Tax-Saving Investment Options for Beginners

By | May 17, 2016

canstockphoto12216357Tax-saving investments are an essential part of every effective financial plan. A smart tax-saving plan can offer dual benefits to an individual by helping him meet his financial goals and save loads of taxes while doing the same. The best tax-saving investment is the one that allows tax benefits without having to compromise on the investment benefits.

Given below are some of the investment plans that offers tax benefits and can help you save substantial amount of taxes:

Life insurance

Life insurance plans are amongst the best investment plans that offer both, protection and tax benefits to a policyholder. Life insurance being a protection plan is a must have in an individual’s financial portfolio. At the same time, life insurance policies, from traditional endowment plans to ULIPS, are the best tax-saving investments. Life insurance premiums up to Rs. 1.5 Lacs a year can be claimed as a deduction from the taxable income under Section 80C of the Income Tax Act.

The 4 kinds of life insurance plans are as as follows:

  • Term plans
  • ULIPs or unit-linked plans
  • Endowment plans
  • Money back plans

Each of these life insurance plans offers equal tax benefits to the policyholder.

Pension plans

Pension Plan is also a kind of life insurance plan and thus a great tax-saving investment. Along with offering tax benefits, this investment plan ensures financial security of the policyholder and his family during the golden years of his life.

The total amount contributed towards the premiums of a pension plan (not exceeding Rs. 1.5 Lacs per annum) are eligible for a deduction from the taxable income under the Section 80CCC of Income Tax Act, 1961.

Also, 1/3rd of the maturity proceeds from a pension plan are exempt from tax, while the remainder is applicable to a marginal tax rate. However, in case of beneficiary’s demise before maturity, the entire maturity sum is free of tax.

Health insurance

A health insurance policy is amongst the most essential tax-saving investments to be included in the financial portfolio. Considering the skyrocketing medical costs, it is imperative to be covered against medical costs arising out of an accident or hospitalization. As per Section 80D of the Income Tax Act, health insurance premiums up to Rs. 15,000 are available as a deduction from the taxable income. The amount of this deduction for senior citizens has been fixed at Rs. 20,000. Therefore, an individual can claim up to Rs. 35,000 as a deduction against health insurance premium. However, this should not include more than Rs. 15,000 for self and spouse and Rs. 20,000 for senior citizen parents. The entire sum received under a critical illness plan is tax-exempt.

New Pension Scheme

The New Pension Scheme, common known as NPS have recently emerged as a popular tax-saving investment due to its excellent tax benefits. NPS is basically an investment plan managed by PFRDA (Pension Funds Regulatory and Development Authority). Any Indian citizen between the ages of 18 to 60 years can participate in the New Pension Scheme. The fund-management charges associated with this investment plan are considerably low.  Under the NPS there are allocated fund managers who manage the funds through 3 different accounts with diverse asset profiles, namely, Equity, Government securities, and corporate bonds. Investors can choose to manage their portfolio actively (active choice) or passively (auto choice).

The amount invested towards the NPS can be claimed as a deduction from the taxable income under the Section 80CCD of Income Tax Act, 1961. The maximum deduction allowable under the section is Rs. 50,000. However, this limit is over and above the limit of Rs. 1.5 stated under section 80C and 80CC of the act.