Arthgyaan

Supporting everyone's personal finance journey

How should you plan your investments and taxes in April?


01 Apr 2022 - Contact Sayan Sircar
12 mins read

This article shows what steps investors should take in April at the beginning of the financial year.

How should you plan your investments and taxes in April?

Disclaimer: Taxation is a dynamic concept. The content of this article is valid on the date of publication and any subsequent updates. Always consult a professional tax advisor before doing anything that leads to due taxes.

April marks the beginning of the financial year. We need to perform some tasks to ensure both investments and taxes are appropriately planned for the entire year. This article will focus on some of the most common items.

Table of Contents

Financial planning vs tax planning

Don’t spend 100 rupees to save 30 rupees tax - Author

A lot of investors focus on taxes first while planning their investments. While saving taxes is essential, an investment plan that focuses on saving tax and not investing as per goals is a recipe for future disaster. Capital is scarce for most investors which means you need to be able to formulate your goals with a proper investment plan to know if your investments are happening correctly. Based on your age, you may not have a lot of time to course correct.

For example, if you are 35 and do not have a corpus of 13x your current annual expenses saved for retirement, you are already behind. You can check this concept here: Goal-based investing will show you how much you should have saved at 30,40,50 and retirement.

Before focusing on tax deductions, ensure that:

A few common mistakes that investors make:

  • taking a home loan only to save tax. You should buy a home to live in it. Tax savings is there just to reduce your cost of a home loan and not make you spend extra money for a home that you do not need yet
  • maximising deductions like PPF or SSY without considering if they have enough amount invested in equity for long term goals
  • Investing in NPS just to save tax. NPS is not recommended for people due to the forced annuitization in a falling interest rate regime and the fact that your money is locked up until 60

Tax savings investments

The 80C waterfall

80C waterfall

Under 80C, you can claim a deduction of ₹1.5 lakhs/year. At the 30% tax bracket, you can save ₹45,000 (plus cess) as taxes.

We will use a waterfall approach to fill the 80C limit by moving to the next step only if anything is left within the 150,000 limits:

  • Step 1: Mandatory EPF contribution if you are salaried
  • Step 2: Life Insurance premium - Why you should have term insurance?
  • Step 3: Housing loan principal
  • Step 4: Children’s school tuition fees
  • Step 5: Long term investments as per goals - NSC, PPF, ELSS, NPS, 5-years tax saving FD etc. All of these should be completed or at least started in April.

Read more about 80C deductions here: How to best use 80C deductions to plan your taxes?

Insurance plans

Apart from term insurance, do not buy other life insurance like whole life, endowment and ULIP. These products are just a term plan with an investment component. They are traps for insurance agents and banks to make money off unsuspecting investors.

Use this guide to purchase term insurance: Term life insurance: what, why, how much to get and from where?

New Pension Scheme (NPS)

NPS offers ₹50,000 deduction under Section 80CCD and is therefore a hot favourite amongst those who wish to save ₹15,000 in tax every year. Two major problems with NPS are:

  • lock in up to age 60 which locks you out of your own money in case life situations change
  • at 60 they force your to buy an annuity out of 40% of the NPS corpus which gives a taxable pension at rates that will fall over time as the Indian economy matures

Our position on NPS investment is:

  • if NPS contribution is a part of CTC, then contribute only enough from your side to get the full match
  • if ₹15000 tax saving is the target, invest no more than ₹50,000/year by creating a SIP of ₹4200/month. If you can spare the cash, dump ₹50,000 in April and forget about it for the rest of the year. You can repeat this activity again next year
  • Invest 100% in the G-option which invests in Government security schemes
  • keep the account active with minimal contribution (₹1000/year as per current rules) up to age 75. Do not withdraw at 60 since the annuity return is poor

Equity Linked Savings Scheme (ELSS)

ELSS funds are mutual funds with a mandatory 3-year lock-in for every purchase and offer a tax deduction under section 80C. If you are investing in the SIP form, then keep in mind that every instalment is locked for three years from purchase.

All ELSS funds are currently available only as active funds. Only having active funds leads to a “which is the best ELSS fund” confusion amongst investors. The thumb rule to choose active funds is

  • keep expense ratio as low as possible
  • past returns are good to know (to avoid the consistently worst funds) but unimportant as a predictor of future returns
  • stick to 1-2 ELSS funds in the whole portfolio
  • you should ignore star ratings shown in rating portals

Many investors use the 1-lakh equity LTCG tax exemption to roll their ELSS funds every year. This form of tax harvesting involves selling the oldest (>3y) ELSS units and reinvesting them immediately in the same or another fund.

If you plan to invest in ELSS, start a SIP in April instead of waiting until December or later when your company asks for investment proofs. Investments in ELSS funds should be only to fill any remaining 80C limit and should be as per the equity allocation of your goals. This post shows you how to select an ELSS fund: What are the best tax-saving ELSS Mutual Funds?.


Our new Goal-based investing tool will help you to create and manage all of your goals in one place. Click the image below to get access:

Arthgyaan creates a system for reaching your financial goals by sharing simple, actionable advice backed by research and analysis.

Your email address will not be shared with anyone and you can unsubscribe anytime.


