.

Here is a list of most popular ones:

  • Public provident fund (PPF)
  • 5-year tax saving fixed deposit
  • Equity-linked savings scheme (ELSS)
  • Contribution to employee provident fund (PF)
  • Pension plans
  • National savings certificate (NSC)
  • Insurance policy premium payments
  • Principal repayment for a home loan

You should ideally allocate these investments for your retirement. Mostly, people make tax saving investments in PPF/NSC/PF and think that their future is secure.

These investments are only to cover inflation and will never grow your wealth in real terms.

Therefore, you can also add growth-oriented assets such as Equity oriented mutual funds (ELSS).

Additionally, you can plan to invest Rs 50,000 per year in NPS that can provide you with a tax benefit over and over Rs 1.5 lakh limit. So effectively, you can reduce Rs 2 lakhs in total if you exhaust Sec 80C limit and invest more than Rs 50,000 in NPS.

2.) Saving taxes under sections 80D, 80DD, 80DDB Section 80D

The income tax department allows you to save taxes if you have purchased a health insurance policy. A deduction is available up to a limit of Rs. 25,000 p.a. for insurance of self, spouse and dependent children. If individual or spouse is more than 60 years old the deduction available is Rs 30,000.

An additional deduction for insurance of parents (father or mother or both) is available to the extent of Rs. 30,000.

Section 80DD

You can claim up to Rs 75,000 for expenses incurred on medical treatment of your dependents (spouse, parents, kids or siblings) if they have 40% + disability.

Section 80DDB

An individual (less than 60 years of age) can claim up to Rs 40,000 for the treatment of specified critical ailments. This can also be claimed on behalf of the dependents. The tax deduction limit under this section for senior citizens is proposed as Rs 60,000 and for very Senior Citizens (above 80 years) the limit is Rs 80,000.

3.) Saving Taxes via a home loan

You can claim up to Rs 2 lakhs as a tax deduction on the interest component of your home loan EMI repayments every year if you are residing on the same property.

If your property has been rented, then the entire interest component payable for the year can be claimed as a tax deduction.

Additionally, principal payment on a home loan is covered under section 80C.

4.) Saving Taxes via an education loan

If you have taken an education loan, any interest payment towards the loan qualifies for a deduction u/s 80E.

This loan is taken for higher education for the assessee, spouse or children or for a student for whom the assessee is a legal guardian.

5.) Saving taxes via long-term capital gains from the sale of a house

Any long-term capital gains, made by selling primary property is eligible for exemption of capital gains tax if the incremental amount is invested in specific tax saving investments (like tax saving infrastructure bonds etc.).

Any asset is considered as a long-term capital asset if the taxpayer holds that asset for more than 2 years.

Let’s assume you bought a house for Rs 50 lakhs and sold it 5 years later for Rs 1 crore. You are liable to pay long-term capital gains on the profit you have made i.e. 50 lakhs.

However, if you invest the Rs 50 lakhs in tax saving infrastructure bonds, then you will be exempted from paying capital gains tax. 

6.) Saving Taxes via long-term capital gains from the sale of shares

You pay 10% long-term capital gain tax if the shares or equity mutual funds are sold after one year.

If the shares or equity mutual fund units are sold within a year from purchase date, short-term capital gain tax at 15% will be applicable.

So if you bought shares or mutual funds worth Rs 60 lakhs, which increase in value to Rs 1 crore after a year, you will not be liable to pay 10% tax on the profit of Rs 40 lakhs i.e. Rs 4 lakh.

NOTE: The deductions and tax rates mentioned above are applicable for the financial year 2018-2019 and usually change from year to year.

Great, now that you have discovered six ways to save tax legally, here are six incomes that you shouldn’t forget to declare.

1.) Interest earned from savings bank account

This interest is tax-free up to Rs. 10,000. Any interest earned above that is taxable and should be declared.

2.) Interest earned from fixed deposits/recurring deposits

This is taxable as per one’s income tax slab. Banks will deduct 10% as TDS when the interest accrued is more than Rs. 10,000 (unless one submits Form 15 G/H).

