How Will My Income Tax Be Affected by My Investments After a 2020 Accident?

Ans: Yes

Person having income above 3 lacs (for new tax regime) is required to file ITR. However, you will be eligible for tax rebate upto 25000 and not likely to pay any tax on gain.

Ans: Your current financial situation reflects a well-structured approach towards savings and investments despite the constraints posed by medical issues. You have a steady income of ?1 lakh per month, and you are diligently paying off a home loan EMI, investing in fixed deposits (FD), Public Provident Fund (PPF), and the National Pension System (NPS). This detailed guide aims to help you navigate your financial strategy effectively while considering your limitations and future goals.

Understanding Your Current Financial Position
Income and Expenses
Your monthly income is ?1 lakh, with an approximate deduction of ?16,000 for taxes. This leaves you with ?84,000 per month.

Home Loan EMI
Your home loan EMI is a significant fixed expense. Ensure this is a manageable proportion of your income to avoid financial strain.

Investments
You are making regular investments in FDs, PPF, and NPS. This is a prudent approach for tax savings and long-term financial security.

Medical Insurance Constraints
You cannot invest in term life insurance or medical insurance for your parents due to medical issues. This presents a unique challenge that requires a tailored financial strategy.

Optimizing Investments
Public Provident Fund (PPF)
PPF is a secure, long-term investment that offers tax benefits. Continue maximizing your PPF contributions up to the permissible limit.

Benefits
Tax-free interest
Long-term growth
Safe investment option
National Pension System (NPS)
NPS is excellent for retirement planning. It offers tax benefits and the potential for higher returns due to market-linked investments.

Benefits
Additional tax deduction under Section 80CCD(1B)
Flexibility in choosing the investment mix
Pension income post-retirement
Fixed Deposits (FD)
FDs offer guaranteed returns, making them a safe investment. However, their returns are generally lower compared to other investment options.

Considerations
Ensure you ladder your FDs to manage liquidity.
Compare interest rates across banks for better returns.
Exploring Additional Investment Options
Mutual Funds
Actively managed mutual funds can provide higher returns compared to FDs. They offer diversification and professional management.

Equity Mutual Funds
Suitable for long-term investments.
Higher potential returns but with market-linked risks.
Debt Mutual Funds
Lower risk compared to equity funds.
Suitable for short to medium-term investments.
Systematic Investment Plans (SIP)
Investing through SIPs in mutual funds helps in averaging out the market volatility and compounding returns over time.

Benefits
Disciplined investment approach
Flexibility in investment amount and tenure
Potential for higher returns compared to lump-sum investments
Tax-saving Investments
Consider other tax-saving instruments under Section 80C and 80D to reduce your taxable income further.

Examples
Equity Linked Savings Schemes (ELSS)
National Savings Certificate (NSC)
Senior Citizens Savings Scheme (SCSS) (if applicable for your parents)
Managing Medical Expenses
Emergency Fund
Maintain an emergency fund equivalent to 6-12 months of living expenses. This fund will provide a financial cushion for unexpected medical expenses.

Strategies
Keep this fund in a high-interest savings account or a liquid mutual fund for easy access.
Regularly review and adjust the fund amount based on your expenses.
Government and Employer Schemes
Explore any government or employer-provided health schemes that might offer some coverage for medical expenses.

Benefits
Reduced medical costs
Additional financial support for treatments
Financial Planning for Your Parents
Health Savings
Since insurance isn't an option, allocate a portion of your savings specifically for your parents' medical expenses.

Strategies
Create a dedicated medical fund.
Invest in low-risk, high-liquidity options like savings accounts or liquid funds.
Estate Planning
Ensure that you have an estate plan in place. This includes having a will to manage and distribute your assets efficiently.

Benefits
Clear instructions for asset distribution
Minimizes legal complications
Budgeting and Expense Management
Monthly Budget
Create a detailed monthly budget to track your income, expenses, and savings.

Steps
List all sources of income.
Categorize and list all expenses.
Allocate funds for essential expenses first (EMI, utilities, groceries).
Set aside a portion for savings and investments.
Review and adjust the budget regularly.
Expense Tracking
Use expense tracking apps or maintain a manual record to monitor your spending habits.

Benefits
Identifies unnecessary expenses
Helps in sticking to the budget
Reducing Tax Liability
Explore ways to reduce your taxable income through various deductions and exemptions.

Strategies
Maximize contributions to tax-saving instruments.
Claim deductions for home loan interest under Section 24(b).
Long-term Financial Goals
Retirement Planning
Continue contributing to your NPS and PPF for a secure retirement. Evaluate the corpus required for your retirement and plan accordingly.

Strategies
Review and adjust your retirement corpus based on inflation and lifestyle changes.
Diversify retirement investments for better risk management.
Child’s Education and Future
Start planning for your child’s education early to ensure you have sufficient funds when needed.

Education Fund
Consider starting an education fund through SIPs in equity mutual funds.
Use PPF and other long-term instruments for this purpose.
Investment Diversification
Diversify your investments across different asset classes to balance risk and return.

Examples
Equity and debt mutual funds
PPF and NPS
FDs and other fixed-income instruments
Conclusion
Your financial journey requires a balanced approach given the constraints on insurance and the need to manage medical expenses. By optimizing your current investments, exploring additional options, and maintaining a disciplined budgeting approach, you can secure a stable financial future for yourself and your family. Consulting a Certified Financial Planner can provide personalized guidance tailored to your unique situation.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

Ans: Your portfolio may be of any amount, it is only when you sell the same it will be taxed. Keeping a portfolio does not attract any income tax.
Most welcome for any further clarifications. Thanks.

Ans: Mutual fund investments are subject to taxation. Long-term capital gains (LTCG) on equity mutual funds above Rs. 1.25 lakh are taxed at 12.5%.

You invested Rs. 1 lakh. After 20 years, the value became Rs. 10 lakh. Your profit is Rs. 9 lakh.

The exemption limit is Rs. 1.25 lakh. You need to pay LTCG tax on Rs. 7.75 lakh.

Ways to Reduce LTCG Tax on Mutual Funds
1. Use Tax-Free Withdrawal Every Year
LTCG tax applies only if gains cross Rs. 1.25 lakh in a financial year.

You can withdraw gains up to Rs. 1.25 lakh tax-free every year.

If planned well, you can avoid LTCG tax completely.

Start partial withdrawals after a few years instead of waiting for 20 years.

2. Use Systematic Withdrawal Plan (SWP)
SWP allows you to withdraw a fixed amount regularly.

This spreads LTCG across multiple years.

You can keep withdrawals under Rs. 1.25 lakh per year.

This helps avoid or reduce LTCG tax.

3. Redeem in Family Members' Names
If your spouse or family members are in a lower tax bracket, use their accounts.

Gift them mutual fund units and redeem in their name.

Ensure that each family member stays within the Rs. 1.25 lakh exemption limit.

This can help divide and reduce tax liability.

4. Plan Redemptions in Phases
Selling everything at once leads to higher tax.

Instead, sell in small parts over multiple financial years.

This ensures that you stay within the exemption limit each year.

Strategic planning can significantly reduce your tax burden.

5. Use Capital Gains Against Exempt Income
If you have losses from stocks or mutual funds, use them to offset LTCG.

Short-term capital losses can be adjusted against LTCG.

This will reduce taxable capital gains and lower tax.

Finally
You cannot avoid LTCG tax completely. But proper planning helps reduce the tax burden.

Spreading withdrawals, using family member accounts, and optimising fund selection can help.

A Certified Financial Planner can guide you in structuring withdrawals for tax efficiency.

Best Regards,

K. Ramalingam, MBA, CFP

Chief Financial Planner

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment