What we should not do When Investing in Tax Saving Mutual Funds !!

We have just two two months left for this financial year and many of us might already have made all the tax saving investments. But many others may be still waiting to completely utilise the tax-saving exemptions available under Section 80C.

We have many tax-saving avenues available, such as Public Provident Fund (PPF), Tax-saving Bank Deposits, National Savings Certificates (NSC) etc., many are flocking to tax-saving mutual funds also known as Equity Linked Saving Schemes (ELSSs). With the falling interest rates on fixed income products and high growth in equity mutual funds, investors are flocking to the equity market in the quest to earn higher returns.
 

PPF, which has a 15-year lock-in (with partial withdrawal after 6 financial years) and bank FDs or NSCs that have a 5-year lock-in while investments in ELSSs are locked in for three years only. This makes it more liquid than other options.

ELSS could be a prudent choice as compared to other fixed income products however as applicable to all market linked investments, there ELSS also has a risk. We should not just get carried away by the double-digit past returns but do it systematically through a well-defined process.

Here are few things which we should not do when investing in ELSS.

 

1.     Investing lump sum rather than in staggered manner:

Many of us invest suddenly wake up for tax saving when the HR of company asks for the proof and then invest full amount at one go in ELSSs. This is not the right way for equity investments as lump sum investments in equity mutual funds might expose our self to a high-volatility risk. Hence, even if we wish to invest lump sum the better way is to invest in a staggered approach is prudent.

The best approach to is to opt for Systematic Investment Plans (SIPs) which helps us to sail the tides of market volatility.  This helps us to accumulate more units when markets go down. It will be best way to start a SIP in an ELSS at the beginning of the financial year. This will help average out the cost as well as will not put all burden in the last months of the year.

   

2.     Not understanding the real risk:

We all heard about this famous tagline in every mutual fund ads “Mutual Fund Investments are subject to market Risk Pease read all scheme related documents carefully”

However still we get carried away with the past performance with the belief that it will continue. Mutual funds returns are not fixed and while investing we should always keep this in mind. Further the returns also depends upon portfolio where the scheme has invested. Therefore it is always better to understand the particular scheme and its portfolio details before making an investments just based on past performance.

3.     Not Matching financial goals with the investments:

It is very important to be clear on our financial goals and select the right investment based on the goals. Making investments without goals is like starting a journey without knowing the destinations. If we don’t know the destination we may not be able to select the right vehicle i.e. whether a car is good or train or a plane and may end up selecting a wrong vehicle which may either not take us to the destination or not within our timeline.

Similarly investment should also be made based on financial goals, investment objectives, investment horizon, and risk profile which will help us to select right investment option and make our investment journey easy and enjoy full.

4.     Not selecting the right option:

 
Mutual funds have two options; growth and dividend. Growth is for those who don’t need money now and want to grow wealth for long duration to achieve financial goals later on. While dividend is for those who need money on regular basis may be to meet their regular expenses.

We should select the right option based on our specific needs so that we get the benefits as desired. Since dividend is paid out of the investors own money, just for the sake of getting money on regular basis does not serve purpose if we actually don’t need it.

 

5.     Following the tips rather than the professionals: 

One person cannot do everything. Doctor are good for advising medicines, Lawyers are good for legal matters similarly Financial advisors are required to get the right advise for our achieve our financial goals.

Some time we just get influenced by some friends/relatives or do our own research in internet to buy financial products. It is like taking medicine by searching on google will that cure or no is a big question mark.

It’s always better to take professional advice so that we are more comfortable and sure that what we are doing is right and make our financial wellness better.

6.     Over diversification:

It’s good to diversify but if it’s too much it may actually not help. Like in food if we have 5-6 items we may enjoy it but if the items are 50-60 we may not be able to enjoy them in fact get confused or eat something which may not be good for us. Diversification is must and is the core principal for investing in mutual funds, however adding too many schemes to the portfolio, especially on the equity side, adds no value. It will lead to over diversification and reduce the potential of your portfolio to generate superior returns.

It is better to invest only in few selected consistent performers tax saving schemes which offer exposure to the entire spectrum of the markets. It is also important to review the portfolio every year and replace the bad performers.
 