However, the actual tax liability will probably be more or less, depending upon the tax bracket of an individual.

3.) Cash gifts

Cash gifts of over Rs. 50,000 should be declared as they are taxable (unless for specific occasions like marriage).

4.) Capital gains/losses

Any capital gains/losses made from trading equities, selling mutual funds, gold, etc. should be declared even though they may be nontaxable (e.g. ULIPs, the long-term capital tax is nil). Similarly, any losses should be declared as these help in offsetting gains for subsequent years.

5.) Exempt income

Exempt income (e.g. interest earned on PPF/EPF accounts) should be declared for auditing purposes only. This is a tax-free income.

6.) Dividend income

Dividend income from equity stock holdings or mutual funds is tax-free in the hands of the investor. However, this should be declared while filing income tax returns.

Generally, many individuals who are employed will get a Form 16 from their employer, which is usually sufficient for filing your income tax returns. However, if you have income from the above 6 sources, you should declare that to your CA so that your returns can be correctly filed.

If you don’t declare an income and the IT department initiates a scrutiny against you and discovers it, you may be liable to pay a penalty.

 

Planning for your child’s education

Planning for your child’s education

Good quality education is a priority for every parent but for anyone overseas education can be a deal-breaker. Even if you have sufficient funds to meet your retirement needs, it is extremely important to separately allocate the funds for your child’s education especially graduate level studies.

Here are few mistakes that parents commit while planning for Child’s education: 

Buying ULIPs

Protect your child’s future

As parents, these wordings in an advertisement may be hard to ignore. Emotions are used by Insurance companies to lure people. These policies often have an opaque way of sharing the charges and lock-in period. Additionally, the policy maturity amount may not be sufficient to meet your child’s future needs. Therefore, securing your child’s future with these policies is not recommended. 

Underestimating the education cost

The costs today are bound to increase in the future. Often parents think of the cost in today’s value. However, the cost of education actually increases more than even the general inflation in the economy. Considering this rise in cost of education due to inflation is critical when parents plan for their child’s future.

Inappropriate investment vehicles

Allocating funds in safe assets usually give a sense of security to parents. However, the real worth of the money does not increase after considering inflation. Therefore, investment allocation towards growth assets such as equity and real estate is very important.

Insufficient life cover

Your child’s future can never be secure until you are adequately insured. You must buy a term plan that insures you for the value of your child’s future goal requirement. If something were to happen to you, your child’s future goals will still be met.

Ignoring your own retirement

Putting your own future at stake is not recommended. Children’s future planning is one of the important goals, but it should not be looked upon in isolation. Let your child’s future goal be part of your holistic planning.

Procrastinating

Parents who start late will have less time to save their money and may not be able to save enough for their child’s future goal requirement.

What you need to do

So what are the costs involved? It will depend upon where your child will go for his/her higher education. If your child chooses India over abroad education, costs could be drastically different. However, we suggest that you should plan with the assumption that you will send your child abroad for education. Later, if your child does not plan to go abroad, you can very well use those funds to meet any other financial requirement.

In today’s time, planning for $200,000 inflation adjusted for 5% p.a. is a reasonable amount of savings. You should not invest these funds in a high-risk category such as start-up funding, private equity etc.

Investments held should be viewed as a medium to long-term investment. More the time, better it is. 

Top equity mutual funds in India

Top equity mutual funds in India

Before we talk about top mutual funds in India, we must also understand the process of arriving at these mutual funds.

There are thousands of funds and selecting 3-4 funds that meet your objective is a challenge.

Most investors have “look at the past record” approach for selecting equity mutual funds. This may not be a complete answer.

For all practical reasons, you should avoid sector based funds and international funds. Sector based funds expose you to unnecessary sector risk and international funds are able to deliver only when INR depreciates. Both these situations create a unique risk and may be avoided.

Although past performance is not the only factor it is still an important factor to consider. A fund should prove its merit over a period of at least 5 years. Therefore, a fund that is recently launched may be avoided.

