For all those who still have not made their tax-saving investments yet, the deadline has been extended to 30th June. This comes across as a welcome surprise amidst the otherwise gloomy global scenario.
Through this detailed report, you will be able to find out more about how you can make the right tax-saving decisions.
The ideal time to make a tax-saving investment is, contrary to popular belief, not the end of the financial year, but rather the very beginning of it. This is because when you begin early, you have extra time at hand to choose the best investments, while rushing would have only landed you with bad investments. It is a great misfortune that most of us tend to see tax planning as an activity that needs to take place in the year-end.
A lot of investors are drawn to these various tax-saving investments, on account of the tax that they can save through the same. However, it is still not prudent to simply overlook the product in which you are investing. Even though through the selection of a wrong product, you would still be able to save some tax; but the overall outcome would possibly not even be worth it.
Tax-saving investments play a crucial role in the creation as well as the protection of wealth, which is why it is important to pay attention to them.
How is income tax calculated?
More often than not, it is the accountant who tells us about how much we need to invest to be able to save tax. To find out your taxable income, you need to first calculate your total income from all sources. Though many of us have just one source of income, others might have multiple sources also, such as income from property or capital gains.
These can be divided into five categories: salary, house property, profits, and gains from business and profession, capital gains, and lastly, sources other than the four that are mentioned above. These include interest income from banks, lottery won, etc.
After calculating the sum of income from all sources, you then arrive at your gross taxable income. From this, the tax-saving investments and expenditures are deducted. What you are left with is your final taxable income. Also, note that the interest from your savings bank account which is above INR 10,000 is also taxable as per your tax slab.
You can check the prescribed tax slabs to determine how much tax you need to pay. The Union Budget for the fiscal year 2021 has also introduced an alternative tax structure, and you can pick either of the two structures, depending on what saves you more tax.
Section 80 C of the Income Tax Act offers multiple avenues when it comes to tax planning. It comprises of various options, such as tax-saving FDs, Public Provident Fund, National Savings Certificate, and so on. Investments that are made towards the National Pension System (NPS) also come under Section 80C.
Many of us will also have provident fund deductions, which are again included in this section. Thus, make sure that you take these into account as well when you calculate your investment amount.
For example, if you have made a provident fund contribution of INR 50,000; you then need to invest only INR 1 lakh towards Section 80C.
Premium which is paid towards life insurance also comes under this section.
Though life insurance comes in many forms, the best of these all is term insurance, which gives you a larger cover at much lower premiums. Term insurance is also different from other endowment and unit-linked policies. The latter is also a saving plan, and premium paid towards them gets accumulated over time. In this case, however, the premiums are invested in the stock market. On the other hand, in the case of term insurance, you don’t get your premium back. This makes a lot of investors believe that endowment policies are much better than term plans, which is far from the truth.
The primary function of any insurance is to provide you with the needed protection. Insurances that double up as investments fail to provide either. If truth is faced, the insurance cover is then sadly inadequate, and the investment returns are not that appealing either. Thus, as a general rule, it is advised to never mix investment and insurance. For investment, buy pure investment products, while for protection, buy a good insurance policy.
Additionally, life insurance is not suited for simply anyone. Since it is only meant for those who have some financial dependents, non-earning members do not need any life insurance. Though a lot of parents buy insurance in the name of their children, it honestly makes no financial logic.
Health insurance, on the other hand, is well suited for everyone. Medical emergencies can have severe impacts on one’s financial health. As per Section 80D of the Income Tax Act, deduction of health insurance premium of up to INR 50,000 is allowed for senior citizens, and premium of INR 25,000 can be deducted for insurance of the self, spouse, or of dependent children. A deduction of INR 50,000 is available for buying health insurance coverage for one’s parents.
Given how stressful and hectic lives these days are, a lot of additional riders have become all the more important now. These are crucial, and it makes sense to consider these as well. Some of these include personal-accidental insurance, critical illness insurance, cancer protection insurance, etc. A personal-accidental insurance cover offers compensation in case of any disability or accidental death. A critical- illness cover will take care of all serious diseases which are likely to result in high expenditures that are not covered in normal health insurance. And even if these illnesses are covered in normal insurance, the sum that is assured will probably fall short of the medical expenditure which will be incurred.
Tax-saving equity mutual funds are good tax saving options. Also known as equity-linked savings schemes (ELSS), these provide equity advantage and therefore will offer better returns as compared to a lot of other 80C options. Additionally, ELSS has a lock-in period of just three years. On the other hand, most other tax-saving options have a lock-in period of five years, while for the PPF, it is 15 years.
ELSS also happens to be one of the few 80C options that offer equity exposure. Other options in the same category include ULIPs and the NPS.
ULIPs, however, tend to have an opaque structure and are often associated with high costs. ELSS, on the other hand, is much more transparent professionally managed. This is because fund houses need to regularly file disclosures of their activities.
And while NPS allows you to invest in equities, the best equity exposure that you can get is 75 percent. This figure keeps coming down as you get older. Moreover, since it is a retirement tool, it is illiquid.
One must also take into consideration how any individual usually tends to have a debt component in his/her portfolio, in forms of provident fund and FDs. This then makes the ELSS all the more attractive and important, since it can generate inflation-beating returns and allocate assets between equity and debt precisely.