With the dawn of the new financial year, it’s time to start planning our finances. It’s important to understand the various options available in the market and make the right investment decisions so that you can get the highest tax benefits.
When you make a financial plan, you need to budget your expenses; set aside an amount for savings and investments and stick to your plan. Once you know how much of your income you can put aside for savings, you need to choose financial instruments that would work well for you.
There is no risk associated with a tax-saver fixed deposit. It is like a regular FD
only that it has a lock-in period of 5 years. You cannot withdraw the money before that, so you lose out on liquidity for 5 years. You can invest up to Rs.1.5 lakh and claim tax deductions under Section 80C of the Income Tax Act, 1961.
Equity Linked Savings Scheme (ELSS)
ELSS is a type of mutual fund plan wherein you can invest by making monthly payments or a lump sum payment. This option gives you the highest returns among the investment options under Section 80C. The lock in period is 3 years minimum. You can claim tax deductions and save up to Rs.46,800. All mutual funds carry some amount of risk as it is dependent on the market.
Public Provident Fund
This is a government-backed scheme and can be opened at banks or the post office. You can deposit a minimum of Rs.500 and a maximum of Rs.1.5 lakh annually. PPF offers one of the highest rates of returns on safe investments. You can earn 8% p.a. The tenure of PPF is 15 years, but after 5 years, you can make partial withdrawals. For a PPF, you can claim tax deductions under Section 80C.
Investing in life insurance and health insurance
is essential. A life policy is needed if you have people dependent on you and your source of income. This policy will financially take care of your loved ones if anything were to happen to you. Health insurance is vital today as the rate of health problems is on a rise given the change in our lifestyles. Premiums paid for life insurance fall under Section 80C, while health insurance premiums fall under Section 80D.
Sovereign Gold Bonds
These bonds are issued by the Government of India and are not available at all times. You need to look out for issue periods and pick up the bonds at this time. SGBs are a safe investment. You can buy minimum 1 gram and up to 4 kgs. The price of the bond is close to the price of 999 purity gold in the market. The tenure is 8 years, but you can exit on the 5th, 6th or 7th year. When you redeem the bond, you will be paid the value of gold on that day plus interest. There is a risk only if the market fails miserably, but generally, gold is a safe-haven asset which always increases in value over the years.
You must always do your research before making any investment as it is not enough to blindly follow the investment plans of our family members and friends. Each person has different needs and risk appetite. Knowing all your options will help you make smart investment decisions for FY20!