You must be excited about this time of the year, as it brings in appraisals and bonuses. By now you must have also planned how to spend or invest it. It could be spending on gadgets like a new laptop, a new iPhone, or even a new air conditioner. While you receive some extra money, you must also learn to manage your taxes to make the most of it. According to experts, bonuses & inheritances are like extra juice packets on a hectic journey. Financial planners do not account for it when making a financial plan.
However, they typically inform their clients that these two income sources are expected and that they should use them to the fullest to expedite their goals. Also, unlike inheritance, bonuses come more frequently and hence you need to take steps to balance it with tax outgo to get maximum money in hand.
How To Manage Your Taxes: According to financial planners, you need to invest maximum to help you achieve all your goals across all horizons. “First one must invest to complete the basic tax-related investments of that very assessment year. It is tax planning. Do not leave what is on the table due to a shortfall of money. Invest using bonus money. If you have missed any premium on your term plan or health policy, the bonus money can be used to revive that lapsed policy. We also recommend increasing your term coverage & family health policy in case it is required - use the bonus money,” Madhupam Krishna, Certified Financial Planner (CFP) and Sebi RIA, chief planner, WealthWisher Financial Planner and Advisors, a financial planning and wealth management firm said.
“Bonus can also be used to open accounts for your retirements like public provident fund (PPF) or national pension scheme (NPS). They can also be used to start Sukanya Samriddhi Yojna (SSY) in case you have a female child under 10 years of age. If you are already a subscriber to these, make top-ups to help you reach early for your goals. Many of these schemes have tax benefits of deduction and also tax-free withdrawals when the scheme matures,” Krishna added.
Please note one is required to invest in these instruments if he is filing taxes under the old tax regime. If he is better in terms of tax outgo in the new tax regime he should choose to invest in only products allowed under the new tax regime e.g. NPS.
You must check your emergency fund. Also, you must repay if you have dipped into it in the last year. Increased earnings mean, growing your contingency fund. Bonus money can help you reset this allocation.
Bonus money should also be used if you have missed any payment which is obligated on you to pay. For example, equated monthly instalments (EMIs), credit card dues, or even payments due to family or friends should be paid back to earn a good credit profile.
Bonuses can be used to create monthly income for the family & especially for the elderly parents. You may gift the amount to your parents and create a Systematic Withdrawal Plan (SWP), periodic income can be arranged for them. You will pay less tax than a simple withdrawal of funds.
“Use your positive appraisal to increase SIPs. The funds can be chosen using the recommendation of your financial advisor. SIP in Equity Linked Saving Scheme (ELSS) can help save tax under Sec 80. Also, SIPs done in equity funds or a retirement plan for the long-term can help save tax when you withdraw as the tax on equity is favourable in comparison to say fixed deposits or bonds,” Krishna said.
A bonus is not a free amount. You have toiled hard for it. It is ok to gift yourself & your family some money. But investing it to save taxes, improve your credit & helping to reach your goals faster, is a smart way to manage this surprise income.
“Given that appraisal money often represents a substantial one-time influx, it is generally wise to avoid high-risk investments. Instead, aim for stability and growth by putting the money into reliable, well-performing companies. This strategy not only helps in tax saving but also ensures that your hard-earned money securely grows over time. Ultimately, the goal is to balance tax efficiency with sound investment principles to make the most of your appraisal and bonus earnings. While it is generally good to invest in balanced funds for new investors, they should also consider investing in index funds, NPS, etc. with a long-term view. These are low-cost investing options,” CA Aditya Sesh, founder and Managing Director of Basiz Fund Services, a Mumbai-based fund accounting service provider said.
