Mar 2, 2011|
Financial planning in light Of the latest budget
In general usage, a financial plan can be a budget, a plan for spending and saving future income.
This plan allocates future income to various types of expenses, such as rent or utilities, and also reserves some income for short-term and long-term savings.
That's how Wikipedia frames it and the definition is accurate.
In light of the latest Budget 2011 - 12 announced by the Hon'ble Finance Minister, Mr. Pranab Mukherjee, let's assess what has changed for us, if at all, from a Personal Financial Planning point of view.
The two key points presented in the Budget from a Financial Planning point of view were as follows:
Both these points are good news for senior citizens, from a tax saving point of view. Senior citizens benefit with a saving of approximately Rs. 26,000 in taxes.
- Age to qualify as a senior citizen has been decreased from 65 to 60 years
- New tax category of Very Senior Citizens has been introduced, which allows tax free income up to Rs. 5 lakh p.a. for individuals of above 80 years. However, income from Rs. 5 to 8 lakhs is to be taxed at 20% and above Rs. 8 lakhs will be taxed at 30%.
In additional, the Budget announced an extension in the tax deductible investment in Long Term Infrastructure Bonds, allowing Rs. 20,000 under Section 80CCF for one more year.
Insurance companies are slightly displeased, considering that the Budget proposes service tax to be charged 'in the portion of the premium', and 'composition rate is also being increased from 1% to 1.5%' on life insurance policies. This implies that the premium on your traditional policy, if you have one, will be a little bit higher, and the returns you earn will be a little bit lower.
From a Financial Planning point of view, this is just one more reason to opt for a straightforward term plan for life cover, and leave the job of generating returns to your investments.
Old tax slabs have been tweaked a bit, but the impact is marginal: Exemption limit for the common man has been increased from Rs. 1.60 lakh to Rs. 1.80 lakh, leading to a tax saving of Rs. 2,000. There has been no change in the exemption limit for women.
This tweak is basically one step towards the Direct Tax Code which is to be implemented next year, where there will be no difference in the exemption across men and women tax payers, and the basic exemption will be Rs. 2 lakhs.
So, all in all, from a Financial Planning point of view, the changes are minimal.
You should still follow the process of Financial Planning when building wealth for your family's and your life goals.
At all times, remember to have your contingency fund stashed in a safe place (liquid plus funds, a sweep in flexi deposit with your bank) in case of an emergency. Your contingency fund should be 6 to 12 months of your family's and your monthly living expenses.
- If you have a goal that is less than 3 years away, for example buying a house or a car, or sending your child for higher studies, then the corpus should be invested in safe instruments and should not be exposed to market risks i.e. no equity exposure.
- For a goal that is 3 to 5 years away (medium term), your exposure to risky assets (equity) should be low, and your primary exposure should be to debt (think more MIPs, fewer balanced funds).
- For goals that are 5 to 10 years away, your equity exposure can be higher, with lower exposure to debt, as the time horizon will enable you to weather any market volatility that comes your way.
- For goals that are 10 years away or more, you can be primarily invested into equity, with some exposure to debt.
This article has been sourced from PersonalFN has been providing independent research since 1999 on mutual funds, insurance, fixed income instruments and gold. It also provides research based advice on investments and financial planning to individual clients. To know about our financial planning services, simply write to firstname.lastname@example.org.
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