Rules are what bind us and make us disciplined and help us reach our desired goals in life. Similarly, there are some rules needed to be followed in Investing for desired returns.

With the right strategies and discipline alongside following the basic thumb rules of investing, investors can record a handsome profit on their employed capital.

There are strategically 31 rules of investing, which we would be discussing later in this blog and each rule has its importance and provide a sense of security to the portfolio. 

These 31 rules are broadly divided into 8 thumb rules of investing which are further divided into three subcategories

• Rules for Faster and higher returns
• Rules for investment checklist
• Rules for wealth management

Follow the following rules with Daulat, invest better, and reach your financial goals!

Why Rules of Investing are important?

Rules are an integral part of our lives, they help individuals build character, accountability, and responsible alongside helping us organize and impart consistency. Similarly, investing rules impart the following characteristics

• Provide Structure and Guidance: Investing can be overwhelming, especially for beginners. Investing rules provide structure and guidance, serving as a roadmap for making sound investment decisions. They offer a framework that helps you navigate through various investment options, asset allocation choices, and market conditions. Rules act as a foundation on which you can build your investment strategy and make informed choices based on proven principles.
• Enhance Returns: Investing rules are designed to optimize returns over the long term. By setting clear investment goals, practicing discipline, and staying focused on your strategy, you can avoid impulsive decisions driven by short-term market fluctuations. Consistency, patience, and a long-term perspective enable you to reap the benefits of compounding and potentially achieve higher returns.
• Minimize Risk: Investing rules help mitigate risks associated with investments. By diversifying your portfolio, conducting thorough research, and managing risk, you reduce the chances of significant losses. Following rules such as setting a stop-loss limit or having an asset allocation strategy helps protect your investments and ensures you are not overly exposed to a single investment or asset class.
• Long-Term Perspective: Investing rules emphasize the importance of a long-term perspective. They encourage you to think beyond short-term gains and losses and instead focus on building wealth over an extended period. By adhering to rules such as starting early, being consistent, and staying invested, you can benefit from the power of compounding and take advantage of market growth over time.

Rules for Faster and higher returns

There is only one norm to achieve faster and higher returns, and that is

INVEST EARLY, AND BEGIN RAISING THE BAR, the following rules will help you decide how to do that

• Rule of 72: Rule of 72 gives the minimum time required to double down your investment.
• Rule of 114: Rule of 114 gives the minimum time required to triple down your investment.
• Rule of 144: Rule of 144 gives the minimum time required to quadruple down your investment.

Formula and Example,

For finding out, the times return on your investment, simply divide the estimated turn rate by your desired times (double, triple, quadruple) return.

Suppose you are investing INR100,000 at an estimated return of 12%. So it would take,

• 7 years to double down
• 9.5 years to triple down
• 12 years to quadruple

Rules for investment checklist

Now, as you have calculated the time required for your desired returns, you gotta invest it following these rules and build your portfolio

• The 10,5,3 rule: When we invest or even think of investing money, the first thing that we usually look for is the rate of returns that we will get from our investments. The 10,5,3 rule helps you determine the average rate of return on your investment. Though there are no guaranteed returns for mutual funds, as per this rule, one should expect 10 percent returns from long-term equity investment and 5 percent returns from debt instruments. And 3 percent is the average rate of return that one usually gets from savings bank accounts.
• The emergency fund rule: As the name suggests, the money kept aside for emergency use is called an emergency fund. It is a good practice to keep six months to one year’s expenses as an emergency fund. While calculating your expenses you should include expenses for food, utility bills, rent, EMIs, etc. And instead of keeping it idle in savings bank accounts invest in liquid funds. These funds provide a little more returns than savings bank accounts. At the same time, like saving banks accounts, liquid funds are highly liquid, i.e. the money is available on very short notice. 
• 100 minus age ruleThe 100 minus age rule is a great way to determine one’s asset allocation. That is, how much you should allocate in equities and how much in debt. For this, subtract your age from 100, and the number that you arrive at is the percentage at which you should invest in equities. The rest should be invested in debt.
• 10 percent for retirement rule “When we start earning in our early or mid-twenties, saving for retirement is the last thing in our mind. But starting to save from your first salary, no matter how little the amount is, you will be able to create a huge corpus for retirement. And ideally, it should be 10 percent of your current salary which you should increase by another 10 percent every year. 

Rules for wealth management

Now as you have accumulated wealth, you have to manage it better than your investment checklist to sustain your retirement life, it could be done by following rules

• The 4% withdrawal rule: If you want your retirement fund to outlast you, then you should follow the 4 percent withdrawal rule. As a retiree, if you follow the 4 percent withdrawal rule, it will ensure that you have a steady income stream. At the same time, you have enough bank balances on which you earn enough returns. For example, let’s suppose, you have a Rs 1 crore retirement corpus, and you should withdraw Rs 4 lakh from it every year, ie Rs 33,000 every month. Now some retirees follow this rule for the entire retirement years, but the rule also allows you to increase the amount owing to inflation. For this, you can increase the withdrawal rate by the inflation rate declared by the reserve bank. Let’s understand this with an example.  Suppose your retirement corpus is Rs 1 crore, and the inflation rate is 5 percent. So if you withdraw Rs 4 lakh in the first year, you should withdraw Rs 4 lakh 20 thousand in the second year and Rs 4 lakh 41 thousand in the third year. That is every year you should increase the withdrawal amount by another 5 percent (which is considered as the inflation rate). We have covered this topic in detail, read here.

Conclusion

These thumbs rules are the basic guide for investors, starting their investment journeys. Investors are advised to abide by the rules for desired returns but it can be altered according to the risk appetite and financial obligations of the investor.

Frequently Asked Questions

• Can the rules of the investment checklist be altered?
  • Investors are not advised to alter the rules, but they can be altered. It all boils down to the risk appetite.
• How to check, whether am wealthy or not?
  • Multiply your age by your gross income and then divide it by 10. If your net worth is equal to or more than the remainder, then you can be called wealthy.
• How to calculate net worth?
  • Difference between the summation of all your assets and liabilities.
• How can Daulat help?
  • Daulat will help you with the investment checklist and wealth management.

With inflation on the rise, investors are searching for areas of safety and security. Many investors are looking towards gold as a haven. It’s an easy way to protect assets when the market takes a downturn, and it offers protection. To provide some diversification in your portfolio, consider investing in gold. There are several ways to invest in gold.

The two most common are through a gold ETF or buying shares of a gold mutual fund. Each option of gold ETF vs mutual fund has its benefits and risks. Gold ETFs and Gold Mutual Funds. But which is the right one for you? It’s a common question among investors looking for an alternative asset to boost their portfolio.

What’s the difference?

Gold ETFs are commodity-based mutual funds that invest in gold as the principal asset. Gold ETFs are passive investment instruments that aim to track the domestic gold price. It invests either in physical gold or stocks of companies engaged in gold mining or refining.

On the other hand, Gold Mutual Fund or Gold Fund is an open-ended Mutual Fund that invests in units of Gold ETFs. The aim of this fund is the same as Gold ETF, i.e., to invest in gold of 99.5% purity and generate income. Each gold fund has a fund manager who manages the buying and selling of assets on the basis of the fund’s investment objective. 

Pros and Cons of ETF

Pros:

• Low Management Expense Ratio (MER) – Typically, gold ETFs have an MER of 0.25% or less, while some mutual funds charge 1% or more per year in management fees.
• Liquidity – Since they trade like stocks, you can buy or sell them immediately. You don’t have to wait until your investment reaches a particular dollar value before redeeming it for cash.
• Diversification – Because gold ETFs track an underlying index (such as GLD), they aren’t subject to individual managers’ investment styles or preferences. This makes them particularly valuable when investing in retirement accounts (where manager risk is not an option).

Cons

Gold ETFs are popular in India, but gold mutual funds have many advantages.

• Gold ETFs are not as well diversified as a gold mutual fund portfolio. A mutual fund will invest only in physical bullion and offer a more diversified portfolio of gold and silver than an ETF does.
• Mutual funds may have lower expenses than ETFs because they don’t need to pay brokerage commissions on transactions made by investors who buy or sell their shares on exchanges around the world (whereas those fees cost money for traders of stocks).
• Mutual funds provide more transparency about how much money each shareholder owns in terms of physical bullion holdings because they report this information regularly with their financial statements filed with regulators like SEBI (Securities Exchange Board India).

Gold ETF vs Mutual Funds

Investment Method And Amount

While you can invest in a Gold fund through SIP in multiples starting from as low as Rs 500 that fetch you units of the gold fund basis the prevailing NAV of that day; when investing in ETFs, you have to buy units of ETFs and minimum you need to buy is 1 unit. In the case of gold ETFs, one unit is equivalent to 1 gram of gold. So when you buy 1 unit of gold ETF, you are actually buying 1 gram of gold. Due to this, the minimum investment amount needed is higher in ETFs compared to Gold Mutual Funds.

Mode Of Holding

Since Gold ETFs are traded on the stock exchange in the manner of stocks, the buying and selling transactions can only be done through a broker and a Demat account. When you buy or sell the ETFs, they get debited/credited to your Demat account. In contrast, there is no such requirement for investing in a Gold Fund. 

You can invest in a gold mutual fund via a SIP or through a lump sum, without a Demat account. The transaction takes place at the Net Asset Value (NAV) of that particular day.

Costs Involved

The key costs for gold ETFs include Demat charges, Expense Ratio, and brokerage charges taking the annual cost to approximately 0.5-1%. Gold mutual funds are close at 0.6-1.2% annually, including the gold ETF charges mentioned above and 0.1-0.2% charges for managing the gold. There are no exit loads applicable on Gold ETFs, whereas, for gold funds, you may have to pay an exit load in the range of 1-2% on redemption within a year.  The difference in the costs involved for both is not very high, hence, it boils down to which method of investment you find more convenient.

Liquidity 

ETFs in India are largely illiquid because since they are being traded on stock exchanges, there needs to be an optimum number of buyers willing to buy when you want to liquidate your holdings. And given that the ETF market in itself is small in India, gold ETFs become relatively less liquid than gold mutual funds which can be purchased/redeemed quite easily.

Conclusion

Although Gold ETF vs Fund India is a viable investment option, you should understand their differences before making any decisions. Gold may be a solid addition to your investment portfolio.

Still, the type of gold product you buy shouldn’t be based solely on the numbers—your goals, timeline, and preferences should all be factored into your decision.

The gold ETFs in India currently have a better performance, but the gold mutual funds are still the best option for most investors.

When you think about saving money for the future, several options are available. Two of India’s most popular retirement-saving schemes are the National Pension Scheme (NPS) and the Public Provident Fund (PPF). In this blog, we will discuss NPS vs PPF based on their characteristics, benefits, and limitations to help you decide which suits you better.

National Pensions Scheme (NPS) 

The National Pension Scheme was launched in 2004 to provide retirement benefits to Indian citizens and is sponsored by the government. It comes under the Pension Fund Regulatory and Development Authority (PFRDA). All Indian citizens between 18 and 60 who are employees from public, private, or unorganized sectors can apply for this scheme.