7.     Investing in close-ended long term funds:

ELSS schemes have lock-in period of three years, t there are schemes which have tenure up to ten years. It is good to invest for long term however investing in long term close ended schemes reduces our flexibility to take out the funds when it is not doing well.

We should invest for the long term, but opt for an open-ended scheme. The performance of different schemes keeps on changing due to various reasons so it is always better to have control in our hand so that we can shift from one scheme to other if it is not doing well.

To Conclude

Tax saving schemes helps us to save tax and also inculcates a habit of savings for long term which is very good and required for every individuals. However last minute tax planning, that also only for the sake of saving tax can lead to lower savings and inefficient investments. It is always better plan for taxes at the start of the year, to see where we stand and make adjustments later on if required. We should know the various routes to save tax on your income and a professional’s advisor can add value in our investments. 

Tax Benefits beyond 80C

We all know about 1.50 Lakhs tax savings under section 80C of Income tax Act. However there are many more things which a salaries employee can do to save more taxes as permissible under income tax act. Let’s discuss few of them which are important.

A-Mediclaim and Health Insurance benefits

You are allowed to claim a deduction up to Rs. 25,000 per budgetary year for medical insurance premium instalments. The premium should be for you, your spouse, and dependent children. On the other hand, if there is a chance that either you or your spouse is a senior citizen (60 years or above), the limit goes up to Rs. 30,000.

However, Medical insurance premium should be made through online banking, a cheque, draft, debit or credit cards, etc. Tax reduction is not accessible for cash instalments of the premium. In any case, instalments for preventive health checkup can be paid in cash. 

1- Deduction on Preventive Healthcare Checkups

You get tax reduction on preventive health checkups annually. Inside the aforementioned limit of Rs. 25,000 (or Rs. 30,000 all things considered) under Section 80D income tax, you can also claim expenses incurred for preventive health checkups up to Rs. 5,000 for each budgetary year.

Remember: The premiums paid for health insurance availed by your siblings are not qualified for tax benefits.

2- Deduction on Health Insurance Premium Payment for Parents

Medical insurance premium paid for guardians is additionally qualified for deduction up to Rs. 25,000 every financial year. If your father or mother, or either of them is a senior citizen, the maximum limit goes up to Rs. 30, 000 a year. This limit additionally subsumes Rs. 5,000 that can be caused towards your parents’ annual health checkups.

What if my wife and parents are not dependent on me? Can I still claim deduction if I pay premiums for their health insurance?

Yes, you can claim deduction in this case. This deduction is available to those who pay health insurance premium members of their family irrespective of whether the members are dependent on the person or not.

Can health check-up expenses be claimed separately for each dependent?

The answer is no because you can only claim Rs. 5,000 in a year for these expenses whether for a single dependent or multiple dependents. This deduction cannot be claimed per person basis but as an aggregate.

For e.g., If a person pays any amount on preventive health check-up (for himself + spouse & dependent children + parents), the gross total deduction allowed would not be more than Rs. 5,000.

3- Deduction on Health insurance premium for very senior citizens

Super-senior citizens (80 years or more) who don’t have any insurance policy can claim a deduction up to Rs. 30,000 every financial year towards medical checkups and treatments. However, this is not for own expenses.

On the other hand, if your dad is a super senior citizen and he has no insurance and mother is a senior citizen, then you are allowed to claim a tax deduction of Rs. 30,000 towards your medical treatment for guardians, medical coverage and registration of both guardians.

4- Deduction Under Section 80DDB (Treatment of Specified Illnesses)

You can get a deduction up to Rs. 1, 40,000 (Rs. 60,000 for senior citizens and Rs. 80,000 for extremely senior citizens) for medicinal expense incurred for determined ailments. For example, cancer, chronic renal failure, Parkinson infection, etc. The complete list of such diseases is given in Rule 11DD.

You have to attach an endorsement from specialist while filing income tax forms.

You can claim for self, spouse, guardians, children, and siblings.

5- Deduction Under Section 80DD (Treatment of a dependent with disability)

You can claim the benefit up to Rs. 75,000 based on the expense incurred for nursing, training, medical treatment, preservation, and rehabilitation of a dependent with disability (Rs. 1.25 lakh for an extreme and serious disability). Reliant can be any of your parents, children, your spouse, or siblings. You need to show or submit a supporting medical certificate.

