“Financial Pyramid ! A mandate for your Financial Health”- Mr. Raghuvir Adhikari,
“Many many happy returns of the Taxation day !!” Surprised ? Why ? As many will start thinking “Who will happy on the Tax-Day?” Definitely it can be you, provided you mindfully plan your savings and investments in advance, considering your tax payouts. Let me explain using the Financial Pyramid shown below.
Let me elaborate the Financial Pyramid now.
1) Health is the foundation of your financial pyramid. If this base is strong, the wealth creation begins on the healthy foundation! As soon as you enter into earning phase of your life or start your financial planning, getting the proper health and accident insurance must be though at first because any health issues or happenings of accidents can erode your entire portfolio! And hence proper coverage against these “wealth leakage factors” is the first step. This also comes with added tax-benefits. Section 80D of Income Tax Act allows you to avail tax deductions, based on the premiums paid for medical insurance or health check-ups for your family, including your spouse, children, and dependent parents. This allows for tax deductible up to Rs 25,000 and for senior citizen (60 years or above), this figure is upto Rs. 50,000 (max). You can avail these benefits for a medical insurance provided by your employer as well as on a standalone policy taken by you. Tax deductions apply to both health insurance and family floater policies. A medical insurance policy allows you to avail tax deduction under Section 80D of Income Tax Act for any expenses incurred for preventive health check-ups. You can avail Rs. 5,000 for the cost incurred for preventive health check-ups for self, spouse, children or parents.
2) Once you ensure your health aspect, then comes covering the life! having a Life insurance plan is a highly preferred investment option of the taxpayers since many years. Under 8OC section, taxpayers may claim a deduction for the premium paid by them on the life insurance plan. Under this section, the deduction limit is up to an amount of INR 1.5 lakh.
3) Then come the top two layers of savings and investments. Savings should be done for your short goals like monthly expenses, paying for school-fees, liquidity requirements in an emergency etc. while the investments should be done for your long-term goals like educations, marriage, purchasing house etc. Saving instruments like Public Provident Fund (PPF) and immediately come to mind when tax saving is the concern. Section 80C, one can save tax on only up to Rs 1.5 lakh. However you won't gain much by investing in PPF if you have already crossed the Rs 1.5 lakh threshold. Equity Linked Saving Schemes (ELSS) funds is an efficient way to save taxes as compared to all the other investment options available under Section 80C of the Income Tax Act. With ELSS, one can invest up to INR 1.5 lakh in a financial year. You are free to invest more than this designated amount, but the excess over INR 1.5 lakh will not qualify you to avail the tax benefits under Section 80C. You should not let go of ELSS as they play a significant role in your portfolio. These pure equity-based instruments carry the potential for higher returns and are an ideal choice of investment for the long term. Also unlike a Public Provident Fund, National Savings Certificate and Employee’s Provident Fund, all of which require a minimum of 5 years lock-in period, ELSS is a better bet with just 3 years of commitment.
The first two levels of the Financial Pyramid (Health, Accident Insurance and Life Insurance) play a crucial of minimization of any “Financial Risk” to your portfolio and the top two layers (savings and investments) are meant for maximization of your “Financial Gain”.
Now let’s turn to the other Pyramid..the Budget Pyramid.
At the beginning of this financial year, as you start thinking on budgeting angle make sure to keep a minimum of 20 to 30 % of your total gross income aside to build your budget pyramid. Out of this amount, 25% share takes care of your Financial Risk and 75% share looks after to your Financial Gain ! If you stick to the “Thorough Implementation” of the Financial Pyramid for minimum 5 years, then the extra returns generated from your 75% budget will automatically take care to generate the 25% budget for you! And this is thrust/beauty of the Financial Pyramid when its starts generating! It certainly takes care of all aspects of life-stage planning and its disciplined implementation results in Wealth Creation !! And when you plan this pyramid with taxation angle, you will certainly wish yourself “Happy Tax-Returns of the Day” !! All the very best to you to begin with your Wealth Creation Journey!!
Mr. Raghuveer Adhikari,