Investments in tax-saving instruments should not be looked at in isolation; they should be part of a larger strategy and of planning our financial goals. An ideal strategy is built on adaptability and should be revised based on an individual's changing financial circumstances.
Tax planning should not be an exercise to be done at the end of the financial year, but should be a continuous process. If you look at tax-planning structures and the investments that can be made under them, you will find that the structure is designed in a way that can help achieve financial goals, with the added benefit of paying lower taxes.
For example, if you have a goal to accumulate funds to buy a home or for your child's future education, you actually have investments options which can help save on taxes as well. One option available is Equity Linked Saving Schemes (ELSS), which are tax-saving mutual funds. These can help build an investment corpus over the years and give tax breaks. Similarly, if you want to buy your own home, there are tax breaks available when you take a home loan.
Another important goal we often overlook is that of securing our family from medical emergencies. While the actual emergency may not always be avoidable, but it is possible to overcome it by having adequate medical insurance.
This strategy is based on an individual's tax-planning goal, under which appropriate tax saving investments can be chosen. Here's a look at the some investment options that you could opt for and the benefits they offer.
Public Provident Fund (PPF)
PPF is a government-backed investment scheme to mobilise small savings and provide tax relief. It is primarily used for retirement planning and building a retirement corpus.
Through PPF, tax deduction of up to Rs 1.50 lakh can be claimed under section 80C for the amount invested during the financial year. It is in the exempt category where interest and maturity amount are exempt from tax. There is a lock-in for 15 years, but depositors can withdraw from an existing account or continue for an additional five years.
National Pension System (NPS)
NPS is also a retirement-planning scheme where you can build a corpus and also generate a monthly income. Both private sector and government employees can invest in the NPS.
There is a choice between two types of accounts -- Tier 1 and Tier 2. The former comes under section 80 CCD (1) and 80 CCD (1B), while Tier 2 is a voluntary scheme. In the NPS you can get an exposure to equity markets.
The minimum amount invested can be Rs 500 in Tier 1 and Rs 1,000 in tier 2.
Life Insurance is one of the best ways to save tax and is also important in your overall plan as it protects your family from any eventuality.
Investment in insurance plans like endowment, term or life plans and ULIP can give tax benefits. Rs 1.50 lakh is the maximum deduction allowed under section 80C.
Unit Linked Insurance Plans (ULIPs) are also market-linked plans which can give tax exemption and long term capital growth. In ULIP, the tax exemption is available for a maximum investment of Rs 2.50 lakh.
Equity Linked Saving Scheme (ELSS)
Tax planning can also be done by investing through mutual funds by investing in ELSS. These are basically mutual funds which are tax exempt and have the lowest lock-in period of 3 years.
Since they are equity linked ELSS gives an opportunity to participate in the stock markets and at the same time, provide tax relief under section 80C.
Tax Saving Fixed Deposits
Tax saving FDs normally provide a higher rate of interest on investments made. They qualify for deduction under section 80C with the maximum exemption of Rs 1.50 lakh. However, these FDs attract a lock-in period of 5 years with no premature withdrawal.
Senior Citizens Saving Scheme
This scheme was launched with the objective of providing a regular income for senior citizens over the age of 60 years. With a current interest rate of 7.4 percent, the maximum amount of exemption allowed is Rs 1.50 lakh under section 80C. This scheme allows for premature withdrawal.
National Saving Certificate (NSC)
The NSC is a fixed income scheme by the government of India. Investment can be started with a minimum deposit of Rs 100. NSC has an investment tenure of 5 years. The entire amount can be claimed back on maturity. If not, the entire amount gets reinvested in the scheme. Under section 80C, tax deduction can be claimed for Rs 1.50 lakh.
Sukanya Samriddhi Yojana
This scheme, launched by the government, is aimed at securing the financial future of the girl child. Planning for daughters’ education and marriage can be aided by investment in this scheme. Again, under section 80 C an exemption of Rs 1.50 lakh is allowed.
Health Insurance Premium
Section 80D of the Income Tax Act gives tax exemption on medical premium paid over and above that which is available through other investments, mostly under section 80C.
Exemption can be claimed on premium paid on regular health insurance premiums as well as paid for critical illness and top up plans.
One can avail a maximum deduction of Rs 25,000 for premiums paid for self, spouse and children. However, if both parents of the premium payer are senior citizens and the premium is paid for them, then the exemption limit goes up to Rs 50,000 in a financial year.
Home Loans are another way to save taxes while also building an asset. If a home loan is taken jointly, both borrowers can claim exemption. Under section 80C one can claim a maximum tax deduction of Rs 1.50 lakh on the principal repayment.
Additionally, under Section 24, a maximum deduction of Rs 2 lakh can be claimed on the interest paid.
For first time buyers too there are additional benefits. An amount of Rs 50,000 can be claimed over and above. However, the home loan amount must not be over Rs 35 lakh and value of the property not more than Rs 50 lakh.
-- The author, Vikas Singhania, is CEO of TradeSmart.
First Published: IST