Q. I am 27 years old, differently-abled, single and a government employee with a gross salary of ₹9 lakh per annum. I don’t have any tax saving investments or health insurance. Please advise as to how and where to invest to maximise my returns and minimise the tax commitment. Is ELSS a good option? What are the tax saving avenues for a differently abled person?
Swaraj S
A. Any person who is starting out on his or her career needs to put three essential components in place before making other investments – an emergency fund, term life insurance (if you have dependants) and health insurance. The emergency fund is meant to help you tide over short periods when your income may be interrupted due to illness or accident. To build this, you will need to save an amount equal to 6-9 months living expense in a bank deposit. A pure term life insurance plan, easily bought online, will ensure that any dependants you have will receive a lumpsum amount in the event of your unfortunate death. This is essential only if you are a breadwinner and have family members depending on your income.
The premium that you pay towards such term life plans is eligible for tax breaks under the overall limit of ₹1.5 lakh under Section 80C. Contributing to a health insurance plan is important to ensure that your finances do not take a big blow in case of illness or surgery requiring substantial payouts. Under Section 80D of the Income Tax Act, an individual is eligible to claim a tax deduction of ₹25,000 a year towards premiums paid on a health insurance cover for himself, his spouse and dependants. You can also claim an additional ₹25,000 towards premium paid for your parents if they are below 60 and ₹50,000 if they are above 60 years of age. In addition, you can claim ₹5,000 a year towards a preventive health check-up.
Do open a Public Provident Fund account at a nearby post office for a tax-free annual return. An annual contribution of up to ₹1.5 lakh can earn you tax breaks under section 80C. The National Pension System (NPS) is another retirement vehicle which can earn you tax breaks totalling to ₹2 lakh a year. ELSS schemes are a good long term option to build wealth too.
This apart, tax laws allow a flat deduction of ₹75,000 from the total income of those with specific disabilities and ₹1.25 lakh for those with severe disabilities under section 80U, on producing a medical certificate, which you may already be aware of.
Q. I earn ₹30,000 per month. My monthly expenditure is ₹22,000. Right now, I want to park my savings of ₹8,000 into a liquid fund so that I can liquidate it any time. My focus right now is to generate money for my short-term needs, like a vacation. Kindly advise what would be the best way to invest.
Vaishali Goyal
A. Given that you are just making a start on investing, it would be good to map out your short term, medium term and long-term goals and then invest towards them using appropriate vehicles. Investing towards your short-term needs alone in the initial stages of your career, can leave you short of savings towards medium term (buying a home or funding higher education) or long term goals such as retirement.
Before investing, it is also good for you to first create an emergency fund and buy term and health insurance to cover you against uncertainties. If you are keen to save up money towards a short-term goal such as a vacation, both bank deposits and debt funds can fit the bill. Your choice between the two will depend on when you need the money and whether you are comfortable with volatile returns. If you have a short term need with a specific date, a deposit with a leading bank can be a good bet. If you can’t specify the date but may need the money any time within a year, liquid and ultra-short debt funds will work.
However, the returns from debt funds can be quite volatile and you may even experience negative returns from them for short periods. Choosing the right short-term debt and liquid funds to invest in requires knowledge and homework, as you will need to look into fund portfolios to assess the quality of securities they own. This is best done with the help of a qualified advisor.
