In the words of Benjamin Franklin, “In this world, nothing is certain except death and taxes”. While the former is something that we cannot control or predict, the latter is something, which we can plan for.Over six crore people (34 lakhs more than previous fiscal) just filed their FY’20 returns1; however, it is not the time to relax. With barely 2 months to go for FY’21 to end, it is critical that we take the necessary steps to review our tax outflows and make amends, if any.
However, before we begin to explore how and where you can save on your taxes, it is critical that one understands his or her current financial situation. The very first step to do that is to calculate one’s taxable income and the amount of tax liability that one may have. Once you have calculated this amount, the next step is to understand the various tax saving provisions that you can avail yourself as per the Income Tax Act, 1961under Sec 80C, Sec 80D etc.Now that you understand the overall steps, let’s explore the various financial instruments available in the market that can help you reduce your tax liability and save more!
Life Insurance
A Life insurance policyis one of the best tax saving instruments available in the market today. It helpsyou reduce your tax outflow and secure your family’s future at the same time.As per Section 80C of the Income Tax Act 1961, premiums paid towards a life insurance policy are eligible for tax deduction of up to a limit of Rs 1.5 lakh every year. This holds true for any type of life insurance policy – be it be a term insurance plan, endowment plan, or a money-back life insurance policy.
Unit-Linked Insurance Plan (ULIP)
A Unit Linked Insurance Plan (ULIP) is a dual benefit tax saving instrument. An investment in ULIP provides one with a life insurance cover along with an opportunity to invest in the market across equity, debt or hybrid (equity and debt) funds. ULIPs come with a five-year lock-in period and have the potential to provide you with market linked returns that are free from Long-Term Capital Gains (LTCG) tax. Like other life insurance products, premiums paid towards a ULIP policy are also eligible for availing tax deductions under Section 80C of the Income Tax Act, 1961.
Health Insurance
Just like life insurance, a health cover is equally important, and a must have to ensure thatone’s financial goals don’t get derailed due to any unfortunate/unforeseen illness. The added benefit is that you can save a substantial amount of tax by buying a health insurance policy since the premium payout for the same is exempt under Section 80D of the Income Tax Act, 1961. Not only can you claim deductions of up to Rs 25,000 on the premiums paid for medical insurance for yourself, your spouse anddependent children, you can also claim separate deductions on premiums paid for buying medical insurance for your dependent parents’ of upto a limit of Rs 50,000. This increases the total deduction limit to Rs 75,000. This deduction is over and above the Rs 1.5 lakh limit that is offered under Section 80C.
Home Loan
While a home loan itself may not count as an investment, it does lead to creation of wealth. Moreover, one can save a substantial amount of tax on the repayment of this loan. This tax saving is applicable not only on the repayment of the principal amount but also on the interest. Under Section 80C, you are eligible to claim a deduction of up to Rs 1.5 lakh against your repayment of the principal component of your home loan. Additionally, you can claim a separate deduction of Rs 2 lakh on the repayment of the interest component under Section 24 of the Income Tax Act, 1961. Collectively, it translates to a potential deduction of Rs 3.5 lakh.
Equity-linked savings scheme (ELSS)
This is an ideal investment option for those looking for capital appreciation coupled with tax benefits. ELSS is a type of mutual fund scheme that invests one’s money in equity and debt instruments. ELSS has a lock-in period of three years and has the ability provide above market average returns. Investment in ELSS funds are also eligible for income tax deduction under Section 80C of upto a maximum overall limit of Rs 1.5 lakh. However, unlike ULIP plans, returns on ELSS funds are subject to LTCG tax at 10 per cent, if the gains are above Rs 1 lakh.
Public Provident Fund (PPF)
A long-term scheme backed by the Government of India, any investment in PPF not only guarantees a fixed return, but also provides tax benefits under Section 80C. However, investments in PPF are subject to a lock-in period of 15 years although premature withdrawals are allowed from the seventh year onwards basis defined terms and conditions. At current rates, an investment in PPF earns an annual interest of 7.1 per cent. You can invest any amount between Rs 500 to Rs 1.5 lakh in your PPF account in a financial year.
National Pension System (NPS)
A voluntary retirement savings scheme by the Government of India, NPS allows one to make a defined contribution towards planned savings thereby securing their future in the form of pension. One can invest in this pension account until their retirement. While investors can withdraw a certain percentage of the total corpus on retirement, the scheme also permits partial withdrawal after 15 years under special circumstances. The NPS subscriber will receive the remaining amount as a monthly pension post his/her retirement. Contributions to NPS are also eligible for income tax deductions up to an overall limit of Rs 1.5 lakh under Section 80CCE. However, an additional deduction of up to Rs 50,000 is available exclusively to NPS subscribers under subsection 80CCD (1B). This is over and above the deduction of Rs 1.5 lakh available under section 80C of the Income Tax Act, 1961.
Basis the above analysis, it is quite evident that benefits of investing in these instruments goes beyond just income tax! While some of them provide insurance cover, thereby securing the future of the policyholder and his/her family from unanticipated events, others generate good returns over a long-term, hence building a corpus for the investor which can be used to achieve one’slife goals. However, one must make full use of these options to optimize their tax savings while ensuring that they choose the right instrument to serve their specific needs.
The entire process of planning for your taxes has just become simpler with an income tax calculator by Finserv MARKETS!. All one needs to do is enter his/her income, current investments, and some additional information and that’s it! The calculator would automatically calculate your total tax liability and provide recommendations and suggestions to optimize your tax outgo!
What’s more? You can directly invest in tax-saving instruments like term insurance plans, ULIPs, ELSS funds and much more on the Finserv MARKETS website or app!You can also avail their pre-approved offers on home loans that are customized to your needs and requirements.
The most important thing to remember is that the journey for managing your finances responsibly never ends. Even as you use these two months to adjust your tax plan for FY 2021, it is never too early to start planning for the next year. Because, as they say, “A penny saved, is a penny earned!”Happy investing!
1https://www.moneycontrol.com/news/business/personal-finance/why-the-tax-department-did-not-extend-return-filing-deadlines-any-further-6364251.html