Personal Finance Tips for FY 2020-21
Last year businesses collapsed, healthcare expenses shot up, lost jobs, interest rates dropped, and stock markets gyrated wildly. As you draw up a plan for managing your personal finance in the new financial year, here are seven moves that can ensure your finances are on an even keel.
Stock up on small savings
The government has reversed the small savings rate cut. However, this seems a temporary breather. It is recommended to stock up on small savings instruments such as Kisan Vikas Patra (6.9%), NSCs (6.8%) and Senior Citizen’s Saving Scheme (7.4%) if you want to lock in at the current rates. Once you invest, these instruments’ interest rates do not change for the rest of the term. However, the rates for PPF and Sukanya Samariddhi Yojana are subject to changes.
Make most of your VPF limit
Though small savings rates have been consistently falling, the interest offered on the Provident Fund remains relatively high at 8.5%, making it the most lucrative instrument in the fixed income space. This year’s budget has put restrictions on this tax-free haven. Only up to ₹2.5 lakh contributed by the Provident Fund’s Employee will earn tax-free interest. Interest earned by any amount exceeding this threshold will be taxed at the average rate. If the Provident Fund covers you, make most of the tax-free limit of ₹2.5 lakh by increasing your VPF contribution.
If you already contribute to the VPF, it’s time to reconsider your options. Your total contribution to the Provident Fund should not exceed Rs 20,833 per month. In the 30% bracket, the excess amount’s returns will now be as little as 5.85%.
Weed out underperformers
The going was very good in the past year as a rising tide lifted all boats. As we all know, the market can be unforgiving when it comes to missing revenue targets, mismanaging finances and slipping on corporate governance. The start of the new year is an excellent time to review your portfolio. Throw out low-quality stocks and underperforming mutual funds before they crack.
Besides reviewing the holdings, it is also time to rebalance the portfolio. The Sensex rose almost 70% in the previous financial year, and investors who did not lose hope or their nerves made good money. This also means their asset allocation changed, an indicator that it’s time to take some profits off the table. Reducing the equity exposure will rebalance the portfolio and restore the original asset allocation, thereby controlling the portfolio’s risk. A rebalanced portfolio is cushioned against shocks and will not suffer too much if the equity markets decline.
Get tax paperwork in order
The tax filing deadline is four months away, so tax is not a priority for you right now. It won’t hurt to start collecting all documents required to file a comprehensive & accurate tax return. You can also access Form 26AS online to check if all the tax deducted on your behalf has been duly credited to your PAN. Get the capital gains statements from your mutual funds and account statements from your banks to know how much interest you earned during the year. Keep in mind that dividends are now fully taxable as income so scan your bank statement for all dividends received during 2020-21.
As you get your tax paperwork in order, don’t forget to link your Aadhaar to your PAN. If the PAN is not linked with the Aadhaar number, the PAN will become inoperative, and you will not be able to conduct financial transactions that require PAN. The deadline has been extended to 30 June so do it right away.
File Forms 15H or 15G to avoid TDS
Investing is not the only aspect of personal finance. Tax savings too play a major role in managing personal finance. TDS threshold is raised to ₹50,000; you may still fall in the tax net even if you are exempt. Getting a refund can take a long time. To avoid TDS, submit Forms 15G or 15H to your bank at the beginning of the financial year. Make sure you understand the rules relating to the use of Forms 15G and 15H, else the penalty for incorrect filing can be stiff. Form 15G is for residents below 60 while 15H is for senior citizens above 60. Use 15G if the final tax on estimated total income is nil; and, the aggregate interest received during the financial year does not exceed the basic exemption slab of ₹2.5 lakh. Both the criteria have to be satisfied. Even if the interest income is less than the basic exemption and the total tax liability is not nil, the individual can’t use Form 15G
Get on with tax savings investments
Start your tax-saving investments in April so that you don’t have to run around the helter-skelter in March. Tax Savings really help to manage your personal finance. Moreover, delaying the process to the end of the year narrows down your options. ELSS funds, for instance, are perhaps the most lucrative way to save tax under Sec 80C. You can’t do SIPs in February-March if the deadline is only a month away. Starting one in April is a better idea and helps space out the investment over 12 SIPs.
Even if you don’t want to take risks and want to go with a low-risk insurance policy, it’s better to buy now when you can understand the details rather than purchase in a hurry later. It’s also recommended to open an NPS account to take benefit of the additional ₹50,000 deduction under Sec 80CCD(1b)
Buy term plan before prices go up
Talking of life insurance, term plan premiums have gone up in the past few months and could rise even further this year. An insurance portal has launched an index that tracks the premium rates of term insurance plans. Premiums surged 4.4% during the March quarter. There are indications that premiums will rise further this year because reinsurers plan to raise the premiums due to the adverse claims experience of 2020-21 following Covid. Although term plans are very cheap and premium rates are hardly the reason for the purchase decision, it still makes sense to buy as early as possible.