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Budget 2020: Here’s How Your Take Home Salary Could Shoot Up Exponentially

Before you think of buying the latest iPhone or that Rolex you’ve been eyeing, or splurging your tax savings on things that will satisfy your materialistic wants, you need to take stock of your financial life.

Whether or not the finance minister cuts tax liability, take this opportunity to put your finances in order.

Budget 2020 is just around the corner. If you are expecting Finance Minister Nirmala Sitharaman to cut taxes, you’re not alone. The buzz is that there could be a reduction in the personal income tax rates, resulting in some tax saving for the average person like you.

There is also a pre-budget expectation for an increase in the tax-saving limit under Section 80C of the Income Tax Act– from Rs 1.5 lakh per financial year to Rs 2 lakh, or even more. Remember, the Direct Taxes Code had earmarked Rs 3 lakh for tax-saving needs. And, what if the expectations are met? That would mean lower tax liability and more money in the hands of taxpayers, including salaried individuals.

So if things go as expected, you can expect quite a windfall! Your take-home pay would go up as the tax liability comes down. But, hold on! Before you think of buying the latest iPhone or that Rolex you’ve been eyeing, or splurging your tax savings on things that will satisfy your materialistic wants, you need to take stock of your financial life.

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Whether or not the finance minister cuts tax liability, take this opportunity to put your finances in order. For salaried individuals like you looking to save tax in the current financial year (FY) 2019-20, the impact may not be much. The various proposals made will be effective from the start of the next financial year 2020-21. So, if there is a personal income tax rate cut announced in the Union Budget 2020, the advantage to the taxpayers will start flowing in the next fiscal year only.

So, what do you do in the meanwhile? As a salaried employee, you still stand a chance to benefit on the tax front for the current financial year, as the last date to save tax is March 31, 2020. Saving tax and meeting your long-term goals should go hand-in-hand. And, this is possible using life insurance plans that can provide three benefits rolled into one – savings for long-term goals, life protection, and tax savings. The other big advantage of saving through life insurance plans is that the amount you receive on maturity is tax-exempt.

Follow the numbers

A life insurance policy helps you reduce your tax liability, the growth of investments over time helps you meet these goals comfortably. Though you can invest as much as you like in life insurance, the maximum tax exemption you can receive on eligible premiums is up to Rs 1.5 lakh in a financial year, under Section 80C of the Income Tax Act, 1961. This means, based on one’s effective tax rate, the amount of tax saving will be Rs 7,800, Rs 31,200 and Rs 46,800 (including surcharge) for those in the 5 percent, 20 percent and 30 percent income slabs.

However, you need to ensure that one important condition is met to enjoy tax saving under Section 80C on the premium paid on life insurance policies and also to enjoy the tax-free nature of maturity proceeds under Section 10 (10D). In order to save tax on the entire premium and get the EEE tax benefit, make sure the sum assured is at least ten times the premium paid. In other words, the premium is to be at least 10 percent of the sum assured in order to get a tax benefit.

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Now, that you are comfortable with how much you need to invest, it’s up to you to do your own analysis on the insurance plan for you. To that end, HDFC Life has a plethora of term insurance options for you to choose from. And once you’re finally ready to buy your life insurance policy, the actual Budget 2020-2021 announcements can wait for now. Any future rate cuts or enhancement in the Section 80C limit will only be applicable from next year onwards. Your tax-saving exercise for the current financial year not only helps you put your life protection needs in place but also gives you a head start to manage any windfall in the form of tax savings in the years ahead.

Remember, your investments are self-funded in nature and any unfortunate eventuality can de-rail the long term goals of the family. Thus life insurance plans provide the twin advantage of life protection along with savings. The presence of a life cover will give you the confidence to take other pursuits in life strongly. With goals and protection needs taken care of, you can then buy that Rolex as well!

First published on: 29-01-2020 at 12:27:41 pm
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