Now that ground rules are laid, here are the aspects to look at closely while short-listing the funds. You have to source all the funds in specific categories i.e. large-cap, mid-cap, small cap, multi-cap and tax saving funds. If you do not perform analysis basis specific category of equity mutual fund, there may be an overlap of securities that will be detrimental to your portfolio.

Criteria no. 1: 5-years Alpha

In simple terms, how well the fund has performed better than the benchmark. A large-cap category can have the benchmark as ‘Nifty 50’ whereas others can have ‘Nifty 500’ as the benchmark. Any funds whose 5-year performance is less than the benchmark may be excluded. Think about it, if the fund manager is not able to beat the benchmark, the manager is destroying value rather than adding value to the investor’s portfolio. Basis the recent SEBI’s requirement to align mutual fund schemes as per the fundamental attributes, various mutual fund houses are combining schemes that have the similar fundamental attributes. This will make calculating alpha redundant for some time since good and bad schemes combined together may indicate above average performance but that may not be a correct assessment. SEBI circular

Criteria no. 2: Information ratio (IR)

Information ratio is a measure of the risk-adjusted return. Information ratio shows the consistency of the fund manager in generating superior risk-adjusted performance. Higher the ratio better it is. IR is expected active return divided by tracking error, where the active return is the difference between the return of the security and the return of a selected benchmark index, and tracking error is the standard deviation of the active return. IR calculation may be misleading due to the recent changes to combine mutual fund schemes based on fundamental attributes.

Criteria no. 3: Asset Under Management (AUM)

As a rule, you should probably avoid funds with assets less than Rs 100 crores simply because of the relatively higher expenses associated with small funds.

Small funds may not survive or may undergo changes in the objectives in the search for greater acceptance in the marketplace. Whether through asset growth or other factors, over time a fund’s return tends to move towards the average.

Criteria no. 4: Fund manager tenure

A fund manager manages a fund. He takes a call on what to buy and what to sell and also in what proportion. Fund’s performance is directly linked to the skill of the fund manager. Therefore, the tenure of a fund manager is an important factor to consider when selecting an equity mutual fund. When managers change, a wait-and-see policy is usually appropriate.

Apply these criteria’s to filter out relevant mutual funds. You will find only a limited set of mutual funds in each of the five equity mutual fund categories.

Here is a list of funds in each category after considering the recent combination of mutual fund schemes.

Large-cap funds

  • Aditya Birla Sun Life Frontline Equity Fund
  • SBI Bluechip Fund

Large-cap funds and mid-cap fund

  • Franklin Templeton India Prima Fund
  • Mirae Asset Emerging Bluechip

Mid-cap and small-cap fund

  • Franklin Templeton India Smaller Companies
  • DSP Black Rock Small and Mid Cap

Multi-cap funds

  • Mirae Asset India Equity Fund
  • Aditya Birla Sunlife Equity Fund

Tax saving funds

  • DSP Black Rock Tax Saver
  • Axis Long Term Equity

The list of the top mutual fund is not an end but rather only a starting point. Often people get too aggressive when the markets are moving up but having a mix of assets ensures a reasonable return in all seasons. A long-term first-time investor may also evaluate Index Funds with the lowest expense ratio.

You have to structure the portfolio in such a way that your overall investment portfolio suits your behavioural aspect. You don’t want to have a heartache due to portfolio fluctuations 🙂

Why is it hard to save money ?

Why is it hard to save money?

The decision to save or not to save is always a personal choice. Everyone’s financial situation is different, and therefore not everyone is able to allocate the same percentage of his or her income towards savings. However, everyone should be saving money (even a small amount) on a regular basis.

Here are some of the reasons clients often tell us ‘why they cannot/or they think they do not need to save’.

There is always something in the market that needs to be bought.

You can always enjoy a better television or a newer car, but splurging on the latest models can be expensive and often unnecessary. We often see young professionals frequently upgrading their cell phones and that too on EMIs. Everyone wants the latest iPhone!

However, is it in your best financial interest?

