Tax Planning is an integral element of personal finance. We are approaching that part of the year when most individuals will start looking at tax saving avenues to submit the proof of investments to their employer. But this is also the time when all financial advisors, banks or other financial intermediaries will start approaching with their tax saving ideas. However, one need to look at risk returns characteristics of the advised instrument and match with their requirement before making any decision on this aspect.
Here is a list of available tax saving options and when should investors consider them-
- Life Insurance– One of the most preferred avenue for investment, life insurance has long been considered as a tax saving tool. But the primary objective has been neglected and investors end up buying the wrong product. A life insurance is the most cost effective tool when you have to provide a financial protection to your family in case of eventualities. What amount of life insurance one should have depends on many factors such as income, expenses, liabilities, goals etc. A pure life insurance i.e. Term insurance, is the right instrument to buy high life insurance coverage. The tax benefit is the inherent advantage which comes with this product. Hence, consider this avenue only after analyzing your need.
- PPF- Public Provident Benefit is a highly beneficial small savings scheme available to investors. Although the government has made the returns from these scheme market linked, due to the tax free interest and maturity along with benefit of Rs 1 lakh under section 80C (If you avail) the net yield to investors is well above 8-9%. The flexibility in contributions as per ones requirement makes it an ideal choice for long term investments and availing tax benefit year on year.
- ELSS- The sluggish equity market for last five years has made investors jittery and ELSS which was favored among all avenues is slowly losing its sheen. Also, proposed DTC changes have been not in favor of the instrument. But for investors with high risk appetite and a slightly longer horizon, ELSS is still a considerable choice in this financial year. Do a good research before finalizing your scheme.
- Fixed Deposit- Bank Fixed deposit for five years falls under Sec 80C tax benefit. Although it is the most viable option for investors when last minute decisions have to be taken, the taxability of interest lowers the net yield. Still, it is a good option in current scenario especially for individuals in lower tax bracket.
- NSC– The old national savings scheme has been revived and there is a new 10 year scheme. With taxability of interest and rate market linked, it does not appeal to many investors now when compared to other avenues under section 80C.
Under this section, one can avail up to Rs 15000 for self and family while additional Rs 20000 is available for parents in senior citizen category on premium paid for a health insurance scheme. However, it should not be considered only for tax benefit as the purpose of health insurance is to provide you benefits in case of emergencies. To buy the right scheme which matches your requirement, a detailed analysis should be done on benefits and exclusions.
The New Pension Scheme gives tax benefit under this section to individuals if they contribute 10% of gross income (If in business) or 10% of the basic salary (If employed) in this scheme. However, the maximum limit clubbed with 80CCE is capped at Rs 1 lakh. Being a low cost product it is one of the good avenues for retirement planning, especially in absence of pension plans.
Sec 80CCD (2)
Not many employers offer it and neither employees are aware of this additional tax benefit. Under this section, if an employer contributes 10% of an employee basic salary to New Pension Scheme, the amount is an additional deduction which employee can claim from his income. This provision was made in this year budget and it reduces tax liability by a good amount. So if someone is drawing a basic monthly Salary of Rs 50000, he can avail additional deduction of Rs 60000 annually. For an individual in highest tax bracket (30%) this will result additional tax saving of Rs 18000. But the decision of this provision rest with the employer and one has to negotiate to include it in the salary structure, if not there.
Going forward NPS may acquire more importance with list of 80C instruments proposed to reduce in DTC.
Selection of right tax saving instruments is essential for reaping the desired benefits. Last minute rush can lead to mistakes and strain your finances. Take a wiser approach and distribute your investments by planning it early.
This article is authored by me for www.Moneycontrol.com