6- Deduction Under Section 80U (Person with disability)

A person who is a disabled can claim benefits of Rs. 75,000 under Section 80U. In case of disability, the limit increases up to Rs. 1.25 lakh. There is no other relation to the treatment costs.

B- House Rent Allowance (HRA)

HRA stands for House Rent Allowance.

It is taxable under the IT Act subject to specified exemption limits. 

If you do one of the following then your HRA is fully taxable, not exempt if you:

       i.          Reside in your own house; or

      ii.          Do not pay rent for house occupied by you.

However, if you are living in a rented house and paying the rent, then HRA exemption can be availed for the period during which you occupy the rented house during the relevant tax year. 

Also, to claim the exemption, your employer is required to obtain appropriate and adequate proof of payment of rent for the entire period for which you want to claim exemption. 

An exception to the 'proof required' HRA rule is that, if you are a salaried employee drawing HRA up to Rs. 3,000 per month, you do not have to provide a rent receipt to your employer.

The maximum amount that can be claimed as an exemption under HRA is the least of

       i.      Actual HRA; or

      ii.      Rent paid in excess of 10% of basic salary + Dearness Allowance

             (DA) if in terms of service; or

     iii.     50% of basic salary + DA in case of Chennai, Delhi, Kolkata, Mumbai

             or  40% of salary + DA in case of other cities

Documents required to claim HRA:

To obtain HRA exemption, you are required to submit appropriate and adequate proof of payment of rent for the entire period for which you want to claim exemption.

       i.   Submit Rent Receipts or the Rent Agreement to your employer if your rent does not exceed Rs 1 lakh annually.

      ii.   If you are paying an annual rent of more than Rs 1 Lakh (i.e. Rs 8,333 per month), report the Permanent Account Number (PAN) of your landlord to the employer (Earlier you had to furnish a copy of the PAN card of your landlord only if your annual rent exceeded Rs 1.80 lakh, or Rs 15,000 per month).

if your landlord does not have a PAN, you need to file a declaration to this effect from your landlord along with the name and address of the landlord.

     iii.   As an employee, if your salary has an HRA of less than Rs 3,000 per month, you are not required to provide a rent receipt to your employer.

Even if you are not living in a rented accommodation, you still have few options to claim HRA exemption. Some common questions asked for HRA exemption are as follows:

1. Can I Pay rent to my parents/ spouse and claim for HRA exemption? 

Yes, you can pay rent to your parents and claim for HRA exemption if they own that house. However In this case, they have to claim that rental income from house property.

But, you cannot pay rent to your spouse and claim for HRA exemption if you own that house. And if you live in a house owned by your spouse, you can claim for HRA exemption.

2. Can I claim HRA if I pay rent to my relative? 

Yes, If you are living in a rented apartment owned by a relative. However it is always better to enter into an agreement and make sure that you pay rent by cheque or electronic transfer. If paying by cash, ensure that your cash transaction is traceable. Mere rent receipts won’t suffice to claim deductions.

In order, to maintain healthy relations, it is recommended to keep your money and legal relations crystal clear, so that there is no awkward situation in future. By doing so you can eliminate the potential for relationships to turn sour.

3. Can I claim both HRA and take home loan deduction benefit to save tax?

Yes, as far as the IT Act is concerned – the two sections on HRA and Rental Income are completely separate, so you can avail HRA exemption and also home loan tax benefits.

For example:

Suppose you are renting a house close to where you work, but your home is elsewhere, and you are repaying a home loan on your home property. In this case you can avail your HRA deduction, as well as take the tax benefit of the home loan. The two sections (dealing with HRA and Home Loan benefit) are completely separate in the IT Act.

Also remember, if you are renting out the property on which you have taken the home loan and are receiving rental income, your rental income is taxable, after the standard deduction of 30%.

4. Can I claim HRA if I live in a house that I own?

No, you cannot claim for HRA deduction against the house you own, because logically you do not pay rent to yourself for living in that house.

5. Can I claim HRA if I'm not currently paying any rent?

No, you can claim for HRA deductions only if you have a proof for the expense incurred. In other words, you need to have electronic/ traceable proof of the amount equal to the rent paid.

