While many have a brief idea about commonly known options, saving in a planned way for maximum returns can be a challenging task especially for the young and newly recruited employees. Here are some prominent tax saving options to help you invest wisely.
The premiums paid against a life insurance policy are eligible for tax deduction under the Section 80C of the Income Tax Act, 1961. The maximum deduction limit under the section is Rs. 1.5 Lakh and apart from policies bought for self, you can also avail tax benefit on premiums paid for the policies bought for your parents, spouse and kids.
The total sum assured received by the beneficiaries or dependents of a policyholder in case of death of the insured is also tax-free. In order to avail the tax benefit, the premium for policies purchased before April 1, 2012, must not exceed 20 percent of the sum assured while for policies purchased post-April 1, 2012, the premium must not exceed 10 percent of the sum assured. One must know that the tax benefit is only available for Individuals and Hindu Undivided Families (HUF).
Another great way of saying tax while keeping yourself insured is by investing in health insurance. As per the Section 80D of the Income Tax Act, 1961, the premiums paid towards health insurance are eligible for tax exemption. A health insurance plan may include Indemnity Plans or Fixed Benefit Plans or both. You can even save tax by investing in term insurance riders such as Partial and Permanent Disability Rider, Hospital Cash Rider and Accidental Death Rider. The maximum deduction that one can avail under Section 80D is Rs 75,000 that includes Rs. 25,000 for health insurance taken for self, spouse and dependent children and Rs. 25,000 for health insurance taken for parents. However, in case the parents are senior citizens the deduction is allowed up to Rs 50,000.
Unit Linked Insurance Plan
The new-age online ULIPs or 4G ULIPs as most know with reduced charges and better transparency have successfully made themselves a must-have in any investment portfolio. Investing in ULIPs can help you save taxes under sections 80C and 10(10D) of the Income Tax Act, 1961.
A ULIP can have a duration of up to 15 or 20 years or more but the initial lock-in period is 5 years. Under Section 80C, the investment made under ULIPs is exempted from tax and the maximum limit is up to Rs. 1.5 lakh per year. Moreover, the fund value on exiting the policy (allowed after 5 years) or on maturity is tax-free. Any switching between the fund’s options irrespective of the holding period is exempt from tax as well.
Pension plans or retirement plans are an excellent investment product that helps you to allocate a part of your savings to accumulate over a period of time and provide you with steady income post retirement. When you choose to continuously invest in pension plans, the amount grows manifold due to the compounding effect, making a lot of difference to your final savings corpus.
Pension plans qualify under Section 80CCC of the Income Tax Act, 1961, that allows individuals to claim tax deductions for contributions made to certain pension funds. This section provides tax deduction up to a maximum of Rs. 1,50,000 during a year. However, one must know that the deduction limit under Section 80CCC is clubbed with the limit of section 80C and section 80CCD – meaning the overall tax deduction limit is Rs. 1,50,000.
It is always advised to start investing for your child’s secured future as early as possible. Under the various child plans available in the market, you can start by investing within 60 to 90 days of your child’s birth. This will help you build a bigger corpus which may not be possible at a later stage of life. As a smart investor, you can start by investing in unit-linked child plans and gradually move to de-risk the policy to safer funds before the maturity term. The premiums paid against various child plans qualify for tax exemption under the 80C of Income Tax Act, 1961. This section provides tax deduction up to a maximum of Rs. 1, 50,000 during a year.
(Views expressed in this article are a personal opinion of Santosh Agarwal, Chief Business Officer- Life Insurance, Policybazaar.com.)