The month of April is fast approaching.Time of Performance appraisals . Aren’t you eagerly waiting for that salary hike? Getting a salary hike is one thing….Managing that extra money is something else. Have you planned how to manage that extra money you get from a salary hike? If you haven’t planned how to spend that extra money, it’s not yet too late… You still have time.
You have availed a home loan, often considered a good loan, to save tax. However if you have availed a personal loan or borrowed heavily on your credit card, you must pay off this debt as soon as possible. You get no tax benefits if you avail a personal loan.
Personal loan charges an interest rate as high as 15% to 18% a year. Credit cards charge an interest rate, as high as 24% to 36% a year. What better way to repay your personal loan or credit card debt, than with the money from a salary hike? You can prepay your personal loan with this money. Your future EMI’s on the personal loan will come down, if you prepay your personal loan.
You invest regularly in equity (equity mutual funds and stocks) or debt (fixed deposits or debt mutual funds), to achieve your financial goals. You may have short term financial goals like buying a car or even going on a foreign trip. You invest money each month, say in an equity mutual fund, to achieve this goal. If you allocate more money towards your financial goal, you will achieve that financial goal faster. So invest the extra money you get from a salary hike, towards your short term and long term financial goals.
Your boss has increased your salary. What does this mean? Oh…you know of all the good things you can do with a hike in salary. I don’t have to tell you how to spend your extra money. There are so many things to buy. Clothes…Shoes…Laptop…A new smartphone.
I’m talking of the bad things of a salary hike. Yes…you may have to pay more taxes, when you get a salary hike. You need to plan for your taxes in the month of April itself. You would not have the tax headache at the end of the financial year.
You love to take risk in your investment. You also want to save on taxes. What better way than an equity linked saving scheme? Equity linked saving scheme is popularly known as ELSS. ELSS invests most of your money in equity. ELSS gives you a high return for a high risk. If you invest in an ELSS (Equity Linked Saving Scheme), you get tax benefits up to INR 1.5 Lakhs, under Section 80 C of the income tax act. ELSS invests your money in equity (stocks + equity mutual funds).
What happens if you invest in ELSS at the last minute…At the tax deadline? You might be forced to invest in ELSS when stock markets are high. ELSS has a lock in period of 3 years. If you invest in ELSS when stock markets are high, you would not get a high profit when you exit from the ELSS after 3 years. You could even suffer a loss. The ideal way to invest in the ELSS is through the SIP (Systematic Investment Plan). You invest small sums of money regularly in equity mutual funds (say each month), through an SIP. You get the benefit of investing in stocks when the stock market is at lower levels, if you invest in ELSS through the SIP route. You cannot get this benefit if you invest in ELSS at the last minute.
Under : Financial Planning