For a large segment of the population earning monthly income, tax planning is usually an activity that is pushed to the back burner until tax season begins. But when you are nearing the end of the financial year, there will be so little time and so many options that you cannot make the right investment decision in a hurry.
The most recommended strategy would be to start investing during the first quarter of the financial year. This way, you will have enough time to plan your investments and get maximum tax savings.
What to keep in mind while investing
When you invest in a financial instrument that delivers returns, one of the most important factors to consider is whether the earned income is taxable. If so, a portion of the money you make over a certain period will be deducted as tax, therefore eating into your return. Consider a scenario in which you have invested in an instrument like National Savings Certificate (NSC). When you receive interest from investments, this amount is added to your income from other sources. This means that the interest earned from NSC is taxed like your normal income.
It should be noted that the NSC scheme also enables you to save tax. However, the interest you earn is a tax liability for each financial year till the end of the tenure. Therefore, with such an instrument, you effectively earn after-tax returns, which may be much lower than your initial estimate. Senior Citizen Savings Scheme (SCSS) and 5-year fixed deposits with post offices and banks are also liable for the same format of taxation. Therefore, it is important that you find investment avenues that not only help you save tax but also provide you with tax-free income.
Tax saving instruments to choose from
The following investment options offer you considerable tax savings. If you intend to maximize your returns, look at investment instruments that provide tax-free income:
1. Unit Linked Insurance Plan (ULIP) – this is a Life Insurance Policy Type Which provides dual benefits of protection and savings to the policyholder. A ULIP provides financial security to the life of the policyholder and also channels his/her investments in markets with different risk profiles such as debt and equity instruments. This, effectively, enables the policyholder to meet his long-term financial goals. In most ULIPs, the insurer offers different fund options from which the investor can choose. The tenure of ULIPs is usually between 15 to 20 years, but the lock-in period for the fund value is 5 years. This effectively means that the policyholder will be unable to withdraw the Fund Value before the completion of 5 policy years.
When the Fund Value is finally withdrawn at the end of 5 years or after the maturity of the policy, it will be available as a tax-free return to the policyholder. Tax exemption is offered under Section 80C and Section 10(10D) of the Income Tax Act. The policyholder also gets the facility to switch between funds while staying invested in the plan.
ULIPs are ideal for those who are not disciplined to make independent market linked investments. If you are comfortable managing investments in ELSS yourself, you can Choose Pure Term Insurance Plan To fulfill the purpose.
2.Employees Provident Fund (EPF)- EPF is an investment channel that helps a salaried individual to save tax through involuntary savings. The investment also deposits a tax-free fund, making it one of the most popular investment avenues. The employee contributes 12% of his basic salary to the EPF account every month. The same amount is contributed by the employer, and a part of this amount gets deposited in the EPF.
The employee’s contribution to the EPF corpus is eligible for tax benefits under Section 80C of the Income Tax Act, with an upper limit of Rs 1.5 lakh. It should be noted that the employer’s share is not tax-exempt. Employee and employer contributions are also eligible for tax-free interest.
The employee has the flexibility to increase his contribution to the corpus. When this is done, the account becomes a Voluntary Provident Fund (VPF). VPF is a part of EPF and the rules surrounding it are similar to EPF. Interest deposited in EPF/VPF account is exempt from tax, provided the individual has been employed for at least 5 consecutive years.
3.Health Insurance – It is a valuable investment tool in the financial arsenal of a salaried individual who has dependents. In addition to providing you with financial assistance to protect you from unexpected medical charges, a suitable health insurance plan Provides you tax deduction under section 80D of the Income Tax Act. The upper limit of this exemption is Rs 15,000. It goes up to Rs 20,000 for senior citizens. You should note that section 80D is not applicable for group health insurance coverage offered by employers to employees.
Suppose you have augmented your health insurance plan with a personal accident rider. Lump sum amount received as payment from rider in case of accidental disability is not taxable.
Apart from the above-mentioned investment channels, you must be aware of the fact that investing in property helps you save tax to a great extent. in line with this, take home loan Buying your dream home would be the right decision. So, be cautious and focus on making prudent investments at the beginning of the year for maximum benefits.
(This content is not created by the editorial team.)
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