Written by Vaidyanathan Ramani
In the month of March just when the nationwide lockdown was announced, the Ministry of Finance in its effort to give respite to taxpayers, extended various statutory deadlines related to income tax from 31st March to 31st July. The extension was allowed considering the hardship people may face due to coronavirus (COVID-19) and measures taken to curb it. Those who are still waiting to make investments in various instruments like Health Insurance, Term Life Health Insurance or other investment products which offer tax deductions under Section 80D and Section 80C respectively, can still do their investments till 31st July and continue to claim a deduction for the financial year 2019-20.
Though, what customers need to know while investing their money in different tax saving products is that investing in the right investment returns or insurance covers is utmost important. While making an investment, it is not just the tax-saving factor that should be kept in mind, the return on investment factor must also be given appropriate importance. To help you, here are some prominent tax saving options that will assist you in making a wise and informed decision.
Health Insurance – Section 80D
A popular way of saving tax while staying insured against any medical expenses is by investing in a health insurance premium. According to Section 80D of the Income Tax Act, 1961, the premiums paid against a health insurance policy qualify for tax exemption. The maximum exemption that you 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. But in case the dependent parents are senior citizens, the exemption can go up to Rs 50,000. Under a health insurance cover, you may choose to invest in Indemnity or Fixed Benefit Plans.
Investments – Section 80C
Another impressive way of saving tax while staying insured is by investing in a life insurance plan. The premiums paid towards a life insurance policy quality for tax exemption 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. An exclusive benefit of investing in life insurance is that the sum assured received by the beneficiaries or dependents of a policyholder in case of death of the insured is also exempted from tax deduction. However, in order to avail the benefit, one must know that the premium for policies purchased before April 1, 2012, must not exceed 20 per cent of the sum assured and premium for policies purchased post-April 1, 2012, must not exceed 10 per cent of the sum assured.
Unit Linked Insurance Plan (ULIP)
The new-age Unit Linked Insurance Plans or 4th generation ULIPs are highly popular in the market owing to their reduced charges and better transparency. By investing in ULIPs, you can easily save tax under sections 80C and 10(10D) of the Income Tax Act, 1961. The exemption limit under Section 80C is up to Rs 1.5 lakh per year and the premiums paid against investment in ULIPs is exempted from tax deduction. A ULIP comes with a mandatory lock-in period of 5 years and can be bought for a term of 15, 20, 25 or 30 years depending upon your needs and requirements. Also, the fund value on exiting the policy (allowed after 5 years) or on maturity is tax-free.
The earlier you start planning for your child’s future the more secured it becomes. There are a plethora of child plan options available in the market that promise secured and guaranteed returns. Under a child plan, you can start by investing within 60 to 90 days of your child’s birth and the earlier you invest, the bigger will be the corpus when you require it at the right time. A smart way of investing is investing in the unit-linked child plans initially and eventually moving to de-risk the policy to safer funds. The premiums paid against various child plans qualify for tax exemption under the 80C of Income Tax Act, 1961 which allows a maximum tax exemption of Rs 1,50,000 per year.
Total Tax Saving
The amount of tax saved is equal to the amount invested multiplied by your tax rate. For instance, if someone paying 10 per cent tax invests Rs 1.2 lakh in section 80C, the total tax saved will be Rs 12,000. If he wants to maximise the tax-saving allowed under this section (i.e., Rs 1.5 lakh), an additional investment of Rs 30,000 has to be made, and then total tax saved will be Rs 15,000 — the maximum for someone in the 10 per cent tax rate. In these tough times, you must maximise tax savings as if you have 30,000 left for limits, by just saving tax, you get returns of 10 – 30 per cent on it already plus the returns given by the instrument. Apart from this, you can also invest Rs 25,000 under section 80D. Someone investing Rs 25,000 under section 80D can save Rs 2500 on tax.
The author is the Head of Product and Innovations at Policybazaar.com. Views expressed are that of the author.
📣 The Indian Express is now on Telegram. Click here to join our channel (@indianexpress) and stay updated with the latest headlines