The scheme offers two types of accounts – Tier I and Tier II. Tier I is a mandatory account for anyone who wishes to join the NPS scheme. The money invested in this account is locked in until the age of 60. It can only be withdrawn under certain conditions, such as medical emergencies, disability, or death. Tier II is a voluntary account allowing investors to withdraw their money anytime, without any restrictions.

The interest rate is linked to the market; thus, there is potential for earning higher returns; however, volatility is also present. The scheme allows you to choose between equity funds, government securities funds, fixed-income instruments, and other government securities.

Those willing to invest in NPS must note that the following Pension Funds are registered under this retirement scheme:

1. SBI Pension Funds Pvt. Ltd.
2. LIC Pension Fund Ltd.
3. UTI Retirement Solutions Ltd.
4. HDFC Pension Management Co. Ltd.
5. ICICI Prudential Pension Fund Management Co. Ltd.
6. Kotak Mahindra Pension Fund Ltd.
7. Aditya Birla Sunlife Pension Management Ltd.
8. Tata Pension Management Ltd.
9. Max Life Pension Fund Management Ltd.
10. Axis Pension Fund Management Ltd.

Public Provident Fund (PPF) 

The Public Provident Fund (PPF) is a long-term investment scheme introduced by the Indian government in 1968. It holds the reputation of being one of the safest and most popular investment options in India, as it offers tax benefits and guaranteed returns. It is open to all Indian citizens and has a minimum investment amount of Rs. 500 and a maximum of Rs. 1.5 lakhs yearly.

The money invested in a PPF account has a lock-in period of 15 years, which can be extended in blocks of 5 years after the completion of the initial lock-in period. The interest rate is reviewed every quarter and is currently at 7.10% per annum.

All Indian citizens can open a Public Provident Fund account in their own name or on behalf of a minor. However, it is unavailable to Hindu Undivided Families (HUFs) or Non-Resident Indians (NRIs). In the case of the latter, if an Indian citizen has recently become an NRI, then they can continue holding their existing account till the maturity period.

Here is a list of some commonly known banks offering PPF accounts:

1. Allahabad Bank
2. Corporation Bank
3. Bank of Baroda
4. HDFC Bank
5. ICICI Bank
6. Axis Bank
7. Kotak Mahindra Bank
8. State Bank of India and its subsidiaries:

1. • State Bank of Travancore

• • State Bank of Bikaner and Jaipur

• • State Bank of Hyderabad

• • State Bank of Patiala

• • State Bank of Mysore

1. Canara Bank
2. Bank of India
3. Union Bank of India
4. Oriental Bank of India
5. Central Bank of India
6. Bank of Maharashtra
7. Dena Bank
8. Syndicate Bank
9. United Bank of India
10. Indian Overseas Bank
11. Vijaya Bank
12. IDBI Bank
13. Andhra Bank
14. Punjab National Bank
15. UCO Bank
16. Punjab and Sind Bank

If you have a savings account with another bank not enlisted above, you can check with them to find out whether they offer to open a PPF account. While some banks allow you to open the account online or offline, others require you to file the application in person.

NPS vs PPF – What are the differences? 

While both are excellent options, what suits an individual more can be decided based on their risk appetite, expectations from returns and liquidity, and taxation benefits.

FAQs

Q1. Can you invest in both NPS and PPF?

A1. Yes! If you wish to save more for your retirement, you can invest in both schemes.

Q2. When can you exit from NPS?

A2. Subscribers can exit from the National Pension Scheme and start pension anytime during the period of continuation.

Q3. Which is better – PPF or FD?

A3. Tax-saving FDs have a lock-in period of 5 years, which is much lesser than 15 years in PPF. However, FDs carry some risk and the interest earned is also taxable; thus, if 15 years lock-in is not a concern, then you should invest in Public Provident Fund.

What Is Indexation?

Indexation is a tax-saving strategy popular among Indian investors when filing their income tax returns. Essentially, the investor’s taxable income is reduced after considering inflationary effects on their returns.

Investment in financial assets like mutual funds or stocks requires you to pay capital gains tax. Without indexation, this amount is based on the sale price at purchase; with indexation however, taxation is reduced because inflation has been adjusted and your taxable gain adjusted for inflation at a lower rate.

This strategy makes sense since the money you earn from investment may not be worth as much due to inflation. By factoring in inflation with indexation, you can save on taxes while still investing your funds and making sound financial decisions.

How Does Indexation Work?

Indexation is a tax benefit available to Indian investors which helps reduce their taxable income. It involves increasing the cost of investments or capital assets according to inflation since purchase, which will then be reflected in your taxes. Important note that indexation must be done for any capital asset sold within three years of purchase for it to take effect.

Here is a brief overview of how it works:

• Before you can begin, you will need to calculate the Cost Inflation Index (CII) for the year in which you purchased and sold an asset.
• Once the CII rate for that year has been released, you can adjust your original purchase cost with this – known as Indexed Cost of Acquisition (ICA).
• Next, use the CII rate for the year in which you sold your asset and multiply it with your Indexed Cost of Sale (ICS), also referred to as Indexed Sales Cost (ICS).
• Finally, subtract ICA from ICS and use this net figure when calculating long-term capital gains tax on sale proceeds.

By indexing your capital assets or investments, you can take advantage of inflation and minimize your tax liability when selling them!

How Can Indexation Reduce Tax Liabilities?

Understanding indexation is one thing, but understanding its potential to reduce tax liabilities is quite another.

Here is the gist: Indexation allows you to adjust your profits for inflation. To do this, find out the Cost Inflation Index (CII) applicable in both years (purchase and sale) and apply that figure to lower your tax liability.