Let’s live today and leave the worries for tomorrow.

This is probably the most common reason why people choose not to save money, and it is also probably the biggest financial mistake that anyone could make. Just because you have other financial priorities, such as travelling or buying new gadgets, doesn’t mean that you can’t save money for your future at the same time. The longer you wait to start saving, the more you will need to save.

I am young right now. I can start later.

This is another huge financial mistake, which a lot of youngsters make. Procrastination can be very costly.

For example, if you save Rs 5000 per month for 20 years at an interest rate of 15% p.a, you will accumulate ~Rs 75 lacs by the end of 20th year.

If you chose to start saving later and say you save for only 15 years instead, you will only accumulate ~Rs 33 Lacs. This is the power of compound interest which early savers and investors enjoy.

I will anyways leave everything when I die-So why bother with saving?

This is true, but no one can predict when he or she will die. If you don’t have sufficient savings to take care of your financial needs in your old age, you will have to depend on others (Would you want to be dependent on your kids!). You may or may not be able to lead a life of your choice.

I am too young to start thinking about retirement

If you have more years to grow your money, lesser is the amount you need to save.

For example, someone who is 45 years and wants to accumulate Rs 6 crores for his retirement (age 60 years) needs to save Rs 90,000 per month. Total investment during the 15-year horizon will be Rs 1.71 Crores. However, a 25-year-old has to save only Rs 4,000 per month to accumulate the same amount upon his/her retirement (age 60 years).

Get into the habit of saving as early as you can.

How to plan for buying your first home ?

How to plan for buying your first home?

Owning your own home is an exciting life milestone and sets you free from the monthly expense of paying rent. However, with soaring real estate prices in India, buying a home is almost out of reach for a lot of people.

That’s why I recommend you start planning and growing your savings from the day you start earning in case you plan to buy a home in the near future.

Here are a couple of things you need to keep in mind about how much your home will cost you:

  • Cost of the property.
  • Agent commissions (1 to 2%).
  • Registrations (5 to 7% – this varies from state to state).
  • Interior decorations and furniture (5 to 20% based on your taste).

So whatever is the base cost of your home, keep in mind that it would cost you about 10 to 15% extra.

For example, if you want to buy a house worth Rs 1 crore. Your total cost of ownership will be about Rs 1 crore 15 lakhs. If you have planned for just the property price of Rs 1 crore, the extra expense can be challenging for your financial health.

Let’s say you are 27 years old, just married with a double income of Rs 2.5 lakhs a month and want to ‘settle down’ in your home in the next few years. The reason for the timeline of few years is because you don’t have the money right now for a down payment.

Here is how you can plan for it.

  • Cost of your dream home today – Rs 1 crore.
  • A number of years after which you plan to buy it – 8 yrs.
  • Cost of your home after 8 years – Rs 1.48 crores (assuming 5% appreciation every year).

The total cost of ownership of your home after 8 years will be about Rs 1.70 crores. (adding 15% extra costs towards registration, decoration etc).

To buy it on loan, you will need 20% or Rs 30 lakhs for the down payment and you will be paying ~Rs 1.2 lakhs EMI per month for the balance loan amount for a period of 30 years.

So what should you be doing today?

Start investing Rs 25,000 per month from your savings – after 8 years, at a balanced rate of 12.5% p.a, you will have about Rs 42 lakhs which will be sufficient for making the down payment + other costs including registration and interior decoration.

If you have additional surplus savings you can invest more so that you can make a larger down payment and have reduced EMIs.

However, make sure that the additional savings are not at the cost of your other priorities like retirement, emergency fund etc.

Owning your home also comes with several advantages like:

  • Emotional satisfaction of living in your own house.
  • No hassles of shifting every couple of years.
  • Expressing your individuality and decorating it as you please.

So while you should plan on buying your own home, weigh both the financial and emotional angles before you put down your hard-earned money.

How to prioritize your financial goals?

How to prioritize your financial goals?

Some financial goals will continually collide with one another.

