Should I invest more to avoid tax with a salary of Rs. 45,000 and Rs. 1 lakh in FD interest?

Ans: Hi Kalim, There are multiple tax saving options you can use.  Following are few of the popular tax saving options available:

You can save tax up to 1.5 lakhs under section 80C by investing in PF, PPF, ELSS, ULIP, Insurance, home loan principal repayment, etc

Investing in NPS helps you to save further of 50k under section 80CCD which is over and above 1.5 lakhs under section 80C.

Section 80D provides income tax deduction on medical insurance premium paid for self and family. You can claim up to 25,000 for premium paid for self, spouse and kids. In case of senior citizens the limit is 50k.

If you have a home loan, you can also claim tax deduction on the interest paid towards home loan. You can claim deduction for up to 2 lakhs for the interest paid.

Further you can claim the contributions made to certain relief funds and charitable institutions under section 80G.

Ans: Hi Chittanand

I am assuming that the tax saving investments are fully available for deduction.

With that assumption, your tax saving by opting for the new tax regime would be about Rs. 23,000

Ans: Income and Existing Investments
Annual Package: Rs 21 lakhs
Home Loan EMI: Rs 2.28 lakhs per annum
Insurance Investments: Rs 3.6 lakhs
Mutual Fund Investments: Rs 2 lakhs
Tax Saving Investments Under Section 80C
To maximize tax savings under Section 80C, you can invest up to Rs 1.5 lakhs per annum. Here’s a breakdown:

Existing Eligible Investments
Home Loan Principal Repayment: Part of your home loan EMI goes towards principal repayment, which qualifies under Section 80C.
Insurance Premiums: The Rs 3.6 lakhs in insurance schemes might include premium payments that are eligible under Section 80C.
Additional Investments Required
Calculate Existing Deductions: First, identify the portion of your EMI and insurance premiums that qualify for Section 80C. Let's assume your home loan principal repayment is Rs 1 lakh per annum and the insurance premiums are Rs 50,000 per annum.
Investment Suggestions for Additional Tax Savings
To fully utilize the Rs 1.5 lakhs limit, you need to invest an additional Rs 50,000.

Equity-Linked Savings Schemes (ELSS)
Benefits: ELSS funds offer tax savings and have the potential for high returns.
Lock-in Period: They come with a 3-year lock-in period, the shortest among all tax-saving options under Section 80C.
Public Provident Fund (PPF)
Benefits: PPF offers tax-free returns and is a safe investment option.
Lock-in Period: 15-year lock-in, but partial withdrawals are allowed after the 7th year.
Sukanya Samriddhi Yojana (SSY)
Benefits: If you have a daughter, SSY is a good option with attractive interest rates and tax benefits.
Lock-in Period: Till the daughter turns 21 or gets married after the age of 18.
National Savings Certificate (NSC)
Benefits: NSC is a safe investment option with a fixed interest rate.
Lock-in Period: 5 years.
Voluntary Provident Fund (VPF)
Benefits: You can contribute more than your mandatory EPF contribution.
Returns: Similar to EPF returns and safe.
Other Tax-Saving Sections
Section 80D - Health Insurance Premium
Benefits: Deduction up to Rs 25,000 for self, spouse, and children. Additional Rs 25,000 for parents under 60 and Rs 50,000 if they are over 60.
Section 80E - Education Loan Interest
Benefits: Deduction on interest paid on education loans for higher studies.
Section 24 - Home Loan Interest
Benefits: Deduction up to Rs 2 lakhs on interest paid on home loan.
Review and Reallocate Existing Investments
Insurance Policies
Evaluation: Assess if your insurance policies are purely for investment or provide adequate life cover.
Reallocation: Consider surrendering or reducing investment-cum-insurance policies and reallocating to mutual funds.
Mutual Funds
Focus on Growth: Since your goal is wealth creation, consider allocating more to equity funds for higher growth potential.
Final Insights
Maximize Section 80C: Utilize the full Rs 1.5 lakh limit under Section 80C with a mix of ELSS, PPF, and SSY.
Diversify: Ensure your portfolio is diversified across different asset classes for balanced growth and risk management.
Regular Monitoring: Periodically review and adjust your investments to stay aligned with your financial goals.
Certified Financial Planner: Consider consulting a Certified Financial Planner for personalized advice and strategy.
Best Regards,

K. Ramalingam, MBA, CFP

Chief Financial Planner

www.holisticinvestment.in

Ans: it's great that you've shared your current financial details. This clarity is important for making decisions. You have a PF balance of Rs 4 lakhs, and you contribute Rs 4,000 monthly to it. Additionally, you pay Rs 50,000 annually in premiums for LIC policies. You aim to build a corpus of Rs 1 crore.

To help you make an informed decision, let's look at your existing financial assets and potential future investment strategies from a 360-degree perspective.

Evaluating Your PF Contribution
The current PF contribution of Rs 4,000 per month, which adds up to Rs 48,000 per year, is a decent start. PF is a safe investment option, as the interest is compounded annually, and it's a debt instrument with guaranteed returns.

Consideration: Since PF is a long-term savings tool, its primary advantage lies in being relatively low-risk. It is also tax-efficient, with both the contributions and interest earned being tax-free.

Improvement: Increasing your monthly contribution to the EPF (if possible) can boost your retirement corpus significantly over the years. But your current contribution is already aligned with long-term goals, so the focus could shift to other investments.

