Key Elemets of Personal Finance

Personal finance is not a linear concept. It involves a number of aspects that eventually link up together to form a strong network, which allows you to plan your finances prudently. To develop financial plans, individuals like you need to be aware of the many metrics and aspects of personal finance. These personal finance essentials, as we like to call them, range from taxes to investments. The average Indian investor is often unaware of the whole picture. 

Sure, it’s common knowledge that when tax season comes around, it’s time to submit all those necessary proofs to the HR department in your company. But beyond that, how much do you know about the taxes you’re paying? And how aware are you about the many investment options available in India? If you don’t know too much about these personal finance essentials, don’t worry about it. This module has been developed specifically to help you understand all these key aspects of personal finance, so you can take all of these things into account when you draw up financial plans for your future.

Let’s begin by talking about taxes.

Taxes in India

Taxes in India are basically of two kinds – direct and indirect. Direct taxes are the taxes you pay directly to the government. Think income tax. Indirect taxes are taxes that are collected and paid to the government on your behalf. Think GST. Now, as an individual, you’ll need to pay both these taxes. 

But with regard to indirect taxes, you don’t really need to plan it out. This is because you end up paying it to the seller of goods or the provider of the service anyway. Say for instance you purchase a TV from a Sony showroom. The product may cost Rs. 20,000, but you’ll pay 18% more on it. You’ll find this marked as the GST on your bill. This is an example of indirect tax. Now, if you’re a business owner, you’ll need to deposit the GST you collect to the government.

On the other side of the coin, you’ll also need to understand direct taxes more clearly – irrespective of whether you’re self-employed or salaried. Also known as just income tax in common parlance, it is essentially the tax that you pay on the income you earn. For instance, if you’re a salaried employee earning Rs. 40,000 per month, you’ll need to pay income tax on your earnings for each financial year, which will total up Rs. 4,80,000. 

What is the rate of tax? Are there any deductions or concessions available? And what are the other things that you’ll need to know about the Indian tax system? These are some of the questions we’ll address in the upcoming chapters on personal finance essentials. 

Insurance: A key element of personal finance

Insurance is another key element of personal finance. Most people only look at it as a tax-saving tool – which is only one-dimensionally correct. Sure, insurance can help reduce your tax liability because the premium that you pay for your insurance coverage can be deducted from your income, thereby lowering your taxes. But is that all insurance does for you? Certainly not.

Insurance basically offers you a protective cover. Life insurance, for example, insures your life. And if anything untoward were to happen, it would ensure that your family has a financial safety net to fall back on in your absence. There is also another kind of insurance, known as general insurance. It involves taking on a protective cover for non-life assets, such as your house, your car or your two-wheeler, your tours and travels, and even your health. 

Down the line, we’ll get into the details of these kinds of insurance in the later chapters of this module. 

Investments in India

Any discussion on personal finance essentials will also grow to include investments. This is the tried and tested way to grow your money beyond merely saving it. And in the Indian landscape, there are many instruments and schemes that you can invest in. Let’s look at a preview of some such investment options.

Direct equity

• Risk: High
• Returns: Generally high over the long term
• Ideal for: Investors with a high risk appetite

Mutual funds

• Risk: Varies from low to high, depending on the kind of funds
• Returns: Linked to the capital markets
• Ideal for: Investors who wish to diversify

Bank fixed deposits

• Risk: Low
• Returns: Fixed returns at rates that vary from one bank to another
• Ideal for: Investors seeking safe and guaranteed returns

RBI bonds

• Risk: Nil
• Returns: Currently 7.75% per annum
• Ideal for: Investors with zero risk tolerance

Real estate

• Risk: Medium to high, but varies based on the location and the kind of asset
• Returns: Varies depending on the location and the kind of asset
• Ideal for: Investors looking for long-term, non-financial investment options

Gold

• Risk: Low
• Returns: Linked to the gold market
• Ideal for: Investors looking for liquid, non-financial investments

Unit Linked Insurance Plans (ULIPs)

• Risk: Medium to high
• Returns: Linked to the capital markets
• Ideal for: Investors who want to enjoy the benefit insurance and investment from one plan

Government schemes in India

Aside from the investment options mentioned above, there are also many savings schemes initiated by the government of India. And being backed by the government, they generally carry little to no risk. Here’s a quick list of some such government schemes.

• Public Provident Fund (PPF)
• National Savings Certificate (NSC)
• Senior Citizens Savings Scheme (SCSS)
• Post Office Monthly Income Scheme (POMIS)
• National Pension System (NPS)
• Employee Provident Fund (EPF)
• Sukanya Samriddhi Yojana (SSY)
• Kisan Vikas Patra (KVP)

Wrapping up

So, this lays the foundation for personal finance essentials. To craft comprehensive financial plans, it’s always advisable to include some elements from all of these aspects, so you have a well-rounded scheme for securing your future. Now that you know what the key elements are, it’s time to get into the details. In the upcoming chapter, you’ll get to know all about the tax system in India. Keep reading.

A quick recap

• Taxes in India are basically of two kinds – direct and indirect. 
• Direct taxes are the taxes you pay directly to the government. Like income tax. 
• Indirect taxes are taxes that are collected and paid to the government on your behalf. Like GST.
• Insurance is another key element of personal finance. Most people only look at it as a tax-saving tool. Insurance also offers you a protective cover.
• There are two kinds of insurance – life insurance and general insurance.
• As for investments, there are many instruments and schemes that you can invest in as an Indian investor.
• Some examples include fixed deposits, direct equity, mutual funds and ULIPs.
• There are also many government savings schemes like EPF, PPF, NPS, NSC and KVP.