You must be familiar with financial products that claim you just need to invest a sum for a certain period and then see it double at the end of the term. While it is easy to think you have earned a return of 50%, it is not so. This is because your money gets compounded each year at a certain percentage of return.

E.g. if you are investing 10,000 for 10 years and are getting back 30,000 at the end of the term, your effective rate is 11.61% compounded annually.

This concept is known as the time value of money.

It says that money available currently is more valuable than the equivalent sum later on because of its earning potential.

So the Rs 30,000 available with you presently is far more than Rs 30,000 available to you in the future.

Why is this important? Whenever you have money, you can either choose to spend it or invest it. If you opt to invest it, you should ensure you earn much more than its present value. This is why it is important to keep your investments for long-term. This will help you earn better returns.

Every parent wants to give the best for his child. So they start saving for their child’s education. However there are many instruments available in the market that claim to offer best returns for your child’s future. These products are designed exclusively for children. Here are the products meant to give your child the bright future.

• Children’s plans from insurance companies: Many insurance companies offer children’s plans. These are the combination of insurance and investment. While they resemble normal ULIPs, the charges are higher here as these products are specialized products offering guaranteed returns. The insurance cover is more, and even if you are not around your child will remain protected. You can also withdraw money from the policy periodically to meet your child’s educational needs..
• Children’s plans from mutual funds: Similar to insurance companies, mutual funds also offer children’s plans. These are more of debt funds with higher charges than traditional mutual funds.

Now when you choose a typical child’s plan, you will get lower returns than a conventional investment instruments. So what should you do?

Start investing in couple of good equity mutual funds as soon as your child is born. Take a term policy that will offer you high insurance at low premiums. This will ensure you can build a healthy corpus for your child by the time he turns 18.

Recently ULIPs were in the news when SEBI had directed 14 insurance companies not to issue any new ULIPs. SEBI contended that despite being an insurance product, ULIP had a high proportion of investment and thus should be regulated by SEBI. However in reality IRDA regulates the insurance products including ULIPs.

The case went to the court and the government had to step in and hand over the jurisdiction of ULIPs to IRDA. But in this war, it is ultimately you the customer has lost. Wondering why? Here is why.

This is because mutual funds and ULIPs do not have level playing field. While mutual funds are not allowed o pay upfront commission to its agents, ULIP agents can pay commission as high as 40% to its agents. As a result, many financial advisors tend to push ULIPs on their unsuspecting clients. Now remember, this commission comes from your investment.

The drawback of ULIP is that you need to keep your investment for at least 10 years to recover this upfront commission. This despite what many insurance agents tell you that you can keep on investing only for 3 years. Also the insurance cover is very low than what you would get for half the investment had you opted for term plan.

Moreover returns from ULIPs are not guaranteed as it is a market-linked product. Thus looking at drawbacks of ULIPs it is advisable to stay away from ULIPs. But with IRDA winning the battle against SEBI, it is the customer who has lost.

Your company has just awarded you the Diwali bonus. You want to use the money to buy the latest mobile phone. But is it the right way to spend your bonus? Is there any other way to make the best use of this surplus cash?

Well, there are actually some things you can do with the money that will help your finances in the long run.

• Clear off any pending debts: Do you have any credit card debt? Have you taken any personal loan? If yes, then use this money to repay any such debts. It will save you a lot of money in terms of interest.
• Build a corpus for retirement: Retirement is one of the most stages in a person’s life. Many people don’t pay serious attention to building corpus for retirement. But when they retire they find out that they don’t have sufficient funds to meet their expenses. So it is very important for you to start building your retirement corpus from the time you start working. Use your bonus to build the retirement corpus.
• Buy additional insurance: Do you know insurance is very important for you and your family? You should have both medical as well as life insurance. Use the excess cash to buy both these insurance.

These are some of the best ways in which you can use your bonus money.

In the budget of 2009, government of India has introduced NPS or National Pension Scheme. This scheme is available in certain banks and post offices throughout the country. It lets you invest your money in equity, debt and government securities. You can invest your money in accordance with your risk appetite. The investment will be managed by fund managers, who will charge a nominal fee for the same.

You can withdraw your money in the form of pension once you reach the age of 60. You can claim tax benefits on the sum invested. The minimum amount you can invest is Rs. 500 per month. Once you reach the age of 60, you can withdraw 40% of the sum invested to buy annuity though a life insurance company to get your monthly income.

However there are 2 drawbacks to this scheme. For one, while investment helps you save tax, you will end up paying tax on the returns at the time of withdrawals. This will reduce your returns and is an important factor during your retirement when you don’t have any source of income. Also the charges for managing the fund are quite high. For opening an account you pay Rs. 50, Rs. 350 for annual maintenance charge, Rs 10 for each transaction and   0.0009% per year of the fund value as the fund management charges. So effectively you pay more than Rs 500 towards the charges. This is quite expensive.

Hence it would be advisable to avoid NPS. Instead stick to mutual funds that have managed to offer consistent returns. As you near retirement, withdraw your investment and invest it in a bank fd. You’ll save on taxes as well as charges.

The government wants to introduce changes in the existing tax regime. It is going to change the way you invest, save tax as well as your overall tax structure. Let us see how with this example.

Ravi earns an annual salary of Rs. 10 lakhs. He invests Rs. 50,000 in PPF, Rs. 30,000 in tax-saving mutual funds and Rs. 20,000 in insurance. He has a home loan of which he has already paid Rs. 2 lakhs in interest along with the principal outstanding of Rs. 1 lakh. Let us see how his tax liability will change.

Ravi’s present tax paid: Ravi invests in mutual funds, insurance PPF and home loan principal. The amounts invested in these options are tax exempted under section 80C up to Rs. 1 lakh. So Ravi’s taxable income goes down to Rs. 9 lakh. He has also paid Rs 2 lakhs towards the interest on his home loan. Hence his total taxable amount goes down to Rs. 7 lakhs. Now out of this, Rs. 1.5 lakhs don’t attract any tax, so his taxable income further reduces to Rs. 5.5 lakhs. Of this, he pays 10% tax on amounts up to Rs. 3 lakhs and 20% tax on amounts up to Rs. 5 lakhs. So the total tax, he pays is 10% of Rs. 3 lakhs and 20% on Rs. 2.5 lakhs  =  Rs. 80,000.

Now when the new tax code comes into effect, his total tax exempted income becomes Rs. 1 lakh (contributions towards PPF + insurance + mutual funds) + Rs. 1 lakh towards home loan principal repayment. Hence his total taxable income now becomes Rs. 7 lakhs. Of this, there is no tax on his income up to Rs. 1.6 lakhs. Hence his total taxable income now becomes Rs. 5.4 lakhs. On this he pays only 10% tax. Hence the total tax he will pay is Rs. 54,000.

Hence with the new tax code, he ends up saving Rs. 26,000.

In the last article on best tax-savings options, we saw the best the options available to you to save tax. Now let us see how to make the best use of them.

First make the best possible use of PPF. You can invest up to Rs. 70,000 in a PPF account in a year. So try to invest as much as possible in PPF.

Next calculate your insurance needs and find out if you are adequately covered or not. If not, then opt for a life insurance policy. Take a simple term plan as you can get high life cover at low cost.

Once you have done this, now is the time to take a look at your investments. Are you a risk taker? Then invest the balance portion of the investment amount in ELSS. If not, then you can opt for bank FDs and NSCs.

E.g. if your taxable amount is Rs 1,00,00,00, then invest Rs. 70,000 in PPF.

This leaves you with an amount of Rs. 30,000. If you have selected an insurance policy with a premium of Rs 10,000, then Rs. 10,000 will be deducted from Rs. 30,000. This leaves you with Rs. 20,000 that you can invest either in ELSS or NSC and bank FDs.

This will ensure you get the best possible returns from your investment.

We are already in the month of February and very soon March will be upon us. So it is time to think about taxes and how to save them. But which are the best tax savings options available? Here we give you a list of some of the best tax savings options open for you.

• ELSS: Are you ready to take risks in order to earn high returns? If your answer is yes, then this is the best option. ELSS or equity linked savings schemes are mutual funds with a lock-in period of 3 years and they invest in equities. Here you not only save tax but also get capital growth.
• PPF: It is one of the best debt products available in the market. It is backed by Government of India and has a lock-in period of 15 years. You get 8% interest on the amount deposited and both interest as well as capital withdrawal are tax-free. However you cannot invest more than Rs 70,000 in any one financial year.
• Medical insurance: You can get a deduction of Rs 15,000 if you are paying a medical insurance premium for you and your dependants. But if your dependents are your parents, you get further deduction of up to Rs 15,000. If you are senior citizen, your deduction amount goes up to Rs. 20,000.
• Home loan principal: The principal portion of your EMI will also help you save tax.
• Life insurance: This investment will not only save you tax but will also give you a peace of mind should you die or are unable to work. Opt for a simple term plan that will give you higher life cover at low premium.

Visit any insurance broker, and you will be bombarded with various different types of insurance products. But one type of insurance that most of them don’t talk about is term insurance. Why do they do that? Simply because they don’t make any hefty commission from selling this insurance. However if you want insurance that offers you highest life cover at the lowest possible premium, then you cannot afford to overlook this insurance.

In simple terms, term insurance provides you only with life cover. You can compare it with car insurance. Just as car insurance insures your car against any damages, term insurance insures you against any calamities. If your car meets with an accident, you can claim compensation from the insurance company. But if nothing happens to your car, then you don’t get anything. Term insurance works the same way.

The main advantage of this insurance is that you can get higher life cover than any other insurance product. But the best part is that this cover is available at the lowest price. As a result, your premium payable is also very low, since there is no investment component involved in this insurance. So your whole premium goes towards buying your life cover.

The disadvantage of this insurance is that it is not available to people over a certain age limit. Also you can just keep on renewing it till you reach the age limit, after which you will not have any life cover.

Today with the stiff competition amongst the insurers, you can get the highest possible cover by paying the lowest possible premium. There are many insurance portals that compare the features of different term insurance products. It will let you get the best deal possible, that is right for your needs.

The adage “Health is Wealth” is true. A couple of days in hospital will set you back by few lakhs of rupees and long-term illness can end up messing around with your finances Hence it is important for you to take care of your health by eating healthy, exercising and insuring it by buying a medical insurance. Here we discuss more about this type of insurance.

What is medical insurance?
Medical insurance is the insurance that compensates you for expenses incurred during hospitalization to treat the ailments suffered or accidental injuries experienced when the policy is in force. It means the insurance company bears the hospitalization expenses that you have to bear during the term of the policy.

Premium
To enjoy this benefit, you have to pay a certain sum as premium. Premium is computed using factors such as your age and health. As you grow older, the premium you pay goes up. However if you have not claimed any compensation and your policy is old, you can enjoy the benefit of either higher insurance cover without paying anything extra or by reducing the premium for later years.

Extra benefits
If you take medical insurance for your whole family, instead of only for yourself, you can get good discounts. Also since many insurance companies are offering the provision of cashless hospitalization by joining hands with third party administrators (TPAs), you don’t have to make any payment to avail of the medical treatment. Alternately, you can avail of the treatment, pay for it and then claim this amount from the insurance company.

Tax benefits
The premium paid is qualified for a subtraction from gross total income, and is Rs 20,000 for senior citizens and Rs. 15,000 for others.

Why be an early bird?
Earlier you take the insurance cover, the better as you can benefit from lower premium, since you are healthy and don’t suffer from any diseases. Most medical insurance products do not cover the existing ailments and so you can easily get a cover if you start early. Also medical check up becomes unnecessary at this time.

Points to consider when taking medical insurance:

• Find out which illnesses are exempted.
• Find out if the insurance cover pays for injuries caused by war, riots and terrorism.
• Find out the diseases that are excluded during the initial policy period.
• Find out if the policy offers cashless hospitalization and the hospitals that provide you with this facility.
• What is the compensation offered for disability (partial and complete)
• For dependents, find out the highest age for availing the cover.
• Be aware of the benefits you are eligible for, if you don’t file a claim.