Buy the right products for Tax Planning

The Union Budget, in July 2014, increased the Income Tax section 80C limit from Rs1 lakh to Rs1.5 lakhs and home loan interest limit under section 24 from Rs1.5 lakhs to Rs 2 lakhs for the year 2014-15.In the meantime distributors have been aggressively approaching to sell their products for availing the increased limits under 80C.

Firstly, before you start rushing to buy any products for the increased limit, we suggest you to do some numbers crunching on the following;

  1. Estimate your annual contribution to EPF/PPF/Voluntary PF if any
  2. If you have a home loan, estimate the breakup of repayment towards principal and interest separately. You can approach your Bank for this breakup.

If both your EPF/PF contribution and repayment towards principal exceeds Rs1.5 lakhs, do not worry about Tax saving. If it is less than Rs1.5 lakhs,then you may go for other tax saving.

Secondly, calculate the total amount of annual premiums for your  life insurance polices and if it is more than the gap estimated above, then do not go for  tax saving  products.

Thirdly, if there is a gap, you may go for either conservative instruments or aggressive instruments. If you do not want to take risk, then you may go for instruments like PPF(Maximum Rs1.5 lakhs) or NSC. If you desire to take risk and aim to get higher return, you may take  the equity route and invest through  ELSS(Mutual Fund)/ULIP(Insurance).

 ELSS is preferred over ULIP for transparency and cost structure. ULIP has an insurance component, the cost of which is built in to the product. It is always advisable not to mix up investment with insurance. The Financial Planners advocate to separate insurance from investments and to take Term insurance for life Insurance cover.

ELSS has a three years lock in where as ULIP has five years lock in. But both ELSS and ULIP are expected to provide good return in the coming days.The redemption proceeds after the lock in period will be tax free.

Fourthly, the home loan interest component has also been increase to Rs 2 lakh. You may approach the Bank to reduce your loan repayment tenure provided you have surplus and can afford the increased EMI. If the loan is in the joint name of the spouse, the benefit is accordingly increased to  Rs 4 lakh per year.

Fifthly, you can avail Rs15,000/- under section 80D for health insurance premium for self and family and an additional Rs 20,000/- for parents who are senior citizens.The amount of Rs15,000/- can include Rs5,000/- towards annual health check ups.

Sixthly, Do not forget the basic principles in investment

-       Know your risk appetite

-       Decide your financial goal

-       Estimate the tenure of the goal

-       Decide on your asset allocation

-       Monitor the portfolio

-       Undertake periodic rebalancing

Finally if you can not do it yourself, it is advisable to take the guidance from a Fee only Certified Financial Planner or SEBI Registered Investment Adviser.

Last modified on Wednesday, 10 February 2016 06:44

Prakash Praharaj

Shri Prakash Praharaj has a passion for excellence. He has been awarded two gold medals for securing top positions both in Graduation and Post Graduation in Commerce. He is an MBA with specialization in Finance and marketing. He has been awarded Diploma in Treasury, Investment and Risk Management besides CAIIB from the Indian Institute of Bankers. He is a Certified Financial PlannerCM from the Financial Planning standards Board, India (FPSB), affiliated to FPSB, Denver, USA and Certified Personal Financial Adviser from NISM. He is also a SEBI registered Investment Adviser vide Reg. no. INA 000000045 dated 2nd August 2013.His book "Your Every day guide to Personal Finance and Insurance" has been published by CNBC TV 18 in August 2015.

4 comments

  • Sujata Aniruddha Sapkal

    posted by Sujata Aniruddha Sapkal

    Saturday, 04 July 2015 06:08

    investment for tax saving should serve the purpose of your financial goal,you should not compromise on your financial goals while buying tax saving products.

    Report
  • insurancewhisper

    posted by insurancewhisper

    Saturday, 23 May 2015 04:37

    I appreciate you sharing this blog article.Thanks Again. Really Great.

    Report
  • meera

    posted by meera

    Friday, 02 January 2015 07:31

    Very very informative.

    Report
  • puja

    posted by puja

    Friday, 02 January 2015 07:30

    One should know all this things. Good Article.

    Report

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