E.g. paying for a child’s school fee may reduce the money that would otherwise go into their higher education fund. Or save effectively for your child’s higher education can reduce a part of the contribution for your own retirement fund.

That’s why to get what you want most, you should try doing the following:

Decide which goals will take priority first.

This can get slightly tricky as most people get serious about financial planning only when they hit a milestone in life e.g. getting married, having a baby etc.

In India, it’s a cultural thing to prioritize your children’s needs over everything else in life. Making sure they get the best schooling, saving enough for their higher education, then setting them up in business if possible, paying for their marriage, gifting them your house etc.

Times are changing and kids are more independent these days and will get more self-reliant in the future.

Your first priority goal should be your own financial security.

Listed below are some recommended goals, which you should start saving for immediately if you haven’t already started doing so.

Your Retirement Fund

You need to have a sufficiently large retirement fund so that you can lead a financially secure life with self-respect during your golden years and without being dependent on anyone else for your financial needs. Plus your kids will automatically inherit your assets (if you wish so!) so they will also be taken care off after you leave for your next journey.

Buying a Home

Your first home is not an investment. It’s an expense till you can afford to buy a second one. That’s because you will always need a place to live. You should start planning to buy a house from the day you start earning. Unless of course your parents own a home and you will continue to live in it. In that case, you can look at alternate real estate investments as a diversification option after you have a significant financial portfolio.

Emergency Fund

You should have a liquid emergency fund equivalent to approximately 3 to 6 months of your living expenses. These funds you can access immediately for any unforeseen or unplanned expenses. This will not only give you peace of mind but will also allow you the freedom from taking on an expensive debt in an emergency situation.

Being Debt Free

We live in the age of excessive consumption with multiple EMI’s. You should try and reduce as many EMI’s as possible. Not all EMI’s are made equal. An EMI for a house loan is not really an expense as it goes towards building an asset. However, an EMI for a high-end smartphone is an expense because your iPhone will start losing value the moment it’s bought – and continue to do so till it becomes worthless after a few years.

Are You an Exception to the Rule?

While these are broad guidelines that will apply to most people, every individual has specific requirements, which means you should allocate money based on your personal requirements and priorities.

How much should be your emergency fund

How much should be your emergency fund?

An emergency fund is used to efficiently meet anticipated and unanticipated demands for cash distributions. Significant liquidity requirements constrain the ability to bear the risk. Liquidity requirements can arise for any number of reasons but generally fall into one of the following categories:

Ongoing Expenses

The ongoing costs of daily living create a predictable need for cash and constitute one of the investment portfolio’s highest priorities. Because of their high predictability and short time horizon, anticipated expenses must be met using a high degree of liquidity in some portion of the investment portfolio.

Emergency Reserves

As a precaution against unanticipated events such as sudden unemployment or uninsured losses, keeping an emergency reserve is highly advisable. The reserve’s size ranges from three months to more than one year of your anticipated expenses. Individuals working in a cyclical or litigious environment may require a larger reserve than those in more stable settings. Although the timing of emergencies is by definition uncertain, the need for cash when such events do occur is immediate.

Negative Liquidity Events

Liquidity events involve discrete future cash flows or major changes in ongoing expenses. Examples might include a significant charitable gift, anticipated home repairs, or a change in cash needs brought on by retirement. As the time horizon to a major liquidity event decreases, the need for portfolio liquidity rises.

The funds to meet liquidity needs may be invested in either a fixed deposit with one-year maturity or in ultra-short-term bond funds. Both these instruments are taxable, however, an ultra-short-term bond fund will usually earn 1-1.5% more than FD. Additionally, if you continue to hold the ultra-short-term bond fund for over three years, you also get indexation benefit, thereby saving taxes as well. 

Money Saved and Invested is Money Earned

Money Saved and Invested is Money Earned

Wealth creation is not about ‘how much you earn’. Rather wealth creation is all about ‘how much you save and invest’.

Before we discuss savings, let’s first discuss earnings.

Do you think you are earning enough? Most people would answer the above question in the negative.

