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In the tax-saving season, buying an insurance policy is a temptation most investors yield to. There is nothing wrong in
choosing a long-term product which comes with some tax sops. The problem is in simplistic decision making by most
investors when it comes to insurance.
This naiveté is exploited by unscrupulous insurance agents who tend to manipulate the features of the product to
misrepresent it to investors. Here are a few pointers before you buy an insurance policy this season.
First, investors see a huge merit in pre-emptive investments. Most are unable to develop a regular saving habit, though they
know they have to save for their future. Savings happen only when consumption and spending are cut back, which is
practically tough. If an investment product requires making a payment even before the money is available to spend,
investors prefer such products, so they are compelled to save.
The decision to buy an insurance policy is mostly done with this noble intent of building a saving habit, or putting aside some
money compulsorily. It is important not to be carried away about how much can be realistically put aside, regularly and over
a long period. A rule of thumb is to estimate the increase in income from increment and career advancement and direct that
to such compulsory saving.
Alternatively, the premium committed should not be over 5% of the monthly income. If one can save more than that, a low
premium commitment provides the room for other investments. The premium committed should never over-estimate the
ability to save regularly, even under a compulsion.
Second, investors are biased by their immediate need to save tax. They buy an insurance policy that would reduce their
immediate tax liability, without taking into account their ability to sustain the high premium payment in the later years. Most
tax-saving products are designed to encourage long-term savings. They have a lock-in period during which they cannot be
accessed. Insurance policies eligible for tax concessions are also long-term products whose benefits will accrue over time.
Investors need to know their choices if they are unable to pay the premium. Can the policy be made fully paid up (the cover
is re-adjusted for premium paid)? Can missed premiums be paid later? Does the policy lapse if premium is not paid? Can it
be revived later?
Deciding on a premium amount, based purely on tax saved in the current year, and buying a unit-linked insurance policy
(Ulip) with no facility to modify the terms are common errors investors make. Ask your insurance agent specifically about the
consequences of not being able to pay the premium.
Third, investors are unwilling to look at insurance as a risk cover, but as investments. They always choose policies that
return something to them, over pure term policies that only offer a cover. However, they do not check how these returns
might behave over varying holding periods. Good returns may accrue in a Ulip only over long periods
heads: one equity and two debt products! There is your financial consultant but more often than not he might suggest only
those products that will get him the highest commission! Obviously you are confused! How about analyzing the right tax
To begin with ask yourself these two questions: your risk tolerance level and what stage in life you are in. But why should
Finding answer to this question can lead you to the right tax saving plan! Analyzing your risk tolerance level will help you
shape up your investment portfolio and get the best out of it. Now what is risk tolerance? Your investments are prone to both
positive and negative changes. In the risk of negative changes the big thing is to find out how much you can afford to lose on
There are two sides to it: one is financial and the other is emotional. The financial risk tolerance level is self explanatory.
That is the amount of money you can afford to lose. If you can afford to lose more money then you have a high risk
tolerance level and if you cannot afford to lose huge money your financial risk tolerance is moderate and if you do not want
Emotional risk tolerance is all about the stress level that you are put into when you lose money on your investment. The
Investors fall into three categories based on their risk profile: conservative, balanced and aggressive.
As the name implies conservative investors are averse to taking risk. Typically they have a low risk tolerance and prefer
investing in safe havens like Public Provident Fund (PPF), National Savings Certificate (NSC), and Employees Provident
Fund (EPF), Endowment plans when it comes to life insurance and on tax-saving bank fixed deposits.
The balanced investors are those who wouldn't mind taking some amount of risk but still would park their investments in low-
risk products like balanced unit linked insurance plan or ULIPs. In other words, their risk tolerance is moderate.
Those investors with the highest risk tolerance levels belong to the aggressive category. They have an appetite for taking
risk. If you belong to this category you could invest in tax saving products like the equity linked savings scheme or ELSS.
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According to Union Budget 2010-11, a few changes have been made in Income Tax Saving Schemes structure. Here is a
glimpse to new additions in tax saving methods :
Y The relaxation limit under section 80C has been inceased to Rs. 2 lakhs.