Let us say you purchased a stock in 2022 for Rs10,000 and sold it two years later in 2023 for Rs12,500. Assuming the CII for 2022 was 317 and 2023 was 333, indexation would be calculated as follows:

Cost Price = Rs10,000 (2022) Certified Investment Income (CII) (2022) = 317

Indexed Cost Price = (10,000*333)/317 = Rs10,545

Then, to calculate the indexed profits, we simply subtract the indexed cost price from the selling price (Rs 12,500 – Rs 10,545) which gives us the indexed profit of Rs 1,955.

Your income tax liabilities will be significantly reduced thanks to India’s lower-rate income tax laws.

About Cost Inflation Index

In India, the CII is periodically adjusted by the Indian government and helps determine your assets’ indexed cost of acquisition and improvement, which will assist with calculating capital gains tax.

Indexation can help minimize inflation-related losses, while past CIIs can be utilized as input in your decision-making process and predict how much tax liability you will owe in any given financial year. This empowers investors in India to be mindful of their investments and make strategic decisions with more insight.

Tips on Minimizing Tax Liability from Indexation

Now that you understand indexation and its effect on taxes, here are some tips to maximize its benefit in terms of reducing your tax liability.

1. Maintain Accurate Records

Good records will aid in making the case for indexation when filing taxes, so make sure all documents related to investments are stored safely and clearly marked so they can be quickly referred to.

2. Choose Long-Term Investments

Indexation offers you a greater benefit over time, so if you are thinking of making an investment that has a long-term horizon, it could potentially reduce your tax liability in the long run.

3. Monitor Inflation Closely

It is essential to keep an eye on inflation and adjust costs for it when filing for tax exemption. Doing this allows any profits made from investments to be measured in real terms rather than just nominal ones–leading to a higher exemption amount.

These tips can help Indian investors reduce their tax liabilities while reaping higher returns from investments.

Conclusion

Indexation is an invaluable asset for Indian investors that can help them save money if used strategically. By researching and understanding its basics and how to utilize it correctly, you may reduce your tax liability and make more profitable investments in the long run. There is no doubt that learning more about this phenomenon holds a wealth of possibilities within Indian investing circles.

No matter your investment level, being able to reduce your tax liability is always worthwhile. If you already own mutual funds and stocks, understanding this concept could help maximize the potential of those assets and safeguard your financial future.

FAQs  

Q1. What is the formula for calculating indexation?

A1. Indexed Cost of Acquisition = [CII for the year of transfer (sale)* Cost of acquisition]/ CII for the first year in which the asset was held by the assessee

Q2. What is the indexation for FY 2023-24?

A2. The CII for FY23 relevant to assessment year (AY) 2023-24 is 331.

Q3. Which assets are eligible for indexation?

A3. Long-term investments, which include debt fund and other asset classes.

Why was there a need for XIRR in Mutual Funds? 

Why do we invest? To generate returns: income and/or capital appreciation. We can calculate Mutual Funds’ returns using Compounded Annual Growth Rate (CAGR) and Extended Internal Rate of Return (XIRR).

CAGR is a financial metric that calculates an investment or business’s average annual growth rate over a certain period. The formula for CAGR is as follows:

For example, if an investment starts with a value of Rs.10,000 and grows to Rs.20,000 over 5 years, the CAGR would be:

CAGR = (20,000/10,000) ^ (1/5) – 1 = 14.87%

However, one of the most significant limitations of Compounded Annual Growth Rate (CAGR) is that it cannot be used in cases with multiple cash flows because it assumes that all investments are made at the beginning of the year. It neglects periodical instalments and does not treat them as separate. But in real life, this is not how things work. Very often, investments are made periodically, not in a lump sum. For example, SIP, additional purchases, SWP, dividends, partial redemptions, etc., all involve multiple cash flows. Hence, there was a need for another measurement to account for these various transactions at different points in time while calculating the returns on mutual funds. This is where XIRR comes in.

What is XIRR in Mutual Funds? 

XIRR calculates the annualized return an investor has earned on their investment in the mutual fund based on the timing and amount of their purchases and redemptions, as well as any dividends or capital gains distributions received during the investment period. By calculating the XIRR at regular intervals, investors can evaluate the performance of their mutual fund investment over time and make informed decisions about their portfolio.

But why not simply use IRR?

Internal Rate of Return (IRR) assumes a fixed interval between cash flows. At the same time, XIRR takes into account the actual dates of cash flows, which may be irregular. For example, in a monthly SIP, the interval between SIP instalments will vary from month to month (28, 29, 30 or 31 days). Similarly, suppose your SIP date falls on a holiday or weekend in any month. In that case, the transaction will change the interval on the next working day.

Since XIRR can account for more complex compounding intervals and schedules, it is a more versatile tool for analyzing investment performance in real-world scenarios.

How to calculate XIRR in Mutual Funds using MS Excel?

5. Make a single column with cash outflows (SIP instalments, lump-sum purchases, etc.) depicted with a negative sign and cash inflows (SWP, dividends, redemptions, etc.) for all your purchases depicted with a positive sign.
6. In the next column, enter all the dates associated with the transactions.
7. You need to mention the existing value of your holding and the date in the last row.
8. Now use the XIRR function in Excel, which looks something like this:
   
9. Choose values for a set of cash flows that match a payment schedule given in dates which denote when the initial investment was made and when the cash flows were obtained. The Guess parameter is not compulsory (if you do not put any value, excel uses 0.1 by default).

Here is an example for further clarity:

SIP = Rs. 1000

SIP dates = between 1/1/2022 and 1/1/2023

Liquidation date = 1/1/2023

Maturity amount = Rs. 14,500

• All transaction dates have been inputted in the “SIP Date” left column.
• All SIP values are mentioned in the right column titled “Amount” with a negative sign as they are cash outflows.
• The redemption amount is mentioned in the row with the date 17-02-2023 as a positive amount as it is a cash inflow.
• In the last row, we calculated the XIRR as “=XIRR (B2:B15, A2:A15) *100” After pressing the enter button, we obtained the value of 19.8%.