If you claim rent allowance while paying rent to your relatives/ family members it is better to fulfil below conditions:

1.     Enter into an agreement such as leave and license agreement

2.     You must incur the expense of rent and preferably pay via bank transfers     or cheque

3.     If rent is paid in cash, then it should be traceable – via bank withdrawals

4.     The said rent paid must be reasonable as per the ongoing rent in the locality

5.     Further, disclosure of rental income by the recipient is recommended to avoid scrutiny

C- Deduction for self-contribution to NPS – section 80CCD (1B) 

A new section 80CCD (1B) has been introduced for an additional deduction of up to Rs 50,000 for the amount deposited by a taxpayer to their NPS account. Contributions to Atal Pension Yojana are also eligible.

Employer’s contribution to NPS – Section 80CCD (2) Additional deduction is allowed for employer’s contribution to employee’s pension account of up to 10% of the salary of the employee. There is no monetary ceiling on this deduction.

D- Deductions on Interest on Savings Account

A deduction of maximum Rs 10,000 can be claimed against interest income from a savings bank account under Section 80TTA of Income Tax Act. Interest from savings bank account should be first included in other income and deduction can be claimed of the total interest earned or Rs 10,000, whichever is less.

This deduction is allowed to an individual or an HUF. And it can be claimed for interest on deposits in savings account with a bank, co-operative society, or post office. Section 80TTA deduction is not available on interest income from fixed deposits, recurring deposits, or interest income from corporate bonds.

E- Leave Travel Allowance (LTA)

As a salaried individual, you can claim LTA for any journey made either alone or with dependent family members in India. The maximum amount you can claim is the least of:

The amount actually incurred; or

The amount of LTA allowed

The exemption is extended for two journeys performed in a block of four calendar years. The current block is 2014-2017. The exempted amount is restricted only to expenses incurred on travelling to the destination. It does not include expenses such as hotel bills, food, etc.

F- Transport allowance

Expenses incurred to commute between your home and work place is also exempt from tax. The maximum amount that is exempt is Rs 1,600 per month.

G- Medical reimbursement

Expenses incurred by you or your family for medical purposes can also help in reducing the tax liability. A maximum of Rs 15,000 can be claimed every financial year for medical expenses. But to claim this, you are required to submit, to your employer, the medical bills for the financial year stating the total amount you intend to claim.

H-Deductions on Education Loan for Higher Studies

A deduction Section 80E is allowed to an individual for interest on loan taken for pursuing higher education. This loan may have been taken for the taxpayer, spouse or children or for a student for whom the taxpayer is a legal guardian. The deduction is available for a maximum of 8 years (beginning the year in which the interest starts getting repaid) or till the entire interest is repaid, whichever is earlier. There is no restriction on the amount that can be claimed.

To Conclude

Last minute tax planning can lead to lower savings and inefficient investments. It is always better that you need to plan your taxes at the start of the year, to see where you stand and make adjustments accordingly. It is important for you to know the various routes to save tax on your income the legal way so as to save tax and also invest in much better way.

Resolution for 2018: Be Healthy & Wealthy

2018 is almost here and we already have a plethora of plans and resolutions that we wish to accomplish. Considering that the New Year is the most motivating time to start with some new decisions which can change our life for the better, one excellent way to do it is by making some solid resolutions which can help us to be healthy and wealthy the two most important part of life. We can learn the good habits for healthy life and use them for a financial wealthy life as well.  Let’s chalked down the good habits for a healthy life and how can we learn from them to also have a wealthy life.

1.  Get up early in the Morning: Start Investing Early in Life

One very significant benefit of waking up early is reduced stress level. When we rise early, it eliminates the need to rush in the morning. We can then start your day on an optimistic note and such positivity often stays with you throughout the day. Early risers often go to bed early.

Similarly starting the investments early allows us to develop disciplined spending habits by focusing on budget and cutting expenses when needed. It gives more time to grow our investments and we get the amazing benefits due to power of compounding. Let’s understand it by an example: Ram starts saving Rs. 5000/- monthly at the age of 25 will get approx. 2.76 crs. At the age of 60. While Shyam who starts saving Rs. 5000/- at the age of 35 will get only 94 lakhs when he reached 60.

