New Year Thoughts: What is all that you need to have in 2018

It’s a new year. We are also in the tax-planning season now — the time when millions of Indians make their tax-saving investments and insurance purchases. I believe that wealth creation and tax-planning should be an year-long activity. Be that as it may, we are almost in January. It may be time for you to take stock of what your financial portfolio is missing. As you search for insurance and investment options, here are a few thoughts to help you on the way.

ELSS may be your best tax saver
Equity Linked Savings Schemes are mutual fund schemes. ELSS have the smallest lock-in of all tax-savers — just three years. It compares favourably with such options as endowment plans, ULIPs, PPF, and National Savings Certificate all of which have longer tenures. ELSS can also potentially provide you higher returns. As per the Crisil AMFI ELSS Fund Performance Index, this category of funds has a CAGR of 12.10 per cent in the last three years, 22.79 per cent in five years, 17.2 per cent in five years, and 10.56 per cent in 10 years. This makes it a more attractive long-term bet than a PPF or an NSC, which have current returns of 7.8 per cent and 8 per cent. What makes ELSS investments all the more attractive is that your investment would be 100 per cent tax free when you redeem it after three years. If you are looking to do a one-time ELSS tax-saving investment, you can purchase a lump sum as per your requirement. From April, you can start an SIP to stagger your investments over 12 months and avoid feeling the pinch in the J-F-M months. With most mutual funds, you can start investing with amounts as small as Rs 500 a month. What’s more, you don’t even need to get up from your desk to start investing. Just head to the website of your preferred fund house to start buying, or rely on an online aggregator to shortlist the fund for you. If you’re still confused, start off with any funds with five-star ratings.

Don’t ignore health insurance
Health insurance is not just another tax-saving header. It is a necessity. If you are without a health cover today, you are taking a risk. A sudden hospitalisation can be potentially worth lakhs of rupees. Paying this out of pocket could drain your family's wealth. Your finances can be easily protected with a basic health insurance plan. If you are a 30-year-old with no tobacco habit, a cover of Rs 4.5 lakh will cost you just Rs 4,726 a year. This is a small amount to pay for your peace of mind. Under Section 80D, you are allowed to claim up to Rs 25,000 a year in tax deductions towards self, spouse and children. You can pay save a further Rs 25,000 by purchasing health insurance for your parents. These limits can be raised to Rs 30,000 in the case of senior citizens. This tax deduction is a sizeable motivation for you to spend on a comprehensive health coverage plan — one that would adequately protect your whole family in a health crisis.

Don't just save tax. Create wealth
Lastly, let’s talk about the tendency to invest only to save taxes. While you may save your taxes, you need to assess the wealth-creation ability of your tax-saving investments. Let’s say you earn Rs 5,00,000. Your taxable income this year would be, at best, Rs 13,000 before deductions. Using the examples above, you can complete your tax-saving by buying a term plan for Rs 6,500, buying a health plan for Rs 4,800, and covering the shortfall with a five-star ELSS fund. You still need to create wealth for your life goals. Let’s say you are saving 20 per cent of your income, which is Rs 1 lakh. You have put away about Rs 15,000 into tax-savers. With the remaining Rs 85,000 you can create wealth. Think of a monthly SIP in a five-star mutual fund that could potentially earn a CAGR of 15 per cent. In only 10 years, this SIP could give you a corpus of Rs 20 lakh, or Rs 1.1 crore in 20 years.

Life insurance should be 10x income
Life insurance is one of the most popular tax-saving instruments out there. If you are a first-time life insurance buyer, here is an advice: Buy a term plan first. This option allows you to buy a life cover that's 10-20 times your current annual income at low premium costs. For example, a 30-year-old salaried male earning Rs 5 lakh annually, and having no tobacco habit can buy a cover of Rs 1 crore with annual premiums starting around Rs 6,500. Such a cover would adequately protect your dependent family members. You would not have to buy other forms of investment-linked insurance plans where the premiums are high and life covers are lower. Instead you would be able to invest your savings in more attractive avenues and generate better returns.