With great income comes great responsibility. Being a high-income earner (or HIE) has its own set of challenges. There is a certain lifestyle that needs to be maintained and an inherent need to improve returns on investment post-tax.
While the fundamental strategies of investment like, setting goals, investment horizon and the risk-return ratio of your portfolio is similar regardless of the amount of wealth, the financial needs of HIE’s vary to some degree. As an HIE, you need to have a holistic view of your wealth and focus on preservation, growth and liquidity. You should have a tax-efficient investment plan.
If you are among those who find themselves in the top section of the Income Pyramid, then here are some tips to help you plan a tax-efficient portfolio:
CONSIDER INVESTING IN EQUITY (Shares / Equity Funds)
Investment in listed securities for more than one year (for equity shares) and more than three years (for debt instruments) is a good option, depending on your risk appetite. As per the prevailing tax laws for Financial year 2016-17, for equity shares or units of equity based mutual fund, the long-term capital gains are exempt from tax. Long term capital gains for debt instruments are taxed at a fixed rate of 20% plus surcharge and cess as applicable, with indexation which would be lower than your current income tax slab.
USE HOME LOAN AS A TOOL
Buying a house on home loan can help you increase your wealth and plan taxes. A residential house purchased through a home loan allows you to claim deduction of interest under Section 24 of the Income Tax Act, 1961. Further, tax deduction of up to Rs. 1,50,000 can be claimed on the principal amount under section 80C of the Income Tax Act, 1961.
If you hold debt-fund units for 36 months or more, you will be eligible for long-term capital gains tax. Some debt funds allow delaying the tax till you withdraw the investment. So, as an HIE, rather than paying 30% tax (assuming you are in the 30% income tax slab), you will pay only 20% post indexation. This can result in saving a good amount of tax.
A certain part of your portfolio can be diversified globally by investing in global markets. This can help you manage geopolitical and currency risks. It also provides you an option to invest in financial instruments not available in India. Diversifying your investments is good, however, care must be taken to not over-do it.
GET A GOOD INVESTMENT ADVISOR
Last but certainly important aspect of an effective investment plan is a good investment advisor. He/she can assess your needs, understand your risk appetite, investment horizon, tax implications and suggest alternatives tailor-made for you. However, find time on a regular basis to revisit your portfolio, study its performance and incorporate changes, if needed.
Follow the basics of investment and couple it with industry experts. This can create a tax-efficient portfolio suiting your needs.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.