Tax is a part of your income that you have to pay to the government of India for the betterment of the country. It is a law and there is no way you can save yourself from paying tax. But of course there are many legal provisions that allow you to lower the amount you have to pay as tax at the end of the each year. You can utilize these provisions and avail assistance in tax planning.
Tax planning is basically a process through which you analyze your income and expenditure that you make in form of tax and come out with ways that can assist you to save tax or lower the amount to be paid as tax in a legal manner.
Tax planning helps you to manage your finances in such a way that you engage your funds to save tax but at the same time it provides you other benefits as well. There are many options that can help you to save tax but you have to find out which one will give you maximum benefit. You have to find out the instrument that enables you to save tax as well as helps you to get maximum return on it.
One such instrument is insurance. You can save up to Rs 1.5 lakh each year out of the amount you pay as tax. Insurance is one of the most important tools that help you to save tax because it also helps you to accumulate funds with return on it and provides financial protection to you and your loved ones at the time of need.
Below are the listed tax-saving insurance plans:
Life insurance: When you pay premium for any kind of life insurance policy, it is exempted from tax under section 80C of Income Tax Act. You can invest in life insurance through various ways i.e. term plan, regular whole life insurance plan, pension plan, child plan, unit-linked insurance plan or money-back plan.
Not just the premium but the receivable amount that is, sum insured at the time of the demise of the insured or the maturity benefit to the insured, is not taxable under section 10(10D). Also, in case of pension plan, one-third of the total annuity is not taxable under section 10(10A).
Health insurance: Having health insurance is another practical way to save tax. It allows you to save up to Rs 25,000 under section 80D, if you buy health insurance for you and your family (spouse and children). To save more, up to Rs 25,000, you can buy health insurance for your parents. In case they are senior citizens this amount increases to Rs 30,000.
• The amount paid as premium is exempted from tax.
• The pay-out from the above mentioned tax-saving plans is tax free.
• Tax-saving plans assist you in planning your long term and short-term investments.
• They provide goal-based wealth creation opportunity.
• You can choose the duration for which you want to invest.
• These plans provide insurance as well as maturity benefit.
• Whether you invest in child plan, pension plan, unit-linked insurance plan or any kind of life insurance plan, the maximum amount eligible for exemption under section 80C of Income Tax Act is Rs 1, 50, 000. This means the total amount of premium paid towards all life insurance plans should not exceed Rs 1, 50, 000.
• Do not invest in an insurance plan just to save tax. Pick the plan after checking your requirement. That means, whether it is a child plan or pension plan or any other plan, pick the one or more wisely that is going to serve your long term goals optimally.
• Do not invest in haste as insurance plans have lock-in period too. Though you might be interested in only saving tax initially but later on, if you find that the investment option is not the suitable and you want to opt-out, it will reverse your tax-benefits.
A plan that assists you to save tax or minimize its amount and alongside provides you investment benefits can be called as a tax-saving plan.
Tax-planning is an important part of the financial planning. You need to analyze every aspect of your income and expenditure and take steps to save as much as possible. The same thing applies to paying and saving tax as well. If you want to save tax, you need to do it legally and in a systematic manner. Tax-saving plans give you an option to plan your finances in such a way that you invest your funds and alongside you save the same amount of fund from paying as tax.
If you invest or put your funds in insurance related schemes, you can save up to Rs 1, 50, 000 every year. Section 80C allows you save the amount paid as premium paid towards life insurance policies provided the annual premium is less than 10% of sum insured. Similarly, premium paid towards pension plan, child plan and term plan are also exempted from tax under the same section.
Section 80D allows you to save tax up to the limit of Rs 25,000 if you pay the premium for health insurance. In case the premium is paid for the health insurance policy of senior citizen, tax can be saved up to Rs 30,000.
Each tax-saving plan has its own advantages and disadvantages. You should first look at your own requirements. Your requirement helps you to choose the best tax-saving plan in your individual case. In case, if a plan suits your requirements, it will be advantageous to you to buy that plan. Also, which plan gives you maximum number of benefits and lesser number of disadvantages, is also a good way to choose an apt plan.
Therefore, be determined with your financial needs and plan to invest in tax-saving schemes accordingly. Never invest just to save tax. You may have to repent later on in case you realize that the investment made was not appropriate. Since there is lock-in period in insurance plans also, you cannot withdraw your money just because you realized it was not the right investment decision.
Even in case you opt out, after your lock-in period is over, your tax-benefits may get reversed. While investing in life insurance, ensure that you pick the right sum insured amount. The add-ons bought are adding value to your plan and are not just frills. While choosing the term plan pick the right term that is, till the time you get retired. While buying child plans, choose the investment term as per your child’s life’s major milestones. Pension plans must be bought with inflation rate in the view. This helps you to choose the realistic amount that is to be received as annuity.
While buying health insurance, you should have an idea about your family’s medical needs. Choose the health plans with recharge options. Go for family floater plans and a separate plan for senior citizens.
Your intention is of course to save tax as much as possible however this criterion should not over-rule your decision to buy the right.