Your LIC Policies: Insurance and Investment
You pay Rs 50,000 annually towards LIC policies. While LIC offers a safe insurance cover, it might not offer the best returns when it comes to investment growth. Investment-cum-insurance policies generally yield lower returns than pure investments like mutual funds. It’s important to keep insurance and investment goals separate.

Advice: Evaluate the return on your LIC policies. If they are traditional or endowment plans, the returns may be modest, usually around 4-6% per annum. This might not be sufficient to meet your Rs 1 crore goal.

Suggestion: It could be better to keep only term insurance (which offers high coverage at low premiums) and shift the rest of your investments into mutual funds or PPF for better growth potential. You could consider surrendering any traditional LIC plans and reinvesting in growth-oriented assets like mutual funds.

Your Goal of Rs 1 Crore: Investment Path
To reach Rs 1 crore, you need to plan your investments carefully. Based on your age (37), you have around 20 years until retirement, which gives you a reasonable time horizon for wealth creation.

Investment Options to Achieve Rs 1 Crore:
Public Provident Fund (PPF)

PPF is another safe investment option, especially for risk-averse investors. It offers tax-free returns and a current interest rate of about 7.1% (subject to change). You can invest up to Rs 1.5 lakh annually in PPF.

Recommended Contribution: To build your Rs 1 crore corpus, you can start by contributing Rs 12,500 per month (Rs 1.5 lakh annually) to PPF. However, the PPF alone might not be enough due to its current interest rate.

Insight: If you solely rely on PPF, you would need to continue contributing consistently for around 20 years. Since PPF is a safe investment, it will protect your capital, but may not provide the accelerated growth needed to achieve Rs 1 crore by itself.

Equity Mutual Funds

Mutual funds, especially equity funds, offer much higher growth potential than PPF or LIC policies. Given the long-term horizon you have, you could consider investing in actively managed mutual funds that offer returns averaging around 10-12% per annum over the long term.

Suggested Approach: If you invest Rs 10,000 - 15,000 per month in mutual funds, particularly in flexi-cap funds, you will be able to generate significant wealth over time.

Benefit of Actively Managed Funds: Actively managed mutual funds outperform index funds or direct funds due to the fund manager’s expertise in balancing the portfolio. You also get professional management, which helps in beating market volatility.

Systematic Investment Plans (SIP)

If you're looking for regular, disciplined investing, a SIP in mutual funds is ideal. Even small monthly investments compound significantly over time due to the power of compounding.

Suggested SIP Amount: You could start with a SIP of Rs 15,000 - 20,000 per month. This amount, invested in equity mutual funds, could help you reach your Rs 1 crore goal within 15-20 years.

Key Insight: SIP in equity funds offers the potential to beat inflation and provide the long-term growth you need.

National Pension Scheme (NPS)

The NPS is another option that can supplement your PF. NPS offers a balanced portfolio of equity, corporate bonds, and government securities, with the option to choose the allocation based on your risk appetite.

Advice: You can increase your contributions to NPS. It’s a tax-efficient retirement tool where returns from equities could also help you meet your corpus goals.

Long-Term Growth: NPS provides a mix of equity and debt, which balances risk and reward. Over a 15-20 year period, this could be another avenue to generate long-term wealth.

Assessing the Purchase of the Car
Now, let's address the car purchase.

You plan to buy a car worth Rs 27 lakhs, with a down payment of Rs 10 lakhs. While you have the additional Rs 10 lakh for the down payment, you should carefully consider whether this purchase fits within your overall financial goals.

Car as a Depreciating Asset: A car is a depreciating asset. It loses value over time, unlike investments that grow your wealth. Paying Rs 10 lakh as a down payment will reduce your liquid assets. Additionally, you will have a loan to pay off, which might affect your cash flow and monthly budget.

Home Loan Impact: You already have a home loan for Rs 9 lakhs, with an EMI of Rs 25,000 per month. Taking on another EMI for the car might stretch your monthly finances, especially if your total outflows increase significantly.

Suggestion: Before making the car purchase, consider whether this is the right time. Focus on clearing your existing home loan first. Once your loan burden decreases, you can comfortably afford a car without affecting your future financial goals.

Balancing Liquidity and Long-Term Goals
It’s important to maintain a balance between liquidity (cash in hand) and long-term investments. If buying a car leaves you with minimal liquid assets, you might find it challenging to meet unexpected expenses or opportunities.

Emergency Fund: Ensure you have a sufficient emergency fund before making large purchases. Ideally, this fund should cover 6-12 months of expenses.

Invest the Extra Rs 10 Lakh: Instead of using the Rs 10 lakh as a down payment for a car, consider investing it in equity mutual funds or PPF. This will help you build your long-term corpus faster while keeping your finances stable.

Final Insights
To summarise, here are the key actions that can help you meet your goal of Rs 1 crore:

Increase your PPF contributions to Rs 12,500 per month for safe and tax-efficient returns.

Start a SIP in equity mutual funds with Rs 15,000 - 20,000 per month. This will give you the growth needed to reach Rs 1 crore in 15-20 years.

Reassess your LIC policies. Keep only the term plan and consider surrendering any traditional plans. Reinvest that money in high-growth options like mutual funds.

Delay the car purchase until your home loan is cleared. It will give you more financial flexibility in the future.

By taking these steps, you will be on track to build your Rs 1 crore corpus while balancing your immediate needs, such as the car purchase.

Best Regards,

K. Ramalingam, MBA, CFP
Chief Financial Planner,
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment