A recent Money Today-Naukri.com survey of 1.7 lakh employees in India reveals that as many as 67 per cent expect a good hike this year. While this may be in the realm of expectation, Finance Minister Pranab Mukherjee has already given all taxpayers a hike by raising tax slabs. Depending on how much you earn, you will be taking home between Rs 170 and Rs 4,800 more per month from April onwards. How do you intend to use this surplus? Here are 10 suggestions to choose from based on your financial circumstances and life stage.
Prepay your home loan
If you have a home loan, it's a good idea to use the tax savings to prepay it. For, even though the new base rate structure to be implemented by banks from July will make your floating rate home loan more transparent, interest rates may rise and extend your loan term. Some banks have already stopped offering teaser rates, while others have increased interest rates. Experts say there is a possibility of lending rates rising by 0.75-1 per cent in the medium term. Don't underestimate the saving potential of this strategy. At 10 per cent, the interest on Rs 50,000 over 10 years is Rs 29,290. Most lenders allow prepayment up to 25 per cent of the outstanding amount in a year. Anything above this attracts a 2 per cent penalty. However, PSU banks don't levy any prepayment penalty.
Start saving to buy a house
If you've always dreamt of owning a house, the budget has landed you an opportunity to realise it. Don't rush out with a chequebook though. The attractive deals and offers in real estate are likely to become sweeter in the months to come. Start putting away your tax savings in a debt fund or a sweep-in bank account. This cash will come in handy when you go shopping for a house. If you have saved enough, a bigger down payment will allow you to dictate terms to the seller. Besides, you will have to take a smaller loan, which means a shorter tenure or a lower EMI. You might also be in a position to consider a house bigger than you could have afforded earlier. At a nominal growth rate of 8 per cent, a monthly saving of Rs 4,000 will grow to nearly Rs 50,000 in a year's time.
Reinvest in your property
A house is often the largest investment and biggest asset for an individual. This could be the right time to reinvest in this asset by adding a floor or a room to your house. Take a home improvement loan (interest rate is the same as that for home loans) and use the largesse from the budget to pay the EMI. The EMI for a Rs 4 lakh loan for 10 years at 9 per cent is Rs 5,000. This is roughly what is needed to build about 400 sq ft of additional residential space. If you rent out the additional area, factor in the rental income in your calculation. The Direct Taxes Code proposes to do away with tax deductions on self-occupied houses, but those given on rent will continue to enjoy these benefits.
Build an emergency fund
What happens if you suddenly lose your job? Or if somebody in the family takes ill? You cannot prevent emergencies, but you can be prepared for them. One way to do this is to build a contingency fund that can be accessed at any time. Financial planners say you need to have an emergency fund to cover at least 4-6 months' expenses. If you haven't already built such a corpus, now's the time to do it. Set aside the monthly gain from the tax cuts in a debt mutual fund or a sweep-in bank account. The first option is better because it prevents the investor from dipping into the fund for routine expenses. If you are disciplined, even a savings bank works, though a sweep-in account earns higher interest.
Review your insurance cover
Have you reviewed your life cover lately? Are you sure that the life insurance policy you took five years ago is enough to cover your family's needs today? Often, people take an insurance cover without factoring in the impact of inflation as well as changes in their financial circumstances. Use the surplus money to buy more insurance if you have taken a big-ticket loan or if your living expenses have gone up. The best form of life insurance is a pure protection term plan. For a 40-year-old, a 25-year term cover for Rs 30 lakh will cost about Rs 15,000 a year. That's a low price for ensuring that your family's future is safe.
Start SIP in an equity fund
The budget has given a new direction to the markets. Experts are optimistic that the lowering of fiscal deficit and other measures will boost global confidence in the Indian economy and increase the FII inflow. This means it's a good time to enter the markets. If you are looking for longterm wealth creation, use the extra cash you get every month to start an SIP in an equity mutual fund. Go for an ELSS fund if you also want tax deduction under Section 80C.
Diversify in gold
The price of gold has come down from its peak but analysts say this could be a seasonal correction. Gold prices are expected to climb up because of several factors, including rising inflation, high crude prices, a shaky dollar and the need for a safe haven. It is predicted to touch Rs 20,000 per 10 gram by March 2011. However, this doesn't mean that one should make a drastic change in one's asset allocation. Experts say no more than 10 per cent of your total wealth should be in gold. If you have allocated less than this, you can use your tax savings to start buying gold in small quantities, preferably as gold ETF units. They are liquid, easy to hold, and cheap. Pity you can't wear them to a party.
Insure your family's health
A health cover is a must in any financial plan. But many people keep putting off the decision to buy health insurance because they look at it as a needless expense. It's good if your employer offers adequate health coverage, but if you are self-employed or don't have health cover, buy one for yourself and your family right away with your tax gain. It doesn't cost too much and allows you to access the best healthcare facilities when you need them the most. Choose a floater plan instead of individual covers. A Rs 3 lakh floater cover for a family of four (husband, wife and two children) will cost about Rs 7,000 a year. You even get income-tax benefits on the premium under Section 80D.
Add accidental death and disability cover
Accidents can be debilitating, physically as well as financially. If the victim is badly injured, he will not be able to work for several months. If he is permanently disabled, he could lose his livelihood. You can safeguard yourself against such a situation by taking an accidental death, disability and dismemberment cover. A Rs 10 lakh cover costs barely Rs 1,300 a year. This is equal to what you will save every month in tax if you earn Rs 5 lakh a year. You can also take this as a rider along with a life insurance policy. Be sure to read the fine print though. It is best to opt for a personal accident cover, which also includes loss of livelihood and offers a lump sum to the insured.
Buy infrastructure bonds
The budget puts more money in your hands, but some of this will come to you only if you invest Rs 20,000 in infrastructure bonds under the new Section 80CCF. Keep this sum aside to avoid a cash crunch when the issue opens. You can save up to Rs 6,180 if you invest in these bonds. The income is fully taxable.
Reproduced From Money Today. All rights reserved.
Source:http://in.news.yahoo.com
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