Category: Blog

22 Mar 2021

Time is Running out for Saving Tax under 80C section for this financial year

The Financial Year 2020-21 is just about to end in a few days. This year has been quite different for all of us.

In terms of financial planning and investments, the government had allowed us to invest for the previous financial year (2019-20) for several months into this financial year. Hence, it is a good time to remind that the extension given for FY2019-20 was a one-off event, and might not be repeated again.

It is crucial to remember that March 2020 was a wash-out in terms of financial activity due to the panic that set in due to the Covid-19 pandemic.

Tax Saving Provisions

So today we are here to just remind you about the tax-saving investments you need to make for the current financial year. This is mainly for those individuals who have chosen to remain under the old income tax regime. Accordingly, they have the window of investing up to Rs 1.5 lakhs under Section 80C of the Income Tax Act and up to Rs 1 lakh spending under Section 80D (medical insurance) of the tax laws.

What is Section 80C? This section gives you tax benefit for total investments up to Rs 1.5 Lakhs made in PF (EPF, PPF, DSOPF), Tax Saving Mutual Fund Schemes (ELSS), Insurance policies including AGIF/NGIS/AFGIS, tuition fee for your children, principal part of home loan payment, SCSS, NSC etc.

Not been able to do it or only done it partially? Let us see what should you do now?

We will first try to answer what not to choose.

Where not to invest?

In their hurry to make these investments in the last few days of the financial year, many people approach friends or relatives to figure out a solution to save some tax. Unfortunately, this hurry leads them towards poor products like buying insurance policies as a tax-saving-cum-investment avenue.

Subsequently, they realise that the investment is not in line with their requirements or they find themselves unable to pay the same high premium in the subsequent years for various reasons. This results in a significant loss, because only a small part of the amount paid in the first year gets recovered in most of the policies. Please make sure you do not buy an investment linked insurance policy at this stage at all.

Similarly, you could be told by someone to invest Rs 1 lakh in health insurance for yourself and your senior citizen parents to save tax of Rs 30,000. While this is better than the unsuitable life insurance policies highlighted above, be careful here too. Buying health insurance in a hurry is not a wise decision. Many factors need to be evaluated to get good health insurance. We won’t say don’t go for this, but instead, consult a financial advisor who will guide you on whether you need it at all and if yes, what is good for you.

Where to invest?

Now that you know the blacklist (for now), you can explore the remaining options depending on their suitability for you for now and for future.

The most preferred option at this stage could be an equity linked savings scheme (ELSS) which is the official name of tax-saving mutual funds. This is preferred because you will be investing in the equity markets with a 3-year lock-in period.

There is no compulsion of investing the same amount next year, so you are not stuck with what you choose this time. After 3 years, if you find it a good one to continue, it is your wish.

The ELSS not only gives you a tax benefit at the time of investing but also when you withdraw your amount after 3 years or later, the taxation of these schemes is very benign and user-friendly. Also, you get a chance for stock market related returns for as long as you want.

If you find this a good proposal, you can even start a SIP (Systematic Investment Plan) in it for Rs 12,500 per month from April 2021 onwards (totalling 12,500 X 12 = Rs 1.5 Lakh per year) so that the yearly hassles of rushing at the last minute are gone forever. However, one word of caution – please do a due diligence while selecting the right scheme. If you feel you are not adept at it, do not hesitate to take the help of a financial advisor.

The last and the safest option is probably going for investing the required amount in PPF. If you already have a PPF account, this is a better option. You do not need any major supervision to make this investment. Moreover, the returns are as guaranteed by the government. The only catch here is the lock-in period of 15 years in PPF. Hence, we said it is ideal for someone already having a PPF account. If you don’t already have a PPF account and typically are less than 55 years of age, you might want to consider having one. If arriving at that decision is taking time, choosing a good ELSS scheme might be the best choice left for you, which can be seamlessly executed now before the financial year ends.

09 Mar 2021
Stairway to Heaven - Put it all together

Chapter:15 | Stairway to Heaven – Put it all together

As more time passed, AK and Rajesh became more and more informed about their own personal finances and over time put all the basics as taught by Pranav in place. Despite some resistance from within family and friends’ circles on their biases and ‘their own version of investing’, they remained steadfast on the path of financial well-being.

AK was the first to retire. He had already put his plans of re-employment aside for the time being. His favourite quote nowadays was: ‘Let me first discover the world as it has been waiting for me for a long time to explore’! He was now contemplating a break for a few months to declutter his financial and family affairs and then have a world tour for a few months. Taking a little inspiration from both Rajesh and Pranav, he too was now planning to either pick up a corporate job or work on social causes he believed in.

Over the next few weeks, Rajesh and Pranav also retired. Rajesh was to join his new workplace in next one month in another city. Pranav on the other hand, had already started spending more time in the NGO he had planned to work with.

The golf sessions had now turned into longish gossip and chat sessions. As Rajesh would be relocating to a new place and AK too would be spending less time in their current city, it was a farewell of sorts. Their schedule of playing golf and then having a good coffee-cum-chat had been in place for over 5 years now.

“We have known each other for so long, but isn’t it strange that we started talking about the most important things only in the past few months,” AK said, referring to the entire personal financial discussions they had. “To be fair to Pranav, he used to give us small advice of prudence from time to time, but unfortunately we were too consumed in our own affairs to take heed,” he added, smilingly.

Rajesh acknowledged what AK had just said, and added that the learnings will have huge benefits for him and he was also certain that his kids will reap the bounty. “I am happy that even my kids have now started investing even though they are just in their late twenties and early thirties. With the kind of time on their hands, I have a feeling that they will be happier and more satisfied than even Pranav,” he joked.

Taking the joke further, Pranav said how he was envious that he himself learned all about personal finance only in his forties. “Had I known all this in my thirties, I would have been playing golf with richer people, rather than you both!”

AK reminded the other two that he still needed to take care of his real estate till he finds reasonable buyers. “But I am certain that I will do that gradually without any pressure. Moreover, I am happy about the fact that my thought-process towards enjoying my own life has changed due to our discussions. Though it was tough, I have also been able to convince my wife on the same,” AK said.

They all agreed that retirement life without having to worry about random issues and more focussed on things that could give inner peace and happiness is something they will cherish. Moreover, they had now made it their aim to guide younger generations at home as well as work towards better personal financial management for friends and colleagues.

“It is surprising that so many people around us, including myself, end up making wrong investment decisions. Sensible investment habits need to be made a part of the training curriculum right at the beginning of one’s career, whether institutionally or personally,” he said.

Agreeing with AK’s point of view, Rajesh added that the availability of information is also a factor and that people of their generation cannot be completely blamed for the decisions they took in the past. “When we were young, the concept and availability of new-age instruments like mutual funds wasn’t heard of anywhere near us. Now that such simple and easy to use financial products are available, we will ourselves use them and ensure that our next generation knows about them and other aspects around investing as well,” he added.

Pranav couldn’t contain his happiness and was smiling all throughout the discussion. “I am really glad the discussions helped you and your families. I was afraid at times that I was boring you both,” he said.

“Having the right insurance, a good emergency fund, a practical goal-based financial plan, tax plan as well as an eye on the silent super-killer called ‘inflation’ is all that needs to be considered. Investments and asset allocation are the next important steps. However, for a Golden Retirement, the most important requirement is understanding the difference between wants and needs, and conquering the emotions of fear and greed,” he said, continuing, “and ensure that your kids and other young lads in the family know the basics from a young age. It is not just about starting investments early but also knowing what to start for – otherwise it will not be sustained.”

Rajesh proposed a family get together for the three families to which AK and Pranav readily agreed. “I only have one condition. Let us not turn that into a personal finance seminar,” Pranav jokingly said.

Gyan Collected

  • It is never too late to learn the basics of personal finance. On the other hand, the earlier we teach our young ones about this important aspect, the better it will be better for them.
  • It is important to be prudent and be aware of the impact that taxes and inflation can have on your wealth. They are normally missed out while they have the most adverse effect on our finances.
  • It all starts with understanding the distinction between wants and needs, and conquering our greed and fear.
  • Finally, we have to understand that Money may not be able to buy happiness and peace in life, but it can buy most other things!!
08 Mar 2021
Do you wish to invest in Google, Amazon, Apple and Netflix?

Do you wish to invest in Google, Amazon, Apple and Netflix?

International Funds are becoming the flavour of the day. Are they for you?

For those keeping an eye on the mutual fund space, you would have suddenly found a lot of discussion on the subject of need for Indians to invest in other markets of the world. And this discussion is through various webinars, news articles, advertisements and social media communications. Let us see what are International funds, how do they work, and are they for you?

Why this sudden interest in global markets?

