Do not buy life insurance for tax savings only

Tax saving or earning tax free income is what we all want to maximize. And any small advice that helps us save tax is welcome. But often in this mad rush to save taxes we end up taking impulsive actions.

One such tax saving instrument is life insurance. Almost everyone invests in one but unfortunately surpassing the prime purpose that of protecting the future of your family. A life insurance policyis solely there to cover all the current expenses of a family incase of death of the breadwinner of the family.

But this life saving instrument is often misinterpreted and treated as a tax saving tool. Life insurance premiums can be claimed as anincome tax deduction at the time of filing your taxes. Moreover, the lump sum received at the end of the maturity period is tax free under Section 10 (10D),provided the premiums paid are up to 10% of the sum assured.

Let’s assume you bought a life insurance policy of Rs 1 lakh 20 years ago. And you have been paying a premium of Rs 5000 every year which earns you an income tax deduction under Section 80C.

At the end of the 20 years you will receive a sum of Rs 220000 that ncludes your coverage and additional bonus and this amount is completely tax free under Section 10 (10D) as the premium paid is not more than 10% of the sum assured.

9 Tax saving investments to save lakhs on your income tax

Income tax is something all of us would like to reduce it to the maximum. And what better than tax saving investments underSection 80C to reduce our taxes to some extent. Choose one of the following tax saving investments before 31st March.

PPF (Public Provident Fund)

It is one of the traditional yet highly preferred retirement planning investments. It is also a great long-term tax saving investment. The maximum amount that is allowed as an investment in the scheme is Rs 1.5 lakh. Interest income on PPF and the amount received on maturity are both tax free.

ELSS (Equity Linked Saving Scheme)

ELSS is a mutual fund that comes within the ambit of tax saving investments. With a lock in period of 3 years, this investment option offers an exemption of maximum Rs 1.5 lakh in a financial year. The interest rate depends on the performance of this scheme in a given year and the maturity amount from the investment is tax free.

FD (Fixed Deposits)

Fixed deposit is another popular tax saving Investment. The interest rate varies from one bank or post office to another. Maximum exemption allowed is Rs 1.5 lakh for a minimum duration of 5 years. The interest earned and the maturity amount are taxable.

NSC (National Saving Certificate)

NSC’s are tax saving investments issued by the Indian Post Office. It has a 5 year lock in period. They offer guaranteed and tax-free returns till maturity, although the interests earned is taxable.

EPF (Employee Provident Fund)

This scheme helps save a maximum of Rs 1.5 lakh. In this fund, up to 12 % of a person’s basic salary gets deducted and the other 12 % is contributed by the employer.The amount at maturity is tax free.

Life Insurance

Life insurance is the most popular tax saving investment under Section 80C of the Income Tax Act. With a maximum deduction of Rs 1.5 lakh is allowed in a given financial year. The amount received at maturity or in the case of death is tax free. Apart from the tax saving benefits life insurance helps one plan for the unforeseen events in his or her life.

ULIP (Unit Linked Insurance Plan)

ULIP is a unique combination of investment and insurance that results in a tax saving of Rs 1.5 lakh per year. The premium paid by you is split between insurance and investment. The corpus received at maturity is exempt from tax.

NPS (National Pension System)

The National Pension System is an additional tax saving investment. It is a long term product with strict penalties on withdrawal. It is primarily to encourage people to save for their retirement. Your contribution in the scheme is deducted from income tax up to a maximum of Rs.50,000. This deduction is over and above the limit of Rs 1.5 lakh of Section 80C.

However, if your employer contributes to your NPS account, it would be tax free without any limit. And this contribution is also exempt from income tax over and above the 80C limit.

Sukanya Samriddhi Yojana

A Sukanya Samriddhi Yojana account can only be opened on a girl child’s name by her parents or legal guardians.The account can be opened anytime from the birth of the girl child till she attains the age of 10 years and it is valid up to 21 years of age. The maximum deduction of up to Rs 1,50,000 can be claimed every year under Section 80C. The maturity proceeds from the scheme is tax-free.

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