Calibrate investments, Prep for tax saving/filing, Align contingency fund to reflect current needs
A new financial year is upon us. Yet, 2021-22 gives the best feeling. The Covid pandemic refuses to go, financial markets remain volatile, and hopes remain high that the good ol' times will be back. The new fiscal requires you to be smart and have a handle on savings, investment, taxes, expenses and much more. Here is a blue-print on the key moves you need to take so that smart money matters are always under control.
Be investment wise
A new financial year requires a fresh assessment to check whether your investments are on track to meet your long-term goals. You must check if there is a need to change or re balance the asset-allocation mix for optimal results, in the light of developments on the personal front.
Also, a new financial year is a good time to do a check on the health of your portfolio. Financial markets, especially stocks, have done very well in the last one year or so. If even in this situation, some market-linked investments have not well, find out for reasons. If you find a pattern of continued poor performance, weed out under-performers.
Be a regular: If you are in the old tax regime and among those who struggle to meet the deadline for tax-saving investments every financial year, now is the time to get smart. Instead of doing tax-saving investments at the end of February/March 2022, start them from April 2021 for ELSS, NPS, PPF, etc.
Just like your EMIs, you have the option to spread out your investments regularly over the next 12 months in most of these products. This will work well if sometimes, you don’t have enough funds to do the investments at one go.
Besides, delaying the investment process to the end of the year will make you prone to mistakes in the form of choosing the wrong products. Also, if you do equity-linked investments through SIPs, you can average your costs better and avoid risk of timing your investment.
Use tactical opportunities: Instead of frittering away the annual bonus , ex gratia or other one time payments that some employers give during this time, this new financial year offers you the chance to stock up on small-saving schemes and voluntary provident fund. If the circular on the new small savings rates issued on March 31 (withdrawn later) is any indication, interest rates may go down further, before moving up.
Hence, for conservative investors to whom the sovereign guarantee offered by the small-saving schemes is important, schemes such as NSC is a good bet (offers 6.8 per cent) compared to similar tenure bank deposits.
As per the new PF rules, interest on cumulative annual employee contributions above ₹2.5 lakh shall attract income tax at the applicable tax slab, wherever employer is also contributing. Nevertheless, despite the tax, the returns on the VPF continue to be attractive when compared to the interest rates being offered on other debt instruments and it will be a smart move to use this window to your advantage in the new financial year.
Contributions to both the NSC as well as the VPF is eligible for deduction up to to ₹1.5 lakh under Section 80C.
Prep for taxes
The end of FY2020-21 and the start of FY2021-22 have different implications from tax filing point of view.
To do tax return filing for the previous fiscal, you will be required to collect all the necessary documents including details of any foreign asset/income.
Though one may argue the tax filing deadline is some months away, it will not hurt to check Form 26AS online to check whether tax deductions for FY2021 are properly credited. Remember to cross check the Form 16 that will be sent by your employer soon. Start collecting capital gains statements for investments and account statements for bank accounts. Dividends are taxable so keep a note on them too.
For the new financial year, there is a tax-related task you can do right away.
Submit a pragmatic investment declaration, basis on which your employer will deduct taxes each month. Avoid a casual approach towards submission of investment declaration such as mentioning maximum contribution for Section 80C, Section 80D when you very well know you can't invest so much.
While it may lead to a higher take-home salary now due to lower tax deduction, what matters is actually doing those investments at the end of year. Failure to submit investment proofs to your employer could lead to substantial tax outgo in the last 2-3 months of the year and pinch your disposable cash.
Rainy day plans
A new financial year is also a good time to do a check on your emergency funds and insurance cover.
The Covid pandemic has shown the need to have a contingency fund. With salaries cut and expenses rising, many had to break their piggy bank to survive last year. This underlines the need to stash away smart money in the savings pool so that 6-12 months of zero/low income does not impact household finances.
Also, take a re-look at life as well as health insurance needs at the beginning of the financial year. Over time, the needs and lifestyle of your family change. Hence, your insurance cover should also change accordingly. Significant life-changing events such as marriage, the birth of a child, home loans, income change etc. increase your responsibilities. Raise your life coverage amount when renewal comes up this fiscal.
Similarly, medical costs for elderly parents, newborn children and hospitalisation can pinch your pocket. To tide over inflation in medical costs, widen your health cover if necessary.
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