The tax season is here and it’s all about searching and investing in tax saving products for lowering your tax liability. After all, with the various tax saving avenues available, why shouldn’t you reduce your tax liability and save your hard-earned income?
When it comes to tax saving avenues, there are a handful of investments which are mass favourites. These include the following –
- 5-year fixed deposits
Section 80C of the Income Tax Act allows investments in 5-year fixed deposits to be tax-free investments. You can invest up to INR 1.5 lakhs in such fixed deposits and claim a deduction for the investment from your taxable income. Fixed deposits give guaranteed returns and are suitable for those looking to invest their savings in risk-free avenues.
- ELSS schemes
Equity Linked Saving Schemes (ELSS) is yet another favourite among investors looking to capitalise on capital market returns. These schemes are mutual fund schemes which invest your money in a portfolio of diverse securities. You can invest in a lump sum or in affordable monthly instalments and get attractive returns from equity exposure. There is a lock-in period of three years after which the fund can be redeemed. Investment in ELSS schemes is tax-free under Section 80C. In case of returns, however, if your aggregate returns from equity exceed INR 1 lakh in a year, the excess is taxed @ 10%.
- Public Provident Fund
Public Provident Fund (PPF) is another tax-saving investment scheme which enjoys tax benefits under Section 80C. Moreover, the returns are also tax-free in your hands making the investment fully tax exempt. PPF scheme also promises a fixed return and is suitable for risk-averse investors.
While these three investment avenues are popular tax saving choices, what most of you overlook is insurance. Life insurance and health insurance policies are very important in the coverage that they provide. Moreover, they also have a tax-saving element to them to help you in reducing your tax liability. In fact, both life and health insurance score over these avenues in terms of tax saving and other benefits. Let’s understand how –
Life insurance vis-à-vis popular tax saving products
- Section 80C also allows life insurance premiums to be tax-free in nature just like investments in 5-year FDs and ELSS schemes. The premium paid for any life insurance policy you buy would be allowed as a deduction up to INR 1.5 lakhs. Besides this tax advantage, life insurance proceeds also enjoy tax exemption. The maturity or death benefit paid under life insurance plans are completely tax-free under Section 10 (10D) of the Income Tax Act. Thus, where fixed deposits and ELSS schemes offer tax-saving only on the investment, life insurance offers tax saving on the returns too.
- Secondly, FDs don’t offer inflation-adjusted returns which is why ELSS schemes are more relevant. However, unit-linked insurance plans operate on the principles of ELSS schemes. They also invest in the market and offer inflation-adjusted market linked returns. Moreover, there is an inbuilt insurance coverage too.
- Even in the case of PPFs, though the tax angle is the same, ULIPs offer better returns which are market-linked.
- Lastly, you cannot ignore the coverage provided by term life insurance plans. At very low premiums these plans offer financial security for your family if you are not around. Even in your absence, your family gets a financial corpus to deal with their lifestyle expenses and other financial liabilities through a term insurance plan.
Comparative analysis of life insurance with other avenues
|Parameters||5-year FDs||ELSS||Life insurance||PPF|
|Tax benefit on investments||Yes||Yes||Yes||Yes|
|Tax benefit on returns||No||Only if returns are below INR 1 lakh||Yes||Yes|
Health insurance vis-à-vis popular tax saving products
Health insurance has its independent relevance which cannot be compared with other tax-saving avenues. Health insurance plans are not means of investments but means of availing financial security. Health insurance gives you the security that the expensive medical costs which are incurred in a medical contingency would not wipe out your savings or cause financial distress. These plans cover the medical expenses and spare you the financial trauma. Thus, a health insurance plan is a must. Moreover, when it comes to saving tax, health plans also allow you a tax deduction under Section 80D. The premiums paid for a health insurance plan qualifies as a deduction from your taxable income up to a limit of INR 25,000. Moreover, if you buy a separate plan for your dependent senior citizen parents, you can claim an additional deduction of up to INR 50,000. So, health plans not only offer you a quintessential coverage, but they also allow you to save tax.
So, this tax season, don’t run only behind the popular tax-saving avenues for lowering your tax outgo. Consider life and health insurance plans too for their innate coverage benefits and also for saving tax.