The goal of tax planning is to arrange your financial affairs in a manner that it minimizes the impact of taxes. This should also play a major role in the financial planning and investment decisions to meet the long term financial needs of an individual. In a country like India where we do not have a social security, it is also important to secure the future of the family as a part of financial planning. With intent to promote savings the government provides various tax benefit schemes on different financial planning tools. It is extremely important for an individual to understand these benefits and align their long term financial needs in a manner which maximizes the tax benefits.
How to plan for tax savings.
Tax planning needs to be “planned” and have to be done with extreme care, after a detailed research and understanding of the options on offer. However, most taxpayers tend to defer this decision to March and then rush into putting their money into anything and everything with the sole objective of saving tax for the year. As a result, the returns are likely to be not commensurate to the amount invested and might not serve financial planning needs.It is therefore of utmost importance that one must do his planning in a timely manner with focus on products that can result in good returns as well as help in saving tax . Also, the product must be chosen based on their long term merits and in such a manner that multiple life goals can be fulfilled.
Tax planning opportunities-
Pension / Retirement Plans.
Most insurance companies offer pension plans which provide option to save when you are earning and thereafter receive pension/ annuity based on your future needs. One can avail benefit of up to Rs. 1.5 lakh on the premium paid towards a pension plan under Section 80CCC. On maturity, one-third of the maturity amount withdrawn is tax-free. Based on risk appetite, one can decide either for a unit-linked or a traditional plan and opt for pension after a defined time frame.
One of the most efficient tax planning tools is life insurance which provide financial security and good returns as well as offer tax saving benefits. There are a variety of products available and one can opt for them based on individual’s needs.
Under Section 80C a deduction from taxable income in respect of life insurance premium paid is available up to a maximum of Rs. 1.5 lakh annually limited to 10% of sum assured. The deduction is available for life insurance policies, on the life of individual, his/her spouse or his/her children, while the children may be major or minor or even married or unmarried.
Further, amount received from an insurance company by the nominee in the event of an unfortunate event of death of the insured individual is exempt from income tax under Section 10(10D). Also, amount received from insurance company in case of maturity, money back etc will also be exempt from tax under Section 10(10D) if the premium in respect of such policies does not exceed 10% of the sum assured in any year.
With the rising cost of medical treatment, this option is a must to cover self and family from hospitalization and medical expenses. One can also claim deduction up to Rs. 25,000/- for covering health of self, spouse and dependent children and up to Rs 25,000/- for covering health of parents (up to Rs 30,000/- in case of senior citizen) under Section 80D in respect of health insurance premium.
There are other investment options available to avail the benefit of income tax deduction. Some of the investment options available under the popular Section 80C of the Income Tax Act are contribution to Public Provident Fund (PPF), post office savings schemes, contribution to your Employee Provident Fund, investments in tax saving mutual funds etc. In addition, investment in house property by availing a loan has dual tax benefit. In addition to the deduction under Section 80C of Income Tax Act towards principal repayment, deduction of interest on such loan from income from house property is also available.
One can invest in combination of products so as to meet different need, namely, tax saving, family protection, housing, optimum return, retirement planning and future cash flow at appropriate time. Most banks in India currently market these products and one can approach them to get the best suited products.
As mentioned earlier, a correct and timely tax planning helps not only to save tax in the immediate future but to optimise returns and provide financial protection to your family against any unfortunate event with you in future. Therefore, instead of waiting till the last month of the year one should start discussing, researching and investing in tax-saving avenues throughout the year. Hence, plan and invest now.