Conclusion

In the world of investing, returns are a primary consideration for investors. Traditionally, Compounded Annual Growth Rate (CAGR) has been used to calculate mutual fund returns. However, CAGR cannot account for multiple cash flows, and thus, the Extended Internal Rate of Return (XIRR) was developed. XIRR considers the timing and amount of purchases, redemptions, dividends, and capital gains distributions in mutual funds, making it more accurate for investors with investments involving multiple cash flows. XIRR is a versatile tool for evaluating investment performance in real-world scenarios, which is why it has become a popular way to calculate mutual fund returns. Excel has an inbuilt XIRR function, which makes calculating XIRR straightforward. Ultimately, understanding how to calculate XIRR in mutual funds allows investors to evaluate their investments and make informed decisions about their portfolios.

FAQs

Q1. What is a good XIRR in Mutual Funds? 

A1. A good XIRR for an equity mutual fund may be 11-14%, whereas debt funds may range between 7% and 9%.

Q2. Does XIRR give annualized returns? 

A2. Yes, XIRR is an annualized form of return.

Q3. What is the XIRR formula? 

A3. The formula in Excel is =XIRR (values, dates, [guess]).

What is Financial Planning? 

Managing money can be tricky. There are many things to take care of – household expenses, loans, investments, retirement, emergency fund, and insurance! That is where financial planning steps in to ease the process of handling money.

So, a financial plan refers to a comprehensive overview of available funds and their allocation. It involves reflecting on your financial goals and the strategies you have adopted for fulfilling those to gain the most out of your assets.

What is the Importance of Financial Planning? 

In the past few years, the world has undergone significant events like COVID-19 and the Ukraine War that have deeply impacted the global economy. Today, we are in a weak growth phase, and all these periods of volatility have reiterated the importance of financial planning. Below are some points which describe how good financial planning can be beneficial:

1. Better Savings – Creating a financial plan gives us a deeper insight into our income and expenses, which might otherwise be overlooked. Thus, being more conscious of where you are spending your money makes it easier to cut down superfluous expenses and, ultimately, increase your savings in the long run.
2. Manage Debt and Increase Your Standard of Living – Piling debt can greatly burden your savings and may even lead to a debt trap. Hence, disciplined investing according to your financial plan can help you manage your loans and credit card bills. It is common for parents to spend the majority of their savings on children’s higher education and often compromise on their comfort. Through goal-based investing, individuals can establish a more sustainable lifestyle where they would not have to rely on debt.
3. Risk Mitigation – Two critical components of a financial plan include asset allocation and risk diversification. Without a proper financial plan, you may invest in high-risk assets threatening your long-term well-being. Having a balanced investment portfolio protects from market vulnerabilities.
4. Increased Tax Savings – Being aware of government taxation policies can help make the most tax-efficient investment decisions. For example, an investment plan enables you to save taxes via deductions under Section 80C.

What is the Importance of Financial Planning for Attaining Life Goals? 

1. Wealth Creation: Our grandparents all say, “During our times, things were much cheaper.” The phenomenon of prices rising over time, also called inflation, is something we must account for in our financial plans to create long-term wealth. If you want to buy a house or a car some years later, you must start building a corpus of wealth from today. Knowing which assets will not be heavily impacted by inflation is necessary to secure your funds. For example, one of the suitable options for long-term goals could be equity mutual funds. 
2. Education of Children: Every parent wants to send their children to the best universities. Unfortunately, the cost of education has been rising considerably, not only in India but around the globe. Hence, starting planning for your child’s education from the moment they are born is necessary.
3. Retirement Planning: You may think retirement is far away, so why save for it now? But to lead a happy and comfortable retired life, you must start building your funds early in life. If you start investing at a young age, then you can invest smaller amounts, and with the power of compounding, you will have a sufficient retirement fund ready when it is time to utilize it.
4. Emergency Fund: Life is uncertain. You never know when a medical emergency or a huge repair can disturb your finances heavily. This necessitates setting up a separate fund for contingencies so you have a safety net during such times. Experts suggest that this corpus should be at least six months of your monthly expenses and be invested in a liquid fund to withdraw quickly whenever the need arises.

What are the Steps Involved in Building a Financial Plan? 

Here are some general steps that you can follow during your financial planning journey:

1. Lay down your financial goals: Before anything else, you must know what you want to achieve in the short and long term. For example, you might want to buy a phone in the next six months, while you may want to start saving for your newborn’s college education in the long run.
2. Evaluate your current financial position: Having clarity about your income sources, expenses, assets, and liabilities is essential to understanding where you stand financially.
3. Create a budget: Once you know your income and expenses, setting a budget becomes easy to manage your cash flow and regulate your spending.
4. Develop a savings and investment plan: It is time to set up appropriate savings and investment planning based on your financial goals and evaluated financial position, considering your return expectations and risk tolerance.
5. Evaluate your insurance needs: If you do not have life and health insurance, then get proper coverage for you and your family. Also, consider other insurance that you may require, including disability insurance, automobile insurance, mobile/laptop insurance, etc.
6. Plan for taxes: Understand how taxes will impact your financial plan and ensure that you take advantage of any tax benefits available.
7. Periodically monitor your progress: Review your financial plan periodically to see if it aligns with your goals. Check progress and make necessary changes as per life circumstances.

Overall, building a financial plan may seem like a daunting process, but the financial security and peace of mind associated with it make the efforts all worth the time and attention.

