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  • 7 ways to make the most of your bonus this year

    Quote by Jayant Pai in The Economic Times Wealth, April 13, 2016

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    7 ways to make the most of your bonus this year
    While extra cash is welcome, handling it can be tricky. Here are seven suggestions for getting the most bang from that extra back.

    BENGALURU: April may be the cruellest for Eliot and the Americans, but for Indians, it usually brings good news. You get your annual increment letters and a performance bonus may be on its way too. Many of you may get a tax refund too. While extra cash is welcome, handling it can be tricky because you need to juggle multiple aims and concerns to maximise returns from your yearly perk. Here are seven suggestions for getting the most bang from that extra back. Take a pick or a combination of them.

    You don't invest when you owe money, especially when interest rates are hovering at 7-8%. Start paring debt in order of interest rates.The ones with no tax benefits and higher interest cost go first. These could be outstanding credit card payments, car loans, personal loans, etc. Check for pre-payment charges.Last would be the ones that offer tax benefits such as student loans and home loans.

    While you are filling out your investment declaration forms for the current fiscal, check the National Pension System box. Up to Rs 50,000 invested in NPS under the new Section 80CCD (1b) is eligible for additional tax deduction, over and above the Rs 1.5 lakh investment limit under Section 80C. At the highest tax bracket of 30% this could imply a savings of Rs 15,000 on your next tax bill.

    The budget has made the deal even more sweeter by rationalising the tax on withdrawals. Under the scheme, it is mandatory to buy an annuity plan with 40% of the corpus at maturity. The rest can be withdrawn. Until last financial year, this 60% was fully taxable at slab rate. This year onwards FM has made withdrawals up to 40% of the corpus tax exempt. So, if a person chooses to withdraw 60%, he will need to pay tax only on 20% corpus withdrawn. If the corpus is Rs 1 crore, at the highest tax bracket, this will mean a tax saving of Rs 4.37 lakh.The pension payouts are however taxable.

    The Sensex has declined 12% over the last one year. However, if you are in for the long-term (three-year plus) this is an opportunity to pick up some cheap stocks at great value. However, the stock market graph is never a straight line and therefore it is always better to use the SIP route. However, keeping the money in a bank account is not the best idea.Invest the lumpsum in a debt fund and move the money to an equity fund. You could also earmark this corpus for a goal that is five to 10 years away ."Even if the returns were in line with the index, the compounding effects of a 12-15% tax free growth rate can really snowball the returns over time," says Priya Sunder, director, PeakAlpha Investment, a Bengaluru-based investment advisory firm. You can later use the money to make down payments for an asset purchase and reduce loan burden. an asset purchase and reduce loan burden.

    If your daughter is aged below 10 years, Sukanya Samridhee is the best debt option. Small savings interest rates have come down and at 8.6%yearly compounded rate, this is one among the two highest paying options. The other is the senior citizens' savings scheme. This makes it even better than the old-time favourite, PPF. Besides, it is a far better al ternative than the fixed deposits and recurring deposits you may investing in for your daughter's future needs. The scheme gets tax benefit under Section 80C. So, the maximum you can invest is Rs 1.5 lakh per financial year. Also it falls under EEE meaning the principal invested, the interest accu mulated and the payout are all tax-free.

    However, before investing, be beware that the scheme lacks liquidity. You will have to stay invest ed in the Sukanya Samridhee Yojana till your child THINKSTOCK turns 21. Premature withdrawals are only allowed after the girl turns 18 and you can withdraw 50% of the corpus. Under the PPF, 50% withdrawal is al lowed from the seventh year. Also, this is a long term commitment. "You might invest the bonus now but this is not a one-time investment scheme. You will have to pour in some money every year till maturity ," says Anil Rego, CEO, Right Horizons.

    Home loans have become cheaper and the real estate market has been flat for more than a year now. Stocks have piled up and real estate developers are ready to haggle if you are a serious buyer. The icing on the cake is the additional Rs 50,000 tax-break on home loan introduced in this year's budget for first-time buyers. So, if your loan is less than`35 lakh and the value of the property is not more than Rs 50 lakh, you could get a deduction of up to Rs 2.5 lakh on interest payment. These incentives make this one of the best time to buy a house. Use the bonus to increase the size of your down-payment. This can do two things. First, makes you eligible for the tax break if you need more than Rs 35 lakh as loan and second, a smaller loan means a lower EMI. Put the bonus in an income fund if your purchase date is less than a year away. "If it is more than a year, it is advisable to invest in equity funds where the returns are taxfree post one year," says Rego.

    If you already don't have one, set aside the money in a liquid option. Draw down as and when the liabilities or unexpected expenses arise. This will preempt the need to indulge in any fire sales or taking bridge loans to tide over liquidity mismatches.

    We often forget that financial instruments are not the only investments that fetch returns. "Spend on enhancing your skills, join a course that can improve earnings," says Bhuvana Shreeram, head, Financial Freedom Golden Practices. This may not only make the bonus package even fatter next year but will fetch regular returns. Finally, it is okay if you cannot think of any credible avenues to invest or utilise your money right away. "Salt away the money in a liquid fund," advises Jayant Pai, CFP and Head Marketing, PPFAS Mutual Fund.

    The original article could be seen here.

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