Y The presumptive tax limit has also been raised to Rs 60 lacs.
Y Announcement of a deduction of Rs 20000 on investment in infra bonds
In India, the middle class feels the heat of Income Tax more than anyone else. However the intensified tax system poses
great stress on the earner's thinking to manipulate different ways to save tax. Here is a list of certain steps which can help
you save your income and minimize your Income Tax.
Conditions Y The house should not be in your kids, spouses or your own name.
Max Deductions Y The total amount of rent paid or the amount earmarked as House Rent Allowance in
your payslip, whichever is less, will be deducted from your taxable income.
Limitations Y It should not be more than 50 percent of salary for those living in metro cities or 40
percent of salary for others
Y If you are paying more than Rs.5000 per month as house rent, you will have to
submit a lease document
Y Rent receipts should have a revenue stamp.
Y Payments towards tuition fees for children to any school or college or university or
similar institution. (Only for 2 children)
Conditions Y Upper Limit is Rs. 1,00,000 (Rupees One lakh) which can be any combination of the
above list.
Deductions
Limitations Y The investment can be from any source and not necessarily from income
chargeable to tax.
!"
#
Applicable If Y Premium paid on medical insurance for oneself, spouse, parents and children
Conditions Y The house should not be in your kids, spouses or your own name.
$ # %
Applicable If Y All life insurance plans gives you the tax benefit
Max Deductions Y Complete amount invested in life insurance policy is tax free.
Limitations Y Go for plan which is suitable to your life and your financial planning.
Y If you think that you have already invested enough in life insurance plan but want to
invest again then you should go for ULIP plans.
î$
Conditions Y The house should be in your kids, spouses or your own name.
Y Tax deduction on the interest component comes under section 24 and will depend
upon whether home is rented or self occupied.
Limitations Y Over a period of time the principle payment increase and the interest payment
decrease.
[ $
Conditions Y The loan should be in your kids, spouses or your own name.
Y Investment in Debentures or Bonds of an institution/ authority/ public sector company/ cooperative society or other such
organization notified by central government.
Y Investment in under other schemes which are notified by central government like national saving schemes, time deposit
schemes, recurring deposit schemes.
Y Investment in units of UTI and Mutual Funds (under Section 10(23D) of the Income Tax Act)
Y Investment in such authorities which are working for planning & development of cities and village
Upper Limitation No
Max. Deductions Y Under section 88 of the Income Tax Act, 1961 any person can take benefit in
income tax on amount invested in this scheme
Y Under section 80L of Income Tax Act, 1961 there is a provision of benefit on
interests coming from scheme.
Availability of Loans The first loan can be taken in the third financial year from the date of opening of the
account, or upto 25% of t credit he amount at at the end of the first financial year.
Mode of Operation Singly, jointly, or by a minor with his/her parent or guardian (Nomination facility
available)
Max. Deductions Y Under Section 88 of Income Tax Act, 1961 there is a provision of tax benefit by
investing in this scheme
Max. Deductions According to Income Tax Act, 1961 interest on this scheme is tax free.
%) [,
Interest Rate Return at interest rate of 9.5% payable half-yearly on 30th June and 31st December
respectively
Mode of Operation Retired PSU employees in his/her own name or with the spouse, jointly.
Max. Deductions According to Income Tax Act, 1961 interest on this scheme is tax free.
"
According to Income Tax Act,1961 there is a provision benefit in Income Tax if assessee has an income as a dividend on
investment in any of the following:
Y Shares
Y Mutual Funds
Y Unit of UTI
This dividend can be given by any company or co-operative society.
# , Investment in bonds issued by specified Infrastructure companies is also eligible for Section 80C
deductions. Investment in Infrastructure bonds is just one of the various options available for the purpose of Section 80C
deduction.
-" , Term deposits with scheduled bank for minimum tenor of 5 years.
& ", Investment in notified bonds issued by National Bank for Agriculture and Rural Development (NABARD)
is also eligible for Section 80C deduction.
Y Monthly Deposit
Y Saving Deposit
Y Time Deposit
Y Recurring Deposit
what we can do is reduