So, it is that time of the year when you receive more than just your salary, i.e. either the quarterly performance bonus or mid year, you surely have been waiting for so long. Now, you have more money in your account, and you can think about spending it on shopping, a long pending vacation, or a looming debt.
There are things that we should and should not spend our bonus on. Paying off debt is understood. It gives you peace of mind. However, splurging all your money on unnecessary things will leave you with nothing in no time. So, whether you work with a startup or an established company, you should know the right way to spend your bonus.
Even, if you are a startup founder reading these lines, you should pass this article to your employees along with the bonus. Let’s see how we can do just that.
How Should You Handle the Windfall (Bonus)?
When we talk about Windfall, we mean any kind of financial help that you might receive unexpectedly like a lottery, an inheritance, or even a check from your loving grandparents. Your salary bonus falls under this category as well and here is how you can handle it before you spend it all.
- First, create a budget
- Pay off your debts
- Build an emergency fund
- Plan your retirement
- Make Investments
Here are some investment options that you can choose from where you can put the rest of your bonus money after paying off your debts.
Investments less than 1 year
If you want to keep your investments very short-term, like less than a year, then you can choose to invest in Liquid Funds, Short Term Plans, and Corporate FDs.
Investment for 1-3 years
In this criteria, you can invest in plans like Equity Tax Saving Scheme (ELSS), Bond Funds, Gilt Funds, Dynamic/Flexi Bond Funds, Monthly Income Plans, Index Funds, Equity Diversified, and Balanced Funds.
Investment for 3-5 years
This criterion involves 3 types of investors. Let’s see what they are and the plans they should opt for.
Low-risk Investors: can invest in FMPs, Short-term Debt Funds, Arbitrage Funds, Long-term Debt Funds, conservative ULIPs.
Moderate-risk investors- can invest in Debt-oriented hybrid funds, Monthly Income Plan/MIPS, Balanced ULIP Funds, ELSS, Systematic Transfer Plans (STP),
High-Risk investors- can invest in equity-based ULIPs, Index Funds, Equity Diversified funds. After 1 year, capital gains from equity and balanced funds are tax-free.
Investment for more than 5 years
Again, this is divided into 3 groups
Low-risk Investors: can invest in CPOFs, FMPs, and Long-term Debt Funds.
Moderate-risk investors- can invest in MIPs and debt-oriented hybrid funds
High-Risk investors- can invest in Equity Diversified Funds, Equity Sectoral Funds, Large-Cap, and Multi-Cap Equity Funds
|Investment Plan||Level of Risk||Tax Status|
|Equity Plans||High||After 1-year tax is free|
|Balanced Funds||Moderate to High||After 1-year tax is free|
|MIPs||Low to Moderate||Long-term capital gain after 3 years|
|Debt/ Income||Low to Moderate||Long-term capital gain after 3 years|
|Money Market||Low||Long-term capital gain after 3 years|
If your status changes to NRI
Non-Resident Indians (NRIs) can stay invested via a non-resident demat account to their mutual funds or shares. However, the taxation on your funds might vary. Here are some points explaining the tax deduction on your funds once your status is changed.
- Mutual funds with more than 65% assets in equities are tax-free
- In case of mutual funds that have less than 65% assets in equities are untaxed. However, a dividend distribution tax must be paid on the dividends that are declared.
- Short Term Capital Gains are at 15%. If the units of a Debt Oriented Mutual Fund are redeemed within one year of inception by the investor, it will be taxed under slab rates applicable to Individual.
- Long-Term Capital Gains are tax-free if they are redeemed after having been held for more than a year.
- Long-term capital gains on debt-oriented funds will be taxed at 20% capital gains after allowing an indexation benefit, or at 10% flat without the indexation benefit, whichever is less. Without the indexation benefit, long-term capital gains will be Rs. 50,000 and tax liability would be Rs. 5,000.
The Best Investments for You
If you are looking for an investment which can provide you with insurance and investment feature in a single product, ULIP based investment is the best option for you. Moreover, with ULIPS you get added benefits such as riders, switching facility, tax-free maturity benefits, top-up facility, multiple fund options and so on. Here are some ULIP based investment plans available in the market:
- HDFC’s Life ProGrowth Plus Plan is an insurance-cum-savings cum-insurance plan that can enable you to benefit from the comfort of creating your own investment strategies and enjoy life cover as well
- Max Life Insurance’s Fast Track Super Plan is aimed at individuals who wish to invest in high-yielding investment plans over the long term. It allows you to choose from six funds as per your risk appetite. Further, you have the option to gift added protection to your wife and secure her financial future from contingencies, in your absence, through Max Life Partner Care Rider.
- Aegon’s iMaximize Plan is again a Unit Linked Insurance Plan (ULIP) which offers a combination of market-linked returns and protection. It is specifically designed to provide investment flexibility, making it well suited for market experts as well as first-time investors
- Bajaj Allianz’s Future Gain Plan is an investment plan offering benefits like seven fund option to choose from, unlimited free switching between funds, availability of riders and so on.
So, ensure that you invest in the best-suited ULIP plan by performing a thorough research and comparison. To sum it up, make optimum use of your mid-year bonus and secure your financial future.