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Financial Planning Tips for the Self Employed

The COVID-19 pandemic has affected trade, growth, investment and employment across multiple sectors of the economy. While the entire workforce is reeling under the impact of the economic slowdown, the times are increasingly tough for the self-employed. This includes both entrepreneurs and small business owners who form a significant part of the country’s workforce. With no safety net to back one up during such a financial crisis, goal based investing and opting for tax saving options become extremely important. If you are a self-employed person, here are a few investment options in India that you can consider investing in during these uncertain times.

ULIPs or Unit Linked Insurance Plans

Unit Linked Insurance Plans are long-term goal based investing options that are designed for building a significant corpus that can be directed towards fulfilling life goals. They offer the perfect blend of investment and insurance. As contributions made to ULIPs are eligible for deduction of tax, under Section 80C of the Income Tax Act, 1961, they can function as ideal tax saving options for the self-employed. Depending on your risk profile, you can choose from an array of equity or a debt funds to invest in. Also, consider the liquidity percentage and the rate of return. Some ULIPs do offer the option of partially withdrawing funds which can be used to take care of urgent cash needs.

ELSS or Equity Linked Savings Scheme

Whether you are looking to save taxes or create wealth, investing in Equity Linked Savings Schemes can be profitable for the self-employed. As the entire sum of money is invested in equity instruments, ELSS delivers decent returns on investment. This makes ELSS one of the best investment options in India. Also, under Section 80 C of the Income Tax act ELSS investments are eligible for tax deductions of up to INR 1.5 lakhs. These diversified equity mutual funds have a lock-in period of three years minimum.

Fixed Deports

Bank fixed deposits are great for short-term investments. As they require a lump sum, they are suitable for people who are self-employed. They also earn decent return of 7-8 per cent. You can save on taxes during the investment phase, but the interest earned is taxable. However, to be eligible for tax deductions under Section 80 C, you need to invest in five-year fixed deposits. These are ideal for people who are risk aversive and are not looking for exposure.

National Pension Scheme

The National Pension Scheme is ideal for goal based investing. The government-based investment option was introduced as a means to promote the idea of retirement planning among the workforce and is open to all. Compared to mutual funds, the cost of exposure to utilities is very low. Also, apart from the usual claim for tax deduction of up to 1.5 lakh, under the Section 80 C of the Income Tax Act, you can claim an additional INR 50,000 deduction under Section 80CCD (IB) when you invest in the National Pension Scheme. 60 per cent of the corpus accumulated can be withdrawn at maturity. This lump sum that you withdraw is tax-free and can be used to meet future goals. The balance 40 per cent investment is required to be used in buying an annuity plan which can offer regular payments. Unlike the lump sum amount, these regular annuity payments are taxable as per the income slab they fall under.

Compromising on yours or your family’s future is not an option. With a mix of tax saving options and high-return schemes, you can make the most the market for earning suitable returns and manage risks efficiently so that you can meet all your short-term and long-goals even in the face of adversities.

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