When it comes to Tax
management, people in India rush to buy any random financial products to save
tax before the financial year ends, without any proper planning as to whether
it will hit your long-term financial health or not. Your tax savings plan should
not be done in isolation. You must align the larger investment plan with tax
saving instruments to maximize returns. Though this should be done at the start
of the financial year, it is never too late to build your own tax savings plan
as and when time comes. The article gives few tips on some of the best ways
that can help get tax savings based on your long-term and short-term financial
objectives.
Getting
Insured
It has been the case for
many years that agents have been marketing insurance plans as tax saving tools.
However, experts suggest it is wise to buy insurance policies for saving tax
only when your existing cover is inadequate to do so.
Life
insurance
The premiums that you
pay for life insurance policies covering you, spouse and dependent children are
eligible for deduction up to Rs 1.5 lakh under Section 80C of the Income Tax
Act (I-T Act). According to the
regulation body for policies starting 1 April, 2012 and later, the premium has
to be less than 10 per cent of sum insured if the person wants to claim tax
deduction.
Health
insurance
Under Section 80D,
the premiums for insuring the health of self, spouse and dependent children are
eligible for up to Rs 15,000 deduction in a financial year. Paying for parents'
cover makes you eligible for an additional deduction of up to Rs 15,000. If at
least of one the insured is above 60 years (a senior citizen for tax
provisions), the deduction limit in that case is Rs 20,000. These limits can
include expenses of up to Rs 5,000 on preventive health check-ups. Cash
payments for health check-ups are eligible for income tax deduction but health
insurance premiums paid in cash are not.
Wealth
Booster
Wealth boosters are
the equity mediums that can make your wealth grow faster than most investments
and also lower your tax burden.
Rajiv
Gandhi Equity Savings Scheme or RGESS
These tax incentives
were being introduced by government in 2012-13 to encourage people to invest in
shares and equity mutual funds. Under Section 80CCG of the I-T Act, first-time
equity investors who buy shares worth up to Rs 50,000 during a financial year
can claim 50 per cent of the investment as deduction. However, this tax savings
plan is applicable only for those whose gross annual income is Rs 10 lakh or
less.
ELSS
(Equity Linked Savings Scheme)
Equity linked Savings
Scheme is another good medium for tax savings. You can claim Section 80C
benefits for investments in equity based mutual funds. The lock-in period for
equity-linked savings scheme, or ELSS, investments is three years. These
investments do not attract capital gains tax.
ULIPS
Unit-linked insurance
plans (ULIPs) can be used to get insurance as well as equity exposure. ULIP investments
are eligible for Rs 1.5 lakh deduction under Section 80C. The maturity proceeds
are tax-free.
Debt
Oriented Funds
These funds are low
risk management especially designed keeping the dusking days of life such as
retirement planning or recession or job loss etc. You have plenty of options even if you are
risk-averse and invest with the sole aim of building a fund for your sunset
years.
Retirement
Plans
These are one of the
best tax savings plan for your olden days. Individuals can get a tax benefit
for the purpose of their retirement planning through investments in pension
products under the Rs 1.5 lakh deduction limit under Section 80C of the I-T
Act.
EPF
(Employment Provident Fund)
EPF requires
contribution from both employees and employers. Your contribution is eligible
for deduction within the Rs 1 lakh Section 80C limit. You can invest from Rs
500 to Rs 1 lakh a year in a Public Provident Fund (PPF) account.
National
Savings Certificates (NSCs)
NSCs are offering 8.6
per cent and 8.9 per cent a year, for 5 and 10 years plans respectively. The investments
are eligible working upon your tax savings plan under Section 80C, but the
interest earned is taxable.
Senior
citizens' savings:
Senior citizens (60 yrs
and above) will get around 8-9 % return. The maturity period is five years. The
interest rate is one percentage point higher than the rate on five year
government bonds. One can open multiple
accounts provided the total investment does not exceed Rs 15 lakh.
National
Pension System (NPS)
NPS, unit-linked pension
plans and mutual fund pension plans can also help you build your best tax savings plan. You have to contribute
minimum Rs 6,000 a year in the NPS account, which is eligible for deduction
under Section 80CCD for around Rs 1 lakh.