2. Have Balanced Diet: Diversify the Assets

A well-balanced diet provides important vitamins, minerals, and nutrients to keep the body and mind strong and healthy. Eating well can also help ward off numerous diseases and health complications, as well as help maintain a healthy body weight, provide energy, allow better sleep, and improve brain function.

Similarly we should diversify our capital across different investments to reduce your overall investment risk. This strategy is designed to help reduce the volatility of investment portfolio over time. For example a single scheme of mutual fund invests in 20-30 stocks and provides the needed diversification in a single investment.

3. Exercise Regularly: Invest Regularly

Regular exercise helps us to Control Your Weight, reduce the Risk of Cardiovascular Disease and Type 2 Diabetes and Metabolic Syndrome.  It also helps in reducing certain type of Reduce Cancers as well as it Strengthen our Bones and Muscles. Exercise also improves our Mental Health and Mood.

Trying to pick the top or bottom of markets is notoriously difficult, by making regular investments we can avoid timing the market. Regular investing helps to ensure that we don’t miss out on the best gains. Regular investments also helps to reduce the impact of periods of short-term volatility and gives our money the time it needs to grow, as markets will generally increase over the long term.

4. Drink enough Water: Have enough Liquidity

One of the best things we should do after waking up in the morning is to drink at least 500 ml of water. Water fires up our metabolism, hydrates and helps our body to flush out toxins. It gives our brain fuel, Improves Skin Complexion, Boosts Immune System and may even make us eat less.

Similarly we should have sufficient liquid assets. Liquid Assets are low-risk investment which can be converted to cash quickly and easily with little or no penalty. Examples of liquid assets are Treasury bills, savings accounts and money-market/liquid mutual funds. Flexibility and accessibility are just two of the ways liquid assets can help you stay ahead in the financial game. Liquidity is important. In case of emergency It is a safety net for us and our family.

5. Have Enough Sleep: Have enough Risk Cover

Adequate sleep is a key part of a healthy lifestyle, and can benefit our heart, weight, mind, and more. Sleep makes us feel better, but its importance goes way beyond just boosting mood or banishing under-eye circles. Sleep plays an important role in our physical health. For example, sleep is involved in healing and repair of our heart and blood vessels. Ongoing sleep deficiency is linked to an increased risk of heart disease, kidney disease, high blood pressure, diabetes, and stroke.

We should always have proper risk cover to face the uncertainties of life like health issues, loss of income, fire or theft at home etc. We should take proper Health insurance, life cover and also insure our valuable assets from the risks. By having proper risk cover we can have a much tension free life without bothering much for the uncertainties of life and can take also take some calculated risks in life.

6. Don’t diagnose yourself: Take Professional Help for analysing

In this day and age of limited time with doctors coupled with ample opportunity to google anything, the temptation for people to reach their own conclusions about their illness is strong. When we self-diagnose, we are essentially assuming that we know the subtleties that diagnosis constitutes. This can be very dangerous, as people who assume that they can surmise what is going on with themselves may miss the nuances of diagnosis. Another danger of self-diagnosis is that we may think that there is more wrong with us than there actually is. Then there is the fact that we can know and see ourselves, but sometimes, we need a mirror to see ourselves more clearly. The doctor is that mirror. To be fit and healthy we should always take Doctor’s guidance to know the exact problem and the right solution to cure it.

Similarly a Financial advisor examines an individual’s financial situation and health. He may pinpoint weak points that need strengthening. For example, the advisor may alert you about wasteful expenditure. He may identify investments that are not giving optimal returns. With the help of the advisor, we can chart out our financial goals–even the improbable and ambitious ones. The advisor can then help you create a plan to achieve these targets. He may suggest that you split your goals into short-term, medium-term, and long-term goals. This allows for better financial management. The advisor can recommend products to help you reach your goals faster. In this, the advisor would assess the risk profile, personality, and financial responsibilities. He would also explain the product features and suggest how to make the investments.

Managing your personal finances is not rocket science. People have been doing it for years with success. But it is all a matter of trial and experience. Choosing the right financial advisor is crucial to the success of any financial plan.