It doesn’t matter whether you are earning Rs 5000 or Rs 5 lakhs a month. Almost everyone feels the need to earn more. While an individual’s income may be sufficient to meet their current needs, it’s usually not sufficient to meet all of their wants – at least not immediately.

That’s why the concept of savings ensures that over a period of time you can gather enough money to fulfil your wants and increasing needs.

More money usually does not mean more happiness

There have been various studies in the field of psychology and economics to understand the correlation between income and happiness. And the findings suggest that the two aren’t related. Yet, most of us continue on a quest for more money thinking it will enable us to buy our way to happiness and freedom.

The reality, however, is that with more money, our lives could materially improve for the better in the short term even though the happiness may be short-lived.

How can you earn money?

  1. Work harder and generate new money via a salary hike or expanding your business.
  2. Invest your existing money so that you can get better returns.

While the first option will happen for sure and it’s completely in your control. However, the second option is where the wealth creation lies. In Option 1 you to be actively involved in day-to-day work and earn. However, option 2 does not require your active involvement. Despite minimal effort in option 2, the potential of creating wealth is substantially more in option 2 than in option 1.

The difference between savings and investing.

Saving is the process of putting cold, hard cash aside, usually in a savings bank account.

Investing is the process of putting your savings in various investment assets (such as stocks, bonds, real estate, gold, etc.). This ensures that your money grows over time.

While it’s important to save money, it’s even more important to invest your savings. If you don’t invest your savings, their value will only reduce year after year on account of inflation.

Unlike the United States or some of the other developed countries, most of us in India haven’t reached a level of hand-to-mouth existence. This basically means we are not spending whatever we are earning.

In India, almost everybody saves some amount of his or her income. There are few who save a lot and few save less. Savings rates range anywhere from 0% to as high as 80%.

There is no one single rule, which determines how much you should be saving, as circumstances differ for individuals. One should try and save at least 20% of their monthly income and increase it as their income rises over the years.

However, apart from the percentage amount saved, it is equally important to be constantly on the lookout for improving your savings potential without impacting your quality of life.

This does not mean that you start living a very frugal lifestyle and cut back on your consumption. After all, what’s the purpose of earning money if you can’t enjoy it. The idea is to find a right balance between savings and consumption.

An approach that can help you save better

Expenses = Income – Savings

Instead of Savings = Income – Expenses

You might be wondering, what’s the difference. In the first option, you first determine how much you want to save, and then spend only the amount that is left after accounting for your savings. This makes your savings as a number 1 priority and forces you to automatically save.

In the second option, you only save the amount, which is left after all your expenses, which can sometimes lead to a situation of zero savings.

Often people who save, do not land up investing. If you are saving in fixed deposits that generate 5-6% p.a. after tax, you are not growing your wealth. Wealth is created when you generate a return more than inflation in the economy.

Wealth creation does not happen in short-term. 

You have to give time for your wealth to grow. Unfortunately, investors have myopic behaviour that makes them commit errors and ruin their wealth. So next time, if someone gives you a HOT stock tip, you are better off ignoring that information.

A disciplined approach to saving will not only gives you greater control over your money but also improve your financial wellbeing. Always remember that money saved and invested is money earned.

How does your money grow ?

How does your money grow ?

While money is not a living thing, it can still grow! That growth is possible because of the power of investing and compounding over a period of time.

So what exactly is compound interest?

Its earning interest on the interest already earned. In other words, your interest on savings also earns interest. Suppose you deposit some money in your account today. There will be an increase in the value of it after a year, on account of the interest earned.

Let’s say you have Rs 1000. It is invested in an asset where it earns interest return of 10% p.a. Here is how it will grow in 10 years.

Year Amount Interest
1 1000
2 1100 100
3 1210 110
4 1331 121
5 1464 133
6 1611 146
7 1772 161
8 1949 177
9 2144 195
10 2358 214

 

As you can see in the interest column, the earning for the first year is Rs 100, which increases to Rs 110 in the second year. This happens because interest is earned on the interest also in the second year and onwards.

