Appraisal season has come to an end and it is most likely that by now you have got your salary hike and performance bonus. While you might be tempted to splurge the additional cash, judicious use of the surplus income can improve your financial well-being and help build wealth for the fulfilment of your life goals. This is the ideal time for you to analyse your financial portfolio and determine if you need to invest more towards your life goals.
Salary hike give you an opportunity to decrease your liabilities, increase investments and to plan new goals. Here’s how you can channelize these extra earnings systematically from the beginning of the financial year:
Lower your debt
It makes little sense to make investment plans when you have outstanding loans on your books. However, whether you should focus on debt repayments or not will entirely depend on the kind of debt you hold and its cost. For example, upfront payment for a home loan or an education loan can be prioritised later as you get tax benefits for such loans. On the other hand, high-cost debts, for instance, credit card dues and personal loans, where interest rates are significantly higher than the return on investment you can earn, should be cleared as soon as possible. As a rule of thumb, start paying off your liabilities in the order of interest rates.
Lower your tax-outgo
If prudently invested, you can use your increment to reduce your overall income tax outgo. Does it not sound wonderful? If you invest your money wisely you can claim certain deductions under the sections 80C, 80CCC, and 80D of the Income Tax Act, 1961, the life insurance, and pension plan premium payments, up to a maximum limit of Rs. 1.5 Lakh, is allowed for deduction under section 80C/80CCC. You can invest in Unit Linked Insurance Plans (ULIP) to claim this benefit as they also offer life cover and pension along with value appreciation and strategic flexibility for your investments. Additionally, ULIP premium paid by you for your spouse or your child's life insurance policy also qualifies for a deduction under Section 80C of the Income Tax Act 1961. Moreover, if the ULIP premium paid does not exceed 10% of the sum assured, the amount received on partial withdrawal or maturity is exempt from tax under section 10(10D) of the Income Tax Act 1961. Also, under the section 80D of the Income Tax Act 1961, you can claim a deduction on the premium paid towards your health insurance plan for up to Rs. 50,000. All the above mentioned deductions and exemption under Income Tax Act 1961 are subject to provisions stated therein.
Life goals and investment continuity
Salary hike give you an opportunity to examine the compatibility of your current investment profile with your future life goals. You can use this additional windfall to design your investment plan while keeping in mind your various short-term and long-term goals and by adding new goals. For example, if you just had a child, you may want to add more investment goals to existing ones for the child’s upbringing and education. At the same time, you also need to ensure that the dreams and aspirations of your loved ones are fulfilled under any circumstances. As a result, you may invest your money in a life insurance plan to make sure that investments towards life goals are not disrupted. One of the preferred ways to cover all the bases is to put your money in combined products like new age ULIPs. With ULIPs, you can invest across different sectors, through various predefined investment strategies, and for various time horizons. It enables you to minimize risk and maximize the returns while safeguarding your investment options from vagaries of life.
A salary increment brings a sense of achievement and allows you to inch closer to your life goals. By using your increased salary wisely, you can establish financial soundness for yourself and your loved ones for a long time to come. However, it is necessary to select your investment options in a prudent manner as it is crucial to achieving the desired results.