FAQs 

Q1. Who can formulate a financial plan? 

A1. You can build a financial plan yourself or take help from a professional. Today, there are robo-advisors that make financial planning even more easily accessible.

Q2. What is the most important step in financial planning? 

A2. While it is difficult to point out one step because each is essential, implementing your plan may be the most important to reach your financial goals.

Q3. Give three reasons highlighting the importance of financial planning. 

A3. Three reasons why financial planning is important are:

1. Better savings and debt management
2. Risk mitigation through diversification
3. Increased tax savings

You have been saving money in your Public Provident Fund (PPF) account for a long time, and it’s finally time to take out some of it. But there are a lot of withdrawal rules that you need to know before you can do that.

Don’t worry; we’ve got your back! This article will discuss every aspect you need to consider before proceeding with a PPF withdrawal in India.

Overview of the PPF Withdrawal Rules

Public Provident Fund (PPF) is a popular investment scheme in India that allows individuals to save money for their future while availing of tax benefits. It is a long-term savings scheme with a maturity period of 15 years, and investors can contribute an amount of up to 1.5 lakh INR every year.

The PPF withdrawal rules are designed for convenience and flexibility. You can withdraw up to 50 per cent of the accumulated balance at the end of the fourth year, and the following withdrawal opportunities are available subsequently:

• After completion of 5th year
• After completion of 7th year
• On completion of each year after 7th year
• During the 15th financial year, when your account matures

The amount you can withdraw at one time cannot exceed 1/3rd of your total PPF balance at the end of 2nd preceding financial year. Additionally, premature closure of a PPF account is allowed only after the completion of 5 years or in cases where the account holder needs funds for medical treatment or other emergency needs.

When Can You Withdraw as per the PPF Withdrawal Rules?

Public Provident Fund (PPF) is a long-term saving scheme offered by the Indian government. It provides a safe retirement corpus with tax exemption and has a loyalty bonus for investments. Its popularity has grown over the years because of the safe and guaranteed returns it offers.

But things get a bit tricky when it comes to PPF withdrawal rules. You can withdraw from your PPF account only after your entire tenure of 15 years or at maturity. In case you need to access those funds earlier, there are certain conditions where you may be allowed to withdraw before maturity.

For instance, once you’ve completed 7 years in PPF, you may be able to withdraw up to 50% of the balance accumulated up till then, but only once in the entire tenure. Additionally, after 12 years, you can take loans from your PPF account of up to 25% of the balance at any point (not just once). Any previous loans taken must be repaid before taking further loans or partial withdrawal facilities. In either case, an administrative fee is applicable for such early withdrawals.

Partial PPF Withdrawal Rules

If investing in a PPF account, you should know the partial withdrawal rules since life is full of surprises, and things don’t always go as planned.

Eligibility

According to PPF withdrawal rules in India, you become eligible to make partial withdrawals from your account six years after opening the account. However, the number of partial withdrawals you make each year is limited to one. Here are other vital points that you need to keep in mind about partial withdrawals:

1. The minimum amount for a partial withdrawal must be Rs 500, with no maximum limit.
2. You can withdraw up to 50% of the balance that stood at the end of the fourth year preceding the year of withdrawal or at the end of the preceding year – whichever is lower.
3. Partial withdrawals are allowed only during the extension period. They won’t be permitted once your account matures, even if it is extended beyond 15 years.
4. Partial withdrawals will not reduce your loan eligibility from a PPF account either, but only if it’s within 30% of the balance available at the beginning of the financial year when calculated individually or as mentioned above over a consecutive block of three years.

Tax Benefits of Investing in Public Provident Fund

Tax benefits are one of the significant attractions of investing in a public provident fund. If you want to maximize your investment, understanding the tax benefits associated with PPF is essential. The following are the tax benefits of investing in a PPF:

Tax Deductible Contributions

Up to Rs 1.5 Lakh per annum is allowed as a deduction from your income for investing in PPF. The amount includes all contributions you and/or anyone else made on your behalf. However, only one individual can claim this deduction each financial year. If you and your spouse invest in their personal PPF account, one of you will have to forgo the deduction.

Tax-Free Interest Earnings

The interest earned on your PPF investment is completely tax-free, which means that all the interest you earn on your investments will be added to your bank balance instead of being deducted for taxes!

Tax-Free Maturity Amounts

The total amount accumulated at maturity (i.e., principal + interest) is also completely tax-free and exempt from taxation under Section 10(11) of the Income Tax Act, 1961. So when it comes time to withdraw your funds or close the account after 15 years, you won’t have to worry about paying any taxes!

Loan Facility from the Public Provident Fund Account

The PPF has an excellent loan facility, too! After paying all due instalments, you can take a loan from your PPF account anytime between the third and sixth year of opening your account.

You have to apply for the loan and get it approved. Still, you can use it to cover emergency expenses like medical bills, or tuition fees. The amount you can borrow is dependent on the amount you’ve paid in your account. The maximum loan allowed is 25 per cent of the lower balances at the end of either the second or third year preceding the year the loan is applied for. You must repay this loan within 36 months in equal instalments.

It’s important to note that if you don’t repay these loans on time, your account will be frozen until it’s repaid. Any interest due will not be credited to your account. So, make sure to keep track of when these payments are due!

Tax Implications according to the PPF Withdrawal Rules

In case you have to withdraw funds from your Public Provident Fund (PPF) account, you should know that there will be some tax implications:

Withdrawing at Maturity

The great news is that your PPF contribution is eligible for tax deductions under Section 80C. If you withdraw your amount at the maturity of 15 years, it will be exempt from federal taxes when the amount is withdrawn.