It’s a beautiful and almost a magical concept, which enables the creation of large amounts of wealth by investing small amounts of money every month.

And the higher the interest rate or return, the more your money can grow. There have been investment assets like equity and real estate in certain pockets, which have delivered 15% to 20% returns per annum.

If your Rs 1000 grew at 15% per annum, it would have grown to Rs 4045 in 10 years.

If it had grown at 20% per annum, it would have grown to Rs 6191 at the end of 10 years – or grown almost 6 times.

Of course such high growth rates are not without risk, which is why you should have a diversified portfolio so that your money can grow in a balanced and risk adjusted way over the years.

The earlier you start investing your savings, the higher the benefit.

However, even if you are older and haven’t started, it’s not too late. As they say, “Better late than never!” – The most important action you need to take is to START INVESTING NOW!

How can you plan for your retirement

There are many things you must do before your retirement. But there are few essential things that you must do before you Retire

Do not put off today what you cannot afford to do tomorrow. In India, you have to create your pension and the government has a minimal role to play in securing your retirement. Here are a few tips on things to do before you retire so that your retired life is more comfortable and enjoyable.

Payoff all your loans 

If you are taking a housing loan, personal loan, car loan or any other loan make sure that you repay them on or before your retirement. You need to choose the term of the loan in accordance with your retirement age. You can truly enjoy your retired life when you have 100 percent financial freedom, not when you have to repay your loans.

Protect your emergency fund

Emergency expenses can happen any time. But the possibility goes up as we grow older. So we need to enhance the emergency reserve year on year, based on the inflation and change in your expense levels. Also, you need to invest back in your emergency fund in case you have withdrawn out of the emergency fund to meet any other expense.

Establish a retirement budget

You need to visualize your retired life well in advance and need to create a budget for your retirement. E.g. You will not be going to an office so expenses on transport and clothes may come down. Also, you will have more time to spend. You may need to spend more on leisure travel and health care.

Examine your cash flow

Assess your cash flow situation and consider any income that will continue post your retirement such rent, interest income, etc. Will there be any unwanted outflow during your retired life? Like paying life insurance, or SIP. You must also realign your existing policy and other investments in sync with your retirement age.

Grow your retirement corpus

Most of the people start to plan for their retirement when they are close to their retirement age. Often its too late to have a structured approach to creating appropriate fund before you retire. Here is a tool that can help you understand how much you need to lead a comfortable life before you retire. A professional financial planner can help you determine the right asset allocation to achieve the required corpus.

Develop a withdrawal strategy

This is one of the toughest aspects any retiree has to deal with. When someone retires bulk of payout is made through an employer. In case you have not created a plan for withdrawal you can either commit your funds to wrong investment channels or park in an extremely safe option that does not cover your retirement life. One simple rule is to spread your retirement savings across various vehicles and then strategize with withdrawal strategy to ensure continuity, stability and tax-efficiency. 

Minimize taxes

Careful selection of investment vehicle can reduce your tax during the retired life. Investing in PF and PPF can help to grow your investments on a tax-efficient basis. However, the growth is limited to these investments. Therefore, you need to add growth assets such as equity and real estate. Until recently, equity investment was tax-free but now with the re-introduction of LTCG, you have to pay 10% on long-term capital gains. However, even considering LTCG, investing in equity is important for your portfolio to beat inflation. 

Get sufficient mediclaim coverage

The moment you retire, your employer will stop covering you under the group mediclaim. So you need to plan for your individual medical cover well in advance. At old age, the medical expenses are inevitable and will only increase. If you have not planned it properly then all your retirement plans can go haywire.

Consider inflation adjusted pension plans

The monthly income you need when you retire is not going to be the same even after 5 years of your retirement. Inflation will increase your retirement expenses year after year. Therefore, your retirement portfolio should grow more than the inflation. 

Oversee estate planning

How your fixed assets and financial assets need to be distributed to your legal heirs? Create a Will. You can avoid creating relationship problems to your next generation because of your left out wealth.

Unless you are aware of what and how much you need for your retirement goals, your current investments will probably not be enough.