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Sumanta Rudra spends a lot of time with his chartered accountant at the start of a financial year. Rudra, a general manager with VFS Global, is worried about starting the year well.
His agenda: Start tax planning and put as much money as possible in the public provident fund (PPF). Though his employee provident fund (EPF) would exhaust his 80C limit of Rs 1 lakh, he still invests in PPF regularly for a strong retirement kitty.
And, he deposits the amount at the start of the financial year because there are interest rate benefits. Though the National Savings Fund has reduced rates on PPF by 10 basis points to 8.7 per cent this year, if he deposits the entire Rs 1 lakh before April 5, he can get an interest benefit for the entire year.
Why April 5? It's because the interest is calculated on the lowest balance of an account from the fifth day to the end of the month. So, to get maximum benefit, deposit the entire amount or as much as possible before April 5.
Rudra is a good example from the perspective of having an investment plan in place. For many others, the beginning of the financial year is chaotic. On the one hand, you are struggling to close the previous financial year's balance sheet, including preparing to file returns. On the other, you have to decide how to manage expenses/ invest/save in the coming year.
No wonder, financial planners and chartered accountants are kept busy because clients overload them with documentation and seek advice. But a few simple steps will help a good start.
Prepare a monthly budget: This is the tough one. The process for most is simple: Calculate the monthly take-home salary, then deduct loans and other expenses, and, there is a surplus. Unfortunately, it is not so simple or true, as financial planner Gaurav Mashruwala puts it.
There are at least three to four months in a year that will be financially draining. For instance, in the May-June period, there will be summer holidays. For those with growing children in schools and colleges, there are expenses, such as fees, fresh set of books, tuitions, etc. Similarly, between October and December, there will be the festival season. So, there will be expenses on clothes, goodies for family members and, possibly even travel.
All these expenses have to be accounted for from the start of the year. "So, if you get a surplus or bonus at the start of the year, don't splurge because there will be expenses during the year when you will have to dig into your reserves," says Mashruwala.
Tax-planning: While the human resource (HR) department in all companies ask employees to give their investment plan for the year, remember you will need to follow the declaration made. Don't make commitments you cannot fulfil, otherwise, there will be a scramble at the end to ensure the salary does not get cut.
First, before making declaration to the HR department, you should be clear if you can get benefits under Section 80C. Many employees will find the entire limit is exhausted through the EPF commitment. Consequently, they need not make any other investment. But there are certain nitty-gritties that will have to be tackled.
For instance, if you are claiming house rent allowance (HRA), receipts have to be produced at the end of the year. In addition, if the monthly rent is more than Rs 15,000, a copy of the agreement with your and the landlord's permanent account number (PAN) has to be given to claim HRA exemption. In case the landlord doesn't own a PAN card, he must sign the self-declaration saying he doesn't have one and a copy must be given to the employer to get the HRA exemption.
Also, there has to be a significant amount of planning in case you have in mind a systematic investment plan in equity-linked savings schemes or the Rajiv Gandhi Equity Savings Scheme (for a first-time investor with a taxable income of below Rs 12 lakh) to claim tax benefits. While there isn't much clarity about the latter - whether the investment of Rs 50,000 can be spread over three years or not, if interested in the scheme, let the chartered accountant or financial advisor know.
This also applies for PPF. As mentioned before, if you are planning to put money in this instrument, the best time is during the start of the year.
Planning big expenses or loans: One good thing about 2013-14 will be that the interest rate of loans is unlikely to go up further. In fact, there is a likelihood that these might come down marginally. Though the Reserve Bank of India has presented a grim picture in terms of further rate cuts, one can safely assume these will not go up either. In other words, any further pressure on the equated monthly instalment (EMI) is not expected.
But the spoil-sport is going to be an absence of or low salary hikes. If possible, it could be a good time to reduce your loan liability by partial pre-payment. "Lower loan commitment will help you save, especially in times when inflation is likely to hover around six-seven per cent," says a financial planner. Also, if you wish to make a big purchase, such as a house or car, keep aside part of the money you get as bonus or bulk cash from other sources like stock or mutual fund dividends because there will be a need for a cashdown payment.
For a new car, you will need to pay at least 10-20 per cent as down payment. For a house, you will need to pay 20 per cent of the house value, plus registration and stamp duty. In other words, for a Rs 50-lakh house, you will need to have at least Rs 15 lakh in the bank.
Manu Selot, a Pune-based software engineer, is planning to purchase a two bedroom-hall-kitchen (2 BHK) costing Rs 60-70 lakh this year. He is already working on the finances. "I am planning to take 50 per cent of the amount as loan. I plan to raise the rest of the amount from family and my other investments," he says, adding that the earlier in the financial year he buys, the better, because the entire interest payout is tax-exempt for a second property.
Don't go overboard on investments: Just like you shouldn't allow money to lie idle in banks, making investments very aggressively, too, can hurt. "If you have any surplus in hand, shift the money into short-term debt funds till you decide how to use it. This way, it will earn better returns than bank savings deposit rates," says Jayant Pai, head (marketing), Parag Parikh Financial Services. According to him, many people rush to invest in stocks or mutual funds when they have a surplus. Instead, they should first have enough in an emergency kitty and then, invest in parts or a lump sum, depending on their time horizon.
Insurance premiums: Most have insurance policies - life, medical, car or house and there is a tendency to forget paying the premiums on time. Though insurance agents do call and remind people of renewals, many wait for the last moment to do so. The insurance industry numbers confirm this - there was a drop of 6.7 per cent in renewal premiums in the October-December period, compared to the corresponding period in 2011. Given that the policies are on different dates, ensure adequate amounts are available in the bank account from time to time.