As the equity markets continue to hit new highs every week, mutual fund houses are looking for ways to diversify investment risks for Indian investors. One of the strategies the industry is looking at is to invest in global markets, ie stock markets outside India.

Global equities, as an asset class, help investors diversify, and thus de-risk, their exposure concentrated due to investing only in one country, India.

When one invests in the stock markets of only one country, the political, economic and financial happenings of that country directly and fully affect the invested portfolio.

Different economies and markets do not move in tandem with each other, except during global phenomenon like the Covid-19 or meltdowns of 2008. International funds provide an opportunity to invest in other economies that are performing well at a particular point in time. The good returns from the foreign markets support the overall return from Indian portfolio in periods when the primary Indian market is not doing well.

Also, Indians do not get access to the top and best performing companies of the world if their stock investments are confined to Indian stock markets whether as direct stocks or through mutual funds. Hence, the case for investments of Indians to be diversified for international exposure provided the risks are well understood.

The Global GDP is approximately $83 trillion. India is around $2.5 trillion only (3%) while the US GDP is around $21 trillion (25%). So, in the global scheme of things, Indian equity exposure is like exposure to a Small cap stock while US equity is like a Large cap stock. Same is the case when we look at other economies with large stock markets like China, Japan, Hong Kong, Singapore and Europe.

How can investment be done in international stocks and stock markets?

An individual who wishes to have an exposure in international stocks has three ways of doing it:

  • Directly invest in equities abroad by using the liberalised remittance scheme (LRS) of the RBI. As per this scheme, resident Indians (individuals) can transfer up to USD 250,000 in a financial year for various purposes including investment in foreign markets.
  • Invest in an Indian fund which invests in a fund abroad which invests in foreign stock markets. Such an Indian fund is called a Fund-of-Funds (FoF).
  • Invest in an Indian multi-cap or Flexi-cap fund which also invests in international stocks, such as Parag Parikh Flexicap fund.

The first route of directly investing in foreign equity could be difficult, or maybe even dangerous, for most investors due to lack of domain knowledge of foreign equity. Hence Indian International Mutual funds, whether investing directly in equity or going through the route of investing in a foreign fund, is the best way to go ahead for this purpose. You also get the flexibility of investing through the route of bulk and/or SIP rote in such funds like any other mutual fund scheme.

The international funds could invest in different ways:

  • Be country-specific, ie, investing in the stock markets of only one country eg, US, Brazil, Japan, and China.
  • Be Region-specific like investing in Europe, Asia or even emerging markets.
  • Invest in companies abroad based on a particular theme like retail consumption, energy, commodities, and real estate.

Risks of investing in international mutual funds

We see three risks which should be understood before one takes a decision:

  • Exchange rate risk: Fluctuations in foreign exchange rates, especially appreciation in the rupee, can adversely impact the returns of international funds.
  • Foreign market risk: International funds expose its investors to the political, economic and stock market risks of foreign economies that the fund is investing in. The risk is higher in case of investing in emerging or frontier markets which could be lacking in a proper regulatory framework, market efficiency and liquidity.
  • Concentration risk: International funds with concentrated investment portfolios, like investing in one index of a country, or a specific theme like global real estate or agriculture, may suffer from higher risk, lower liquidity and higher return fluctuations.

Taxation of International Funds

International Mutual funds are treated like debt funds in India as far as taxation is concerned.

The gains for a holding period of less than three years are treated as short-term capital gains. They are added to the income of the investors and are taxed at the slab rate. The gains over a holding period of more than three years are treated as long-term gains and are taxed at the concentrated rate of 20% post indexation, making them quite tax-efficient.

What is the current mutual fund activity in this arena?

As more Indians look to invest abroad, MFs are lining up international funds like never before. ABSL, DSP, Edelweiss, Franklin, HSBC, ICICI, Invesco, Kotak, Motilal Oswal, Nippon and PGIM already have many international funds in their kitty.

SBI Mutual Fund has recently announced the launch of SBI International Access – US Equity FoF, an open-ended Fund of Fund scheme that invests in mutual fund scheme/ETFs that further invest in the US markets. Six mutual fund houses are further seeking SEBI’s permission to offer nine international schemes. The fund houses include Mirae Asset, Mahindra Manulife, Nippon India, Kotak Mahindra, HSBC and BNP Paribas.

The competition to take your money abroad is hotting up. Judge for yourself whether you want to be a part of it.