Partial Withdrawal

You can also partially withdraw from your PPF account up to a specific limit. Any money removed from the account post-completion of 5 financial years and before completion of 15 years is taxable under Income Tax Act 1961 in the year it was withdrawn.

Premature Closure of Account

In exceptional cases where premature closure of a PPF account is allowed, any withdrawal becomes taxable unless this condition is fulfilled – withdrawals made before completing 5 financial years would only qualify as tax-free if the amount is used for higher education or specialized medical treatment.

Conclusion

In conclusion, with a PPF fund, you get many advantages regarding returns, security, and tax benefits. The PPF withdrawal rules are straightforward, and the investment can be held in perpetuity if you wish. The rules offer flexibility and the ability to make partial withdrawals if needed. It is a great choice for those who want to save for retirement and provide a comfortable financial future for themselves and their families.

FAQs

Q1. Can we withdraw PPF any time?

A PPF account holder is eligible to withdraw funds only if the account has existed for at least 5 years.

Q2. How much can we withdraw from PPF after 7 years?

A PPF account holder can withdraw up to 50% of the amount after 7 years, beginning with the end of the year when the first contribution was made.

Q3. What happens if you stop investing in PPF?

It is not possible to discontinue Public Provident Fund account. You must deposit a minimum of Rs.500 in a financial year. If you fail to do so, a penalty of Rs.50 will be applied each year along with arrears of Rs.500 for each year missed.

Pension is an important aspect of financial planning, particularly for individuals in the unorganized sector who do not have access to formal pension schemes. The Government of India has launched several pension schemes to provide social security to the people in the unorganized sector, and one such scheme is the Atal Pension Yojana (APY).

Launched in May 2015, the Atal Pension Yojana is a government-sponsored pension scheme that provides a regular pension income to workers in the unorganized sector. The scheme is administered by the Pension Fund Regulatory and Development Authority (PFRDA) and is open to all Indian citizens between the ages of 18 and 40.

Features of Atal Pension Yojana

1. Eligibility criteria:

• To be eligible for the Atal Pension Yojana, the subscriber must be an Indian citizen between the ages of 18 and 40. Since the contribution is made till the age of 60, it implies that the contribution period is 20 years or more.
• The scheme is open to all individuals who are not enrolled in any other formal pension scheme.
• The person should have a savings bank account or a post office savings bank account.
• The government has announced that from October 1, 2022, all income taxpayers are not eligible to apply for the Atal Pension Yojana (APY). This is to ensure that the scheme’s benefits go to the underprivileged.

2. Contribution:

• The subscriber can choose the contribution amount, which depends on the pension amount they wish to receive.
• The minimum contribution amount varies from Rs. 42 to Rs. 1,454 per month, depending on the subscriber’s chosen pension amount.
• The contributions are made until the subscriber reaches the age of 60.

3. Pension amount: The Atal Pension Yojana provides a guaranteed minimum pension of Rs. 1,000 to Rs. 5,000 per month, depending on the contribution amount and the age at which the person joins the scheme.

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4. Co-contribution by the government:

• The government provides a co-contribution of 50% of the subscriber’s contribution or Rs. 1,000 per year, whichever is lower, to eligible subscribers who join the scheme before December 31 2025.
• Only after the Central Record Keeping Agency receives confirmation that the subscriber has paid all the year’s instalments does the Pension Fund Regulatory and Development Authority (PFRDA) pay the government contribution to the eligible Permanent Retirement Account Number (PRANs).

5. Nomination: The subscriber can nominate a nominee to receive the pension in case of their death.

Advantages of Atal Pension Yojana

1. Social security: The Atal Pension Yojana provides social security to workers in the unorganized sector who do not have access to formal pension schemes
2. Guaranteed pension: The scheme provides a guaranteed minimum pension, which ensures a regular income for subscribers during their retirement.
3. Affordable contributions: The contribution amounts are affordable and vary based on the pension amount chosen by the subscriber.
4. Co-contribution by the government: The government provides a co-contribution of 50% of the subscriber’s contribution or Rs. 1,000 per year, whichever is lower, which helps build a larger corpus for the subscriber.
5. Tax benefits: The contributions made towards the Atal Pension Yojana are eligible for tax benefits under Section 80CCD of the Income Tax Act.

How to apply for Atal Pension Yojana

The Atal Pension Yojana can be applied online or offline. To apply for the scheme online, the subscriber can visit the scheme’s official website and fill in the online application form. To apply for the scheme offline, the subscriber can visit the nearest bank or post office and fill in the application form.

Documents required for Atal Pension Yojana

The following documents are required to apply for the Atal Pension Yojana:

• Aadhaar card or a proof of identity and address
• Savings bank account details
• Mobile number

Note: The subscriber is also required to provide the nominee’s details.

Withdrawal Rules of Atal Pension Yojana 

1. On attaining the age of 60 years:

• After 60 years, subscribers will request the guaranteed minimum monthly pension or a greater pension if investment returns exceed the guaranteed returns included in APY from the associated bank.
• After death, the spouse (default nominee) receives a similar monthly pension.
• After the subscriber and spouse die, the nominee will get pension funds accrued until age 60.

2. Exit before the age of 60 years:

• In accordance with NPS rules for a pre-mature exit, PFRDA may allow exit before 60 in extraordinary situations, such as beneficiary death or terminal illness.
• If a subscriber who has received Government co-contribution leaves APY voluntarily, they will only be repaid their payments and the net actual accrued income on them (after deducting the account maintenance charges). Subscribers will not receive the Government co-contribution and its accrued income.

3. Death of the subscriber before 60 years of age: The spouse or nominee will receive a full refund of the accumulated corpus under APY. However, the spouse or nominee will not be entitled to a pension.

