Welcome to the second chapter of our weekly series on ‘Personal Finance’. In this chapter, we list out four smart money moves you can make to achieve financial freedom. These moves will probably help you make more money, so read it till the end.
4 Smart Money Moves to Achieve Financial Freedom
1. Investing in equities? Consider export-oriented businesses
You are aware that the US Fed is expecting a rate hike this year, which will cause a liquidity crunch in the markets. This means, the emerging markets like India that enjoyed foreign institutional investor inflows (FIIs) over the last year, will see an outflow for a short period.
This move has resulted in strengthening of the dollar against rupee. Dun & Bradstreet India’s Chief Economist says “Due to worries about quicker rate hikes by global central banks, there could be some more depreciation in the next 1-2 quarters and the US dollar may go up to Rs. 77 in the short term. However, the situation should improve in the second half of 2022.”
A weaker rupee will help export oriented businesses. When we write exports it does not only mean the traditional import export businesses dealing with cargo and logistics. The Information Technology (IT) industry also forms part of export-oriented businesses as they provide services to foreign companies.
This sector has rallied significantly in the past one year and outperformed the benchmark indices with a huge margin.
Along with rupee depreciation, exporters may benefit from production linked incentives (PLI) schemes, and the China plus one policy for supply chain, global companies and others have adopted.
While the IT industry seems promising, you may want to maintain caution when investing in other export-based businesses. Pharmaceutical stocks may witness volatility due to US FDA approvals. Further, increasing shipping costs have put pressure on traditional export sectors such as textiles and chemicals.
2. Be a long term equity investor and save tax
Equity investments is a risky affair for sure. But if you buy fundamentally strong businesses and remain invested for the long term, no other asset class can match the returns made through equities. Need sound advice on which stocks to invest in? Click here.
In addition to wealth creation to Achieve Financial Freedom, long term investments help you save on taxes. Gains from equity investments fall under capital gains. Short term capital gains i.e. profit booked within a year is taxed at 15%. On the other hand, Long term capital gains (LTCG) i.e. profit realized in >1 year, are taxed at 10%.
The plus point is, under section 112A, LTCG of Rs. 1 Lakh from equity and equity mutual fund are tax free in a financial year. The tax is calculated only on the amount you earn above the exemption limit of Rs. 1 Lakh.
For e.g. if your gain is Rs. 1, 10,000, the 10% tax will be calculated only on Rs. 10,000.
Tax experts suggest booking profits on a yearly basis. Doing so helps you reduce tax liability. Refer to the tables below to understand it better.
Investor A, who booked profit every year for five years only paid Rs. 10,000 in taxes, whereas Investor B, who booked profit only after the 5th year paid Rs. 50,000 in taxes.
Booking profits does not mean you reduce equity allocation. In this scenario, your asset allocation to the equity portfolio remains largely the same.
When you book profit, we expect you to buy another script against the one you sell.
3. Consider utilizing Rs. 2.5 lakh tax-free limit in VPF
VPS stands for Voluntary Provident Fund. Last year’s budget introduced a new tax on the interest earned on PF contributions above Rs. 2.5 lakh in a year. It did not affect many as very few had more than Rs. 2.5 lakh in their PF account.
Under VPF, a subscriber can save more than the mandatory 12% of the basic pay; however, it’s not used widely. Given the low interest rates, contributions of up to Rs. 2.5 lakh in PF can earn tax free 8.5% returns.
Tax experts suggest one can make higher contributions to VPF because despite the new tax, the VPF still works out to be the best investment option in the fixed income space. Refer to the table below for better understanding.
4. Verify your Tax on AIS
Things have changed after the introduction of AIS i.e. Annual Information Statement in the taxing space. The AIS has all the details of all your financial transactions such interests earned on bank FDs, dividend receive on stocks, realized capital gains after selling a stocks or switching funds as well as expenses incurred during a particular financial year.
It’s a comprehensive statement of financial transactions that are reported to the tax department. You need to pay attention to this statement while filing your income tax. Tax experts say the income declared in the tax return must match with the details available in the AIS. Mismatch in the information may force the IT department to issue a notice against you.
Login to the new income tax website to view your AIS. You can download it in PDF format.
Well, the moves we’ve mentioned above are doable. Of course, not to forget the traditional methods are also available to you such as buying gold when prices drop, buying your house now before the prices rise, ensuring your health policies are updated and even add to your skills that will help you earn more and Achieve Financial Freedom.
Make these smart money moves this year and we are sure you will not go wrong. Remember, take decisions after researching it thoroughly.
Look for our next chapter, which talks of the idea equity allocation you must have.
In the meantime, subscribe to our 5 in 5 Wealth Creation Strategy to begin your wealth creation journey.