7. Periodic Reports & Regular visits to Doctor: Periodic review & regular interaction with advisor

Our health is our greatest treasure. Taking care of our health is utmost important. But in our daily life, we keep on looking for excuses to not visit our doctor. Be it for saving money or for other reasons like ‘I am too young and healthy to go to a doc’, ‘I don’t have time today; may be next week, I’ll get an appointment…”, we keep on ignoring our health. We ignore the fact that performing regular health check –ups from young age can actually reduce the risk of occurrence of several health issues in future.

Similarly we should have regular interaction with our financial advisor. Given the ever changing economic landscape, it is prudent to keep in touch with your financial advisor at least once in six months. This communication can take the form of a telephone call, an e-mail, text or meeting to discuss our current financial situation and any changes in our goals and needs. It is also important to have a face-to-face meeting at least once a year, or upon the event of any major significant changes in our or family’s life such as birth, marriage, divorce, death, inheritance, sale of house, purchase of house, change of job, loss of job, illness, pending retirement, or reaching Medicare age etc. Topics of discussion could include subjects such as tax situation, financial evaluation and estate planning, structure of portfolio, total assets, current and future growth or earnings, non-market related assets such as a private company or real estate.

7. Have qualified family Doctor: Have qualified & Certified Financial Planner

We should have a good doctor who is learned, honest, kind, humble, enthusiastic, optimistic, and efficient. He or she inspires total confidence in patients and develop a good relationship that by itself constitutes good treatment for any kind of ailment and the best starting point for confronting all causes of pain and suffering.

Similarly we should have a good and well qualified Financial Advisor who understand our requirements and also qualified to advise to client’s best interest in mind and can help in sorting out the income, expenses, needs, wants and financial ambitions as required for a person and his family.

If we follow these basic principles in life we may stay healthy & wealthy and live life peacefully.

Basic Rules of Personal Finance

For some people, getting personal finances in order is most difficult part of their life. However there are few basics and if we follow them properly it can make our financial life easy and systematically. Let’s discuss these basic commandments and understand their implications in our life.

1. Not just read but take Action

We keep on reading various articles about personal finance however just jeading about how to improve your personal finances will not work unless we take the action of putting what we learn into motion. Before we can get anywhere with our personal finances, we need to begin and the best time is-- right now. If we are reading this article, we know that we should be taking steps to get our personal finances in order.

First thing we should do is to take a print out of this list and place it where we can see it every day, so that it reminds us that personal finance is a priority in my life and that I shall take some action each and every day to try to improve it.

2. Credit Cards are costliest loan so clear it first

Credit card company’s charges interest rates between 3-4% monthly compounding which comes to 40-50% annualized. This is the costliest loan ever. In many cases people just pay the minimum due amount and that results into a debt trap. This is the number one enemy to our personal finances. It can have a huge negative effect if we don’t pay our credit card bills fully every single month. Make this a top priority.

3. Keep the Cashflow positive

It is simple math that our cash inflows should be higher than cash outflows. If we want to keep our personal finances in order, we should live on less money than we make. That means either our total expenses for goods and services we use should be less than our current income, or we should find out a way to increase our income so that we can spend more, but still less than what we make. Either of these is perfectly fine.

We should create a budget and track our expenses to see where we are spending and how it fares vis-a vis our income. If we are spending more than we make, we need to decide whether to curb unnecessary expenses or figure out how to increase the income.

4. Wants and Needs! They are different

We need to understand the difference between wants and needs yes they are different and must be differentiated to keep our personal finances in order. Yes we can spend some amount in small luxuries, however it should be in budget and after meeting the essentials.  It is very important to realize that wants are not needs. If we understand the difference and control our spending’s our finances will be in much better shape.

5. Pay Ourself First

Keeping specific amount for our future/emergency needs is a must. So before we start spending money on other expenses we should pay our self a minimum of 15-20% of take-home pay. This money is not part of monthly spending budget but saved for future goals/emergencies. A direct debit from bank account to liquid funds could be a good starting option for that.

6. Have Specified Financial Goals

We should have specified financial goals as per our requirements In order to reach them. Every person has their life style and priorities hence specific goals, so we should understand and decide our specific financial goals and when we want to achieve them. Based on these goals steps need to be taken to reach them.