Terms of Penalty in Atal Pension Yojana

The following penalty penalties are applied if the recipient delays paying contributions:

• 1 for monthly contributions of up to Rs. 100.
• 2 for monthly contributions within Rs. 101 and Rs. 500.
• 5 for monthly contributions within Rs. 501 and Rs. 1000.
• 10 for monthly contributions of Rs. 1001 and above.

The account will be frozen if payment defaults for six consecutive months. If this continues for twelve consecutive months, the account will be deactivated, and the amount accumulated and interest will be returned to the respective individual.

Conclusion

The Atal Pension Yojana is a simple and effective scheme that provides social security to millions of workers in the unorganized sector. The scheme offers a guaranteed minimum pension, affordable contributions, and tax benefits, making it an attractive option for individuals wishing to secure their financial future during retirement. With the growing awareness about the importance of financial planning and retirement, the scheme is likely to attract more subscribers in the future.

What is the Kisan Vikas Patra Scheme?

Kisan Vikas Patra is a small-savings certificate programme launched by India Post in 1988 with the motive of inculcating the habit of long-term investment discipline in people. As per the most recent update, the scheme’s duration is now 124 months, i.e., 10 years & 4 months. Initially, the scheme was targeted towards farmers, hence the name, but today anybody who fulfils the eligibility criteria can avail of the scheme. KVP is a safe and secure option that the Government of India guarantees.

Why was the Kisan Vikas Patra Scheme launched?

At the time of its launch, India was largely an agrarian and rural society. Unfortunately, most of the rural population did not have access to formal banking services due to a lack of infrastructure, low financial literacy, and the high cost of accessing these services. This is why the government launched the Kisan Vikas Patra scheme in 1988 to enable the farming population to save without risking their funds and still earn a good return.

Since KVP was made available at post offices nationwide, it was much easier for people in rural areas to invest in it. Moreover, this scheme was designed for long-term investing because a majority of the rural population did not have retirement funds or pension plans. By investing in KVP, individuals could support themselves in their old age.

What are the eligibility criteria for Kisan Vikas Patra Scheme?

• A candidate must be 18 years or older.
• A candidate must be a citizen of India.
• Adults may apply on behalf of minor applicants.
• Adults may apply on behalf of a person of unsound mind.
• Non-Resident Indians (NRIs) and Hindu Undivided Family (HUF) are not eligible to invest in KVP.

What is the investment amount required for Kisan Vikas Patra Scheme?

• The minimum investment amount needed is Rs.1000, with no upper limit.
• In 2014, the Government of India made PAN card proof necessary for investments above Rs.50,000. This was done to prevent money laundering.
• If depositing Rs.10 lakh or above, the applicant must submit income proofs, including ITR documents, salary slips, bank statements, etc.

What are the different types of KVP certificates?

There are three types of KVP certificates:

1. Single Holder Type – This certificate is furnished to an adult. An adult can also obtain the certificate for a minor, where it will be issued in their name.
2. Joint A Type – In this case, the certificate is issued to two adults who will both be receivers of the pay-out at the end of the tenure. However, if one of the account holders dies before maturity, then the amount will be given to the second holder.
3. Joint B Type – In this type, the certificate is again issued in the name of two adults, but the difference is that the pay-out is given to only one of the two certificate holders or to the one who survives till maturity

What is the current interest rate of the Kisan Vikas Patra Scheme?

As announced on December 30, 2022, KVP deposits made in the first quarter of 2023, i.e., January to March, will earn an annual compounded interest rate of 7.2%. This means that if you invest in a lump sum in KVP right now, your money will double by the end of 120 months.

It is important to note that the Kisan Vikas Patra interest rate is revised every quarter by the Union Government, with the next revision scheduled around the end of March 2023.

What are the documents required for availing of a KVP certificate?

• Form A must be duly submitted to the nearest post office or one of the designated banks.
• Form A1 is required when applying through an agent.
• KYC documents like Aadhar Card, PAN Card, Passport, Voter’s ID, Driving License, etc., as identity proofs.

How to apply for Kisan Vikas Patra online?

1. Log in to your DOP internet banking account.
2. Click on General Services > Service Requests > New Requests
3. Under “New Requests,” choose “KVP Account.”
4. Enter the KVP minimum deposit amount and choose the debit card linked to your Post Office Savings account.
5. Agree to the terms and conditions, enter your OTP, and click “Submit” to view/download your deposit receipt.

What are the rules regarding premature withdrawals in the KVP Scheme?

• If the withdrawal is made within 1 year, no interest will be given. Moreover, the investor will also have to pay a penalty as per the regulations of the scheme.
• If the withdrawal is made after 1 year but before 2.5 years, the investors will receive interest but at a reduced rate.
• If the withdrawal is made after 2.5 years, the investor will not have to pay any penalty and will also receive interest at the applicable rate.

Conclusion

The Kisan Vikas Patra is one of the safest options for investment, with profitable returns guaranteed by the government and protection from market risks. The scheme provides financial security for the long term and thus benefits people with low-risk tolerance.

FAQs

1. Can the KVP certificate be used as collateral for securing a loan? Yes.

2. Is KVP eligible for deductions under Section 80C? No.

3. Is KVP taxable? Yes, the returns from KVP are completely taxable. However, the withdrawals made after the scheme’s maturity are exempt from Tax Deducted at Source (TDS).

5. Can the KVP certificate be transferred to another person? Yes, it can be transferred from one person to another in some cases with the consent of an officer of the post office or bank.
6. Can the KVP be transferred from one post office/bank to another? Yes, it can be transferred to another post office/bank by filling out and submitting Form B.