We are a month away from the beginning of the new financial year 2018-19. People spend the last few months of each financial year deciding on investments to lower their tax incidence. The necessary investments have to be made before March 31 of each year. Till date, most people have preferred to put their money in Public Provident Fund (PPF), equity-linked saving schemes (ELSS) and tax-saving fixed deposits (FDs) to seek relief from tax payments. However, the guidelines announced in the Union Budget 2018 have changed the way one must invest, be it to earn returns or save on tax. The re-introduction of long-term capital gains (LTCG) tax on earnings from equity-oriented mutual fund schemes sans the indexation benefit has now forced people to relook at the utility of making systematic investments in ELSS.
Though deposits in PPF and the returns earned from them are also tax free, the moderate returns being equivalent to government security rates may not be enough. Investments in tax-saving fixed deposits though qualify under Section 80C of the Income Tax Act, the interests or income earned on them are exempt from tax only up to the limit allowed under the country’s tax bracket.
Saving taxes the smart way
Based on your requirements and inclination to gain exemption from tax, you may consider making the following investments that would not only help fulfil your financial goals, but also help save on tax.
# Buying a term plan: Though a term life insurance plan cannot be classified as an investment option, yet it can protect your family against liability which may occur during your absence and lets you focus on your investment without much of a worry. In case of the insured person’s death during the term period, the insurance company hands over the sum assured to the beneficiary nominee and helps his/her family meet their financial distress. These benefits go a long way in providing financial security to the family of the deceased and are exempt from tax. The premium paid on a term plan is also exempt from tax under Section 80C of the Income Tax Act.
# Unit Linked Insurance Plans (ULIPs): The EEE (exempt- exempt- exempt) available on ULIPs ensures that ULIP customers benefit from the triple tax exemptions available during investments, earnings and withdrawal. Investments in ULIPs are eligible for deduction under Section 80C of the Income Tax Act. The withdrawal of income earned is again exempt from taxation under Section 10(10D) of the Income Tax Act. With the introduction of the Long Term Capital Gain tax (LTCG) on mutual funds, the ULIP form of investment is being considered as a very attractive form of investment over the mutual fund. This benefit also surpasses the advantages one earns from the commonly held fixed deposits (FDs) that are subject to tax deducted at source (TDS) if earnings exceed Rs 50,000 and the higher return that is expected from investing in the market over a period of time.
# Buying health insurance for yourself or your dependents: Some people tend to rely only on the health insurance provided by their employers. There is an ardent need to have one’s own health insurance cover. As per the provisions of Section 80D of the Income Tax Act, one can avail a deduction of Rs. 25,000 on premiums paid to buy a health policy. If your parents are aged above 60 years, then a health insurance bought for them can give you bigger relief as the Union Budget 2018 has increased the tax rebate for senior citizens from Rs 30,000 to Rs 50, 000 under Section 80D of the Income Tax Act)
With income, comes the responsibility to pay tax. But careful reading of the income tax proposals can help save considerable tax legitimately as per government laws and a smart investment can give a good returns. As explained above, both these benefits can now be availed by investing in insurance products, particularly ULIPs.
(By Jerry Bhutia, Director, Policybazaar.com)