7. Save and Invest

The money taken out (as mentioned in point no. 5 that you pay yourself) should be invested properly so as to make it grow and work for us in the future.

As mentioned in point no. 2 If we are carrying credit card debt, invest in (pay) it first. We should also make sure to take full advantage of various tax saving and investing opportunities that are available. Build retirement corpus and make sure to have an emergency fund.

8. Be Responsible for our Decisions

All of us cannot be expert on finance and investments and may feel it more convenient to hand over all our money matters to somebody else. However we should have the final say in all decisions about our money. We may seek out advice and get opinions on our finances, but in the end it is my money hence our responsibility. Remember we are the only one who is going to truly look after our own interests.

9. Protect the Assets

Life is uncertain and beyond our controls hence we should take all the necessary steps, usually through insurance, to make sure that our assets are protected in case of a disaster.

Take the time to check and ensure that all assets are properly insured, and re-evaluate this every few years or whenever a major life change occurs, such as marriage or a new addition to the family. Also be sure to compare insurance rates on a regular basis, since this is a competitive business.

10. Contribute to the Society

We may be not very rich but there are a lot of people that are far worse off than us in the world. It's important to nurture a sense of giving and to be thankful for the small things that we have. That means donating to worthy causes on a regular basis.

We can select a few causes that we believe in, and give to them generously. It’s not just money that we can give. Volunteering time and skills are also appreciated by most charitable organizations. 

Insurance: Are you covering Risk or just saving Tax?

Almost all of us have insurance policies, many of us have actually multiple policies, mostly sold by someone known to us. But do we really know whether we actually need them and how much risk cover we are having?

We should keep in mind that an insurance policy is supposed to protect one against a financial loss in the event of a casualty or untoward event. In the case of life insurance policies, such an event is the untimely death of an earning member of the family, resulting in loss of future income. The best way to buy protection against such financial loss is to buy an insurance policy for an earning member of the family such that the risk cover (or sum assured) is as high as possible for the lowest amount of premium payable.

Most of the policy holders do not know the amount of life insurance cover they have but they know exactly how much premium they pay each year and also insurance agents generally push more on investment based insurance products rather than pure risk cover products. Why is it so, let’s understand it?

1. According to the accounting principles followed by the Insurance Sector, the premium collected by an insurer is booked as its income, while the risk covered is the firm’s liability. A pure term plan is a policy that gives the least income to the insurance company, while creating the highest liability. Hence, it really does make good business sense for insurance companies to sell investment-linked insurance policies, to shore up their income. 

2. Since income is the main criterion, insurers fix sales agents target based on premium collected rather than total risk covered. This leads to the agents to sell those policies where higher premium can be collected.

3. The seller’s commission is linked to the premium and not the cover. Therefor pure insurance policies tend to lose out to investment-cum-insurance products in sales.

4. The Income tax deduction under section 80C is linked to the premium paid and not the risk cover. Therefore investors also focus more on the premium amount and how much they will save on tax rather than the risk cover.

5. The normal human psychology is to get something when we are paying for it. In pure term insurance policy a policy holder do not get anything if he survives over the tenure of the policy which makes it unattractive. But we should compare it with mediclaim or vehicle insurance where we don’t get anything if there is no claim.  In case of life insurance policy why we always want something. Read my earlier post Mutual Fund + Term Insurance: Best of both Worlds for to understand that how term insurance and mutual funds can give much higher returns as compared to traditional policies.

The most suitable policy for providing such protection is a pure term plan. Whenever a person tries to sell an insurance policy, we should ask for a comparison of features and costs across the various options available. The first step in buying insurance cover is to calculate one’s need. The next step is to find which insurance policy would serve the purpose.

As for tax planning, many options besides insurance are available. If we want to take risk, invest in an equity-linked savings scheme. If we do not want to take risks, there are longer-term bank fixed deposits, NSC, PPF, SSY etc.  which come under Section 80C. Certain expenses like: Children’s tuition fees, the principal repayment part of the home loan EMI, etc. are also eligible for Section 80C benefits:

We should always remember: As a life insurance buyer, our primary need is to get a risk cover. Focus on that. That will save us from mis-selling, too.