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Joining the workforce opens a whole new world for an individual. A new place, people, culture, setup, income, ever-increasing expenses, etc -all become part of the change. Usually in the initial years, there are more expenses than income as one starts fulfilling his/her aspirations. If you are living with your parents and have very few dependencies, then there are more savings to start with. But for most people, savings start accruing only after two-three years into the job.

 

Usually in the first year of work life, it is also the first time for filing income tax returns. In such cases, understanding the tax structure and tax deductions becomes essential. More often than not, during the last quarter of the financial year (Jan-Mar) your office would require details of all investments and expenses for calculating taxes for an individual. There would be a mad rush to make last minute investments to avail of the maximum tax benefits (typically advised/guided by friends, colleagues or seniors).

 

Rather than making investments at the last hour, it would be beneficial to start early and invest through SIPs in case of mutual funds or plan investments well in advance. Know your I-T deductions The deductions covered under section 10 of the Income Tax Act include HRA, LTA, medical, transport and leave encashment deductions. All of the deductions under this section would be based on actual expenses incurred. The deductions under section 80C (Rs 1 lakh) give ample options for investment under different instruments like life insurance, PPF, NSC, ULIP, ELSS, tax-saving FDs, infrastructure bonds, etc.

 

What is important before choosing any or some of the options is to evaluate the net returns (post fees and taxes), investment limits of each instrument and know the lock-in periods for each of the available options. For example, ELSS investments have a lock-in period of three years while PPF 15 years, although some withdrawals are allowed after the sixth year. Also, in case of recurring payments like life insurance premiums, recurring FDs, etc, one should be sure of being able to make those payments every year depending on the tenor of the instrument.

Other options such as NSC, infrastructure bonds, post office deposits, etc, are safer investment options with varied or no lock-in periods.

 

There are several other deductions under section 80CCC (Pension scheme), 80CCG (RGESS), 80D (mediclaim insurance premium), 80E (education loan interest repayment), 80DD, 80EE (interest on housing loan) and 80U that one can avail of depending on each individual and the actual expenses incurred.

Have an allocation plan Of all the options available, you should start with a certain asset allocation plan which is diversified (that is, don't make all your investments in one instrument only , but in at least two-three instruments). Life insurance is a must for every individual and the earlier one starts, the lesser is the premium and the higher is the compounding effect one will benefit from. PPF investments have a Rs 1 lakh-per-year limit.

Being young and just into your first job, from an asset allocation perspective it is good to allocate funds to equities.

ELSS and ULIPs may help achieve that objective if you are not sure about direct equity investments.

Track your investments In the initial years of work, the savings may be small or even negligible for most. But as one starts saving more and spending less, there is dire need for financial planning. These savings would be over and above the requirements under tax structure. Financial planning means accounting or keeping in check the expenses and investing the savings for planned future needs. What most of us forget is to manage the savings from the onset.

 

The ease of investing in various instruments and tracking the investments on a regular basis is as important as investing. Also, rather than keeping money in a savings bank account, it is advisable to park funds in liquid mutual funds.

With online/mobile access, the process of investing has never been more simplified. Also, information about each investment alternative can be easily gathered and evaluated before choosing the right opportunity .

For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call

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