Debt investments for tax planning

Debt allocation for any portfolio has three parts:

  • short term debt allocation for goals up to five years that has to be kept liquid in a bank account or suitable mutual funds
  • liquid debt allocation for rebalancing purposes
  • long term debt that is illiquid like provident funds and SSY

Public provident fund (PPF)

PPF allows you to invest ₹1.5 lakhs/year in every family member’s PPF account (grandparents, parents, children) and allows ₹1.5 lakhs exemption/year under 80C per investor who is investing. So a family with goals that are far away can invest 1.5 lakhs/year for multiple family members as long as their asset allocation allows it. The interest rate for PPF is 7.1% today and is expected to fall with time. The money is locked until maturity for 15 years.

If you are wondering when to invest in PPF keep this in mind: since the balance of the PPF account does not reduce, you need to invest as much as you can or need to as early as possible. The interest for PPF is calculated based on the balance on 5th April, then on 5th May and so on and then credited on 31st March next year.

Employee provident fund (EPF) / Voluntary provident Fund (VPF)

These are retirement schemes (currently offering 8.1%/year) with the following main differences

  • all salaried employees must invest in EPF while VPF is optional
  • EPF is locked in until retirement age, while VPF can be withdrawn after five years

VPF, like PPF, should be considered if the asset allocation allows it and not because of the interest rate.

Sukanya Samriddhi Yojana (SSY)

SSY is allowed only for girl children and has a ₹1.5 lakhs/year limit. It offers a deduction under 80C and has a 7.6% interest rate as of today. The amount is locked in until 21 years from account opening and allows partial withdrawal once the child is 18. It is recommended that SSY is used mainly for goals like post-graduation degree and marriage due to the lengthy lock-in if your asset allocation allows it. However, if your monthly investment amount is high enough, SSY can also be used for retirement planning.

It is expected that over time, as the economy matures, these debt instrument returns will go down. Invest in them only if

  • the product maturity aligns with the goal maturity (PPF is 15 years, EPF is up to retirement, and SSY is 21 years)
  • the motivation is not just to save tax under 80C. There are other alternatives to save tax

Just like PPF, the interest on SSY is calculated on the 10th of the month and so you should invest as much as possible or need to by that date.

Should you max your contributions to debt investments?

This is a common question regarding investments in PPF, VPF and SSY. On one hand, we have the allure of the “government-backed secured returns”. On the other hand, we need to beat inflation for 30-40 years in retirement, which can be done by equity and is impossible via debt investments.

Our position on PPF, VPF and SSY investments is this: follow a step-by-step process:

Once you have these three corpus figures, you can use one of these calculators to know your monthly SIP amount and asset allocation between debt and equity:

Your debt proportion should go into EPF, PPF, VPF and SSY (if you have a girl child) only up to the limit allowed by the debt SIP amount. If you do not have a large exposure to equity already, your debt allocation will possibly come lower than your current debt investments. In such a case, your entire monthly SIP should only be in equity. You can choose equity funds from here: Which index funds to invest in and why?

Investment declarations

Most salaried employees have to choose their tax regime (old vs. new) along with 80C and other deductions in April. A quick way, if you have not thought about where you plan to invest under 80C is to declare ₹1.5L in PPF since you can always edit this later. The same concept applies to health insurance (80D) and HRA.

Choosing old vs new tax regime

Choosing old vs new tax regime

The new tax regime, introduced in Budget 2020 as Section 115BAC, is a more straightforward taxation system that forgoes a few regular deductions (like 80C, HRA etc) in return for lower tax slabs. Every tax payer must check, based on their investments and expenses like house on rent, life insurance premiums and investments like EPF etc, whether the new tax regime is applicable to them or not, and if not they should choose the old tax regime. Generally, if your taxable income is more than ₹15 lakhs and you have deductions like 80C and HRA, then you should take the old tax regime.

The most updated calculator is on the income tax website here. A simple Excel based calculator, as per the image above, is present here.

15H and 15G

You should submit 15H or 15G forms for avoiding TDS on dividends from companies and bank fixed deposits if you are below the 30% tax bracket. If you are already in the 30% tax bracket, though, there is no need to submit these forms since you will anyway pay tax at 30% on this income.

If you liked this article, consider subscribing to new posts by email by filling the form below.

Previous and Next articles:

Latest articles:

Topics you will like:

Asset Allocation (18) Basics (5) Behaviour (10) Budgeting (9) Calculator (10) Children (6) Choosing Investments (24) FAQ (2) FIRE (8) Gold (6) House Purchase (10) Insurance (6) Life Stages (2) Loans (10) NPS (3) NRI (3) News (5) Portfolio Construction (27) Portfolio Review (17) Retirement (20) Review (7) Risk (6) Set Goals (24) Step by step (3) Tax (10)

Next steps:

1. Email me with any questions.

2. Use our goal-based investing template to prepare a financial plan for yourself
OR
use this quick and fast online calculator to find out the SIP amount and asset allocation for your goals.

Don't forget to share this article on WhatsApp or Twitter or post this to Facebook.

Discuss this post with us via Facebook or get regular bite-sized updates on Twitter.

More posts...

Disclaimer: Content on this site is for educational purpose only and is not financial advice. Nothing on this site should be construed as an offer or recommendation to buy/sell any financial product or service. Please consult a registered investment advisor before making any investments.

This post titled How should you plan your investments and taxes in April? first appeared on 01 Apr 2022 at https://arthgyaan.com


We are currently at 161 posts and growing fast. Search this site:
Copyright © 2021-2022 Arthgyaan.com. All rights reserved.
Goal-based investing
X

Click here to create your own investing plan.