We are in the fourth quarter of the financial year 2020-21. It is that time of the year when most Indians, especially those with salary income, spend time on tax planning. People look for financial instruments that can help them save income tax and also create some long-term financial assets in return. The latter is the best part of tax-planning. So here are some ways to save your tax outgo in the current fiscal and also create a corpus for your old age or meet any other long-term financial goals.
1. Employee Provident Fund (EPF). The annual contribution to the employee provident fund (EPF) is completely tax-free free under Section 80C. You can save a maximum of Rs 1.5 lakh per annum by investing in provident fund account. With an annual interest rate of 8.5 percent, EPF is the best way to save tax and create a corpus for your retirement or child’s education in the current macroeconomic environment.
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Other tax savings instruments under Section 80C including insurance policies or mutual funds are only the second best to EPF.
There is no income tax on EPF withdrawal after 5 years, making it one of the most tax-efficient means to save and invest for the long-term.
2. Public Provident Fund (PPF). If you are self-employed or work in the gig economy with no social security, then open a Public Provident Fund account with one of the top public sector banks. The State Bank of India is the preferred destination for opening a PPF account. A PPF account can also be opened in post offices. Similar to an EPF, PPF is a saving-cum-retirement instrument that aims to provide financial security to people in their old age.
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Just like EPF you can save tax up to a maximum of Rs 1.5 lakh per annum through PPF. But keep in mind that investment in PPF has a lock-in of 15-years but you can avail a bank loan against your PPF investment from 3rd year onwards.
Another good point about PPF is that the maturity amount is completely tax free that makes it a highly tax efficient means to save and invest for the long-term.
3. Buy a life-insurance plan. If you have not secured your life and your earnings by buying a suitable life insurance policy then this is the right time to buy one. Start with buying a plain vanilla Term Insurance Plan from one of the reputed life insurance companies. It can even be bought online. Term insurance plans provide the highest level of risk cover or mortality benefit for any given premium.
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For example, if your annual take home pay is Rs 10 lakh then you should buy a term plan with a minimum sum assured of Rs 1 crore. But if your budget permits you can stretch the sum assured to Rs 1.5 crore.
If you have already covered the risk with Term Insurance then you can consider buying Endowment Plans or Whole Life Insurance Plans that provide the option to earn an old-age pension for up to 100 years of age.
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Most life insurance companies also offer a single premium plan where you can pay a lump-sum premium amount, say Rs 1 lakh or more, and get regular pension or annuity either from the second year onwards or after an interval that suits you, say 10 years. These plans are also tax-efficient vehicles to save for your children’s higher education or marriage.
If you want even higher returns from your investments, then consider buying a Unit-Linked Insurance Plan (ULIP). As the name suggests ULIPs invest in high-risk and high-return assets such as equity and bonds. This offers the opportunity to get double-digit returns over the long-term nearly double the returns from traditional endowment and whole-life plans. But invest in ULIPs only if you can afford to lock-in your money for a minimum of 10-years.
4. Buy a medical insurance cover for your family. Consider buying a medical insurance cover for your family if you haven’t bought one or if you feel that the medical insurance cover provided by your employer is inadequate. The health insurance premium is tax deductible under Section 80D.
You can claim a deduction up to Rs 25,000 for the insurance of self, spouse, and dependent children. An additional deduction of upto Rs 25,000 is available if your parents are less than 60 years of age or Rs 50,000 if your parents are senior citizens.
5. Invest in Equity Linked Savings Schemes (ELSS) Mutual Funds. If you are done with buying life insurance and medical insurance then consider investing in ELSS mutual funds. Unlike regular equity mutual funds ELSS have a lock-in period of three years and have a longer investment horizon than traditional diversified equity schemes.
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The investment in ELSS schemes is tax deductible under section 80C just like life insurance and PPF investments. ELSS schemes are good for people who like to take some risk with their savings and earn higher returns than fixed income such as tax-free bank FDs or tax-free post office deposits.
6. Join the National Pension Scheme (NPS). The NPS is tailor made for those of you who have exhausted the Rs 1.5 lakh limit of annual tax saving under section 80C that covers investment in provident fund, insurance, ELSS and principal repayment of housing loan. The investment under NPS provides additional tax savings of Rs 50,000 per annum under Section 80 CCD.
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For simplicity NPS is a market-linked retirement scheme that invests in both equity and debt markets. NPS fund managers follow a life-cycle approach, which means that younger investors have greater exposure to equity and as you grow older, equity exposure decreases and debt exposure increases.
After 60 years of age, you can withdraw a maximum of 60 percent of your corpus while the balance 40 percent must be used to purchase an annuity scheme from insurance companies. For simplicity annuities are like pension plans that provide you monthly income till you are alive.
Happy Tax planning and investing.
(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist).
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