The tax season is coming to an end and if you haven’t locked in your savings into tax-efficient instruments yet, it’s time you hurry. However, it’s important to choose the right instruments, as you also want to earn good return along with saving taxes. Here are some of your go-to tax saving investment options.
The Much-Needed Instruments
If you don’t already have life and health insurance, these should be your first go-to products. However, they should be purchased with the prime purpose of insuring your family and yourself against any unforeseen circumstances. Remember, tax saving on insurance product is an additional benefit that comes along. Before you zero in on a product, make sure you go online and compare the products available in the market to find the best-suited one.
Life Insurance: The sole purpose of life insurance is to provide financial protection to the family of a policyholder in case of his/her untimely death. So, if you are someone with dependents, you must buy a term plan. The sum insured must be about 10-20 times of your annual salary to ensure sufficient coverage. After all, this money should be of use to pay for your children’s education, repaymentof home loan and to carry out your family’s day-to-day expenses. Premium paid towards life insurance is tax exempted under Section 80C. Therefore, it helps you to insure your life in a tax-efficient manner leaving plenty of scope for investment in other high-return assets.
Health Insurance: Your health insurance should be wholesome enough to cover your cost of hospitalization and treatment expenses for critical illnesses such as cancer. It is an extremely essential component in your financial portfolio, considering the constantly inflating cost of healthcare. Section 80D of the Income Tax Act allows a deduction of Rs 25,000 for individuals under the age of 60 years, and 30,000 for those above. For senior citizens, the deduction has been revised to a generous Rs 50,000 from the next financial year. You can also buy health insurance for your parents and claim the premium as deductions, taking your overall deductions to at least Rs 50,000 if your parents are under 60 or Rs 55,000 if they are above 60.
Once you have bought yourself sufficient insurance, you can reach out for more tax benefits through investment in instruments covered under Section 80C. Here are four best investment instruments that are easy to manage and cover all kinds of investment requirements and risk appetites.
These are diversified mutual funds investing in equities, allowing you to earn market-linked return. These funds are ideal for moderate risk takers, as there is a certain degree of risk associated with them. Equity Linked Savings Schemes, with a lock-in of three years, are covered under Section 80C.Your returns on ELSS will now be subjected to a 10% Long Term Capital Gains tax starting April 1. As per the CRISIL – AMFI Fund Performance Index for December 2017, the ELSS fund can earn annual interest of 37.50% in the preceding year, 13.09% in three years, 18.40% in five years, and 9.24% in 10 years. You can either go for a lump sum investment or invest through SIP starting from Rs 500 per month. You can invest in mutual funds either by registering yourself online through an aggregator or through the fund house itself.
5 Year Fixed Deposit
A fixed deposit can serve as the quickest solution to save tax. You can open a fixed deposit either with a bank or post office and earn an interest of about 7%. If you have a net banking account, you can open an account remotely. Deposits are to be made in multiples of thousands and it can go up to Rs 1.5 lakh. While the investment towards fixed deposit is tax exempted under Section 80C, the return is taxed as per your slab rate. Your interest earnings up to Rs 10,000 in a year are tax exempted as well.
PPF, with its 15-year maturity period, remains the most tax-efficient, long-term investment option for the risk averse investors. You can earn interest of up to 7.6% with a minimum investment of Rs 500 per annum. The maximum you can invest in a year is Rs 1.5 Lakh. The investment is completely tax free as it comes under the exempt-exempt-exempt regime. However, this investment instrument is relatively less liquid, as you can only start making partial withdrawals starting from the sixth year. On the other hand, that’s what makes it suitable for long-term pursuits such as creating a pension fund.
You can save an additional Rs 50,000 under Section 80CCD (1b) through investment in National Pension Scheme (NPS). This pension fund allows you to save up to Rs 200,000 with effective tax saving under Section 80C. Individuals in the age group of 18-65 years can open an NPS account with an investment amount as low as Rs 500 a year. NPS funds are invested in both equity and debt.
The author is CEO, BankBazaar.com