Tax planning is an essential part of your financial planning. Efficient tax planning reduces your tax liability to the minimum.
This is done by legitimately taking advantage of all tax exemptions, deductions rebates, and allowances while ensuring that investments are in line with the long term goals.
Life Insurance Policies (LIC)
The tax exemption available for insurance and pension policies are described below:
- Under Sec.80C of the Income Tax Act
Premiums paid up to maximum of Rs. 1,50,000/-, subject to maximum of 20% of sum assured, to effect or keep in force an insurance on the life of the individual, the spouse, and any child of the individual
- Maturity Benefits are exempted Under Sec.10(10D) of the Income Tax Act.
- Under Sec.80CCC of the Income Tax Act
Premiums paid up to maximum of Rs. 1,50,000/- to effect or keep in force a contract of annuity plan for receiving pension
- Under Sec.80 D of the Income Tax Act
Premiums paid (other than through cash) towards critical illness rider, subject to a total maximum of Rs. 25,000/- (an additional Rs. 30,000 for senior citizens) to effect or keep in force an insurance on the health of the individual, spouse, and dependent parents or children
Unit Linked Insurance Plan (ULIP)
Tax benefits under Section 80C and Section 10 (10D) is available for ULIPs. They are the same as those for regular life insurance plans.
Equity Linked Savings Scheme (ELSS)
- The investment is eligible for tax deduction under Section 80 (C) of the Income Tax Act.
- Investments up to a maximum of one lakh are eligible for tax deduction in the year of investment.
- The income derived by way of dividends is absolutely tax free in the hands of the investor.
- The ELSS scheme comes with a compulsory lock-in period of three years from the day of investment. This gives an opportunity for long term investment.
- Capital gains are tax free at the time of redemption under the current IT rules.
54EC Bonds: Get Paid To Save Tax
One of the ways of saving tax on long-term capital gains is by investing in the bonds issued by NHAI or REC. This deduction is under Section 54EC of the Income Tax Act. The maximum limit for such investment in any financial year is Rs 50 lakh. Since the main function of these bonds is tax saving, the interest rate on offer is a modest 6% per annum.
NPS (National Pension System)
NPS (National Pension System) is a defined contribution based Pension Scheme launched by Government of India with the following objectives
- To provide old age income
- Reasonable market based returns over long run
- Extending old age security coverage to all citizens
It is based on a unique Permanent Retirement Account Number (PRAN) which is allotted to each Subscriber upon joining NPS.
The additional tax benefit of 50000 is over and above the benefit of 1.5 Lakhs which can be claimed as a deduction under Section 80CCE. Therefore, the total tax benefits that can be claimed for NPS under Section 80CCD(1) + Section 80CCD(1B) equals to 2 Lakhs for this financial year.