Buy the right products for Tax Planning

The JFM (January, February & March) tax season fever has set in. The Insurance Agents and Banks relationship managers have become super active to push insurance products for tax saving for Rs1.50 lakh limit under section 80 C of the Income Tax Act. One needs to take an advice from a Financial Doctor before buying it from a medicine shop.

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

  1. Estimate your annual contribution to EPF/PPF/Voluntary PF if any
  2. Take note of your Term Insurance premium/Online Term Insurance premium, if any.
  3. If you have a home loan, get a certificate from the Bank on the breakup of repayment towards principal and interest separately.

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

Secondly, If there is a gap, you may go for either  instruments suitable for low risk taker or instruments suitable for high risk taker. 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. 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.

Thirdly, NPS has some issues. The scheme does not provide any pension as such but on maturity, one has to buy annuity from a Life Insurance Company from 40% of the proceeds of NPS. This annuity is gain taxable. The remaining 60% of the corpus of NPS will be subjected to income tax .In short this is EET where as EPF & PPF are EEE. The additional NPS of Rs50,000/- can give a max tax saving of RS15,000/- per year (30% tax slab) per year; but the future tax burden is much more.

Fourthly, If the home loan is in the joint name then the interest benefit of Rs2 lakhs is available for all the owners separately. In case the house is rented, then there is no limit on the amount of interest component and the full amount is allowed as deduction.

Fifthly, You can avail Rs25,000/- under section 80D for health insurance premium for self and family and additional Rs 30,000/- for parents who are senior citizens. The amount of Rs25,000/- can include Rs5,000/- towards annual health checkups.

Sixthly, Do not forget the basic principles in investment

-       Know your risk appetite (Conservative/Moderate/Aggressive)

-       Decide your financial goal (Children’s education/Buying a house/Retirement)

-       Estimate the tenure of the goal (5 yrs/10 yrs/15 yrs/20 yrs)

-       Decide on your asset allocation (Real estate/Equity/Debt)/Gold)

-       Monitor the portfolio (Performance of MF schemes on risk and return parameters)

-       Undertake periodic rebalancing (Restore the Debt equity ratio at least once a year)

Finally if you cannot do it yourself, it is advisable to take the guidance from a Fee only Certified Financial Planner or SEBI Registered Investment Adviser who are Financial Doctors and can guide you in buying need based products.

Last modified on Wednesday, 02 March 2016 06:20

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 Planner 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.


  • niraj

    posted by niraj

    Wednesday, 17 February 2016 04:59

    very correct

  • subhra

    posted by subhra

    Wednesday, 17 February 2016 04:57

    very financial yr ending coming soon..

  • arjun

    posted by arjun

    Wednesday, 17 February 2016 04:54

    Please continue to post good articles

  • ravi

    posted by ravi

    Wednesday, 17 February 2016 04:52

    true n helpful points..tnx to share

  • Shubham Pandey

    posted by Shubham Pandey

    Tuesday, 16 February 2016 09:25

    Great one Sir!


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