Part I: Time to start your tax planning
Part II: What falls under Section 80C?
Part III: Where to invest to save tax
In Where to invest to save tax, we spoke about the Public Provident Fund and Equity Linked Saving Schemes being good investment options.
Over here, we discuss home loans and insurance, both of which have tax implications.
Do you have any dependents?
In your twenties, the best insurance to opt for is term insurance. It is the purest and simplest form of life insurance.
You pay the company a premium for a certain number of years. Should you die during this time, the beneficiary (person you name in the policy) gets the money.
Should you live, you lose the premiums paid and you get no money at all.
Let's say you are 25 years old and you take a term insurance policy for 20 years. The amount you get insured for is Rs 10 lakh (Rs 1 million).
If you outlive your policy, you get nothing.
If you do not outlive your policy, the person you nominate will get Rs 10 lakh.
In the first scenario, you pay; you get nothing; your beneficiary gets nothing.
In the second scenario, you pay; you get nothing; your beneficiary does.
Either way, you personally do not benefit.
That's the bad part about term insurance.
The good part about term insurance is that it is the cheapest life insurance available, so you pay the least amount of premiums. For the above policy, you should pay just around Rs 1,988 per annum. This is just an average, you could be paying more since each insurance company will set their own premiums.
If you have absolutely no dependent family (parents, spouse, children), then there is no need to opt for this policy. But, if you do, term insurance is a must. No other policy will offer you as much value for money as this one.
The premium you pay for this policy will be available for deduction under Section 80C.
Play safe, insure your health
A Mediclaim policy is a must because should you fall sick or meet with an accident, your medical bills could wipe out your savings.
As in term insurance, the premium rates will vary among the insurers and will also depend on your age. The older you are, the more hefty the premium.
For instance, Mediclaim policy from General Insurance Corporation has a fixed premium till 35 years and then it changes in 10-year slabs.
Let's say you take a Rs 1,00,000 medical insurance cover.
|
Age (years) |
Annual Premium (Rs) |
|
Till 35 |
1310 |
|
36 45 |
1425 |
|
46 55 |
2039 |
|
56 65 |
2322 |
|
66 70 |
2589 |
|
71 75 |
2784 |
|
76 80 |
3445 |
The premium you pay for your Mediclaim is eligible for tax benefits under Section 80D of the Income Tax Act, 1961. This is in addition to the Section 80C benefit of Rs 1,00,000.
This premium is deducted from your gross income. Let's say your gross annual income is Rs 5,00,000 and you pay a premium of Rs 5,000. Your gross will drop down to Rs 4,95,000 for tax calculations.
Even if you do have a medical cover provided by your employer, it makes sense to take out a cover for yourself. Read Why office Mediclaim is not sufficient to understand this better.
Have you thought of buying a home?
It is something you will have to eventually consider. And, you get great tax benefits on a home loan.
When you repay a home loan, you do so via an Equated Monthly Installment. This EMI is a combination of interest payment and principal repayment. Read What you must know before taking a loan to understand how EMIs work.
Principal payments upto Rs 1,00,000 on your home loan are eligible for deduction under Section 80C.
The interest you pay also gets a tax benefit. Under Section 24, the maximum amount of interest that can be deducted from your income is Rs 1,50,000. As a result, your taxable income decreases by that amount.
Let's say your salary income is Rs 3,50,000 and the interest payment on your home loan is Rs 1,60,000. Your taxable income will drop to Rs 2,00,000.
Taxable income = Rs 3,50,000 - Rs 1,50,000 (maximum limit for interest on home loan) = Rs 2,00,000
Summing it all up
Let's take an example to see how the tax is deducted.
Salary income: Rs 3,20,000
Home loan interest payment: Rs 1,20,000
Home loan principal repayment: Rs 80,000
ELSS investment: Rs 30,000
PPF: Rs 5,000
PF: Rs 32,000
Premium on Mediclaim policy: Rs 5,000
|
Salary (a) |
320,000 |
|
Income from house property (b)* |
-120,000 |
|
Gross total income (c) (c = a + b) |
200,000 |
|
|
|
|
Less: Section 80 deductions |
|
|
|
|
|
Section 80C deductions |
|
|
Home loan principal repayment |
80,000 |
|
ELSS investment |
30,000 |
|
PPF |
5,000 |
|
PF |
32,000 |
|
Sub Total |
1,47,000 |
|
|
|
|
Limit for Section 80C deduction (d) |
1,00,000 |
|
|
|
|
Section 80D deduction (Mediclaim Premium) (e) |
5,000 |
|
|
|
|
Taxable income (c - d - e) |
95,000 |
|
Tax on taxable income |
Nil |
* The tax man views the home loan interest payment as negative income.
When doing your tax planning, look at it comprehensively. Take a look at your insurance needs, your investment needs and whether or not you are servicing a home loan.
If you do not have a home loan, you will have to increase your investment allocation. If you do have a home loan, then you can accordingly decide how much to invest in PPF and ELSS.
Try your best not to compromise on your insurance. Once you decide how much to insure yourself for, stick with it. Don't let your tax outgo determine that.
Part I: Time to start your tax planning
Part II: What falls under Section 80C?
Part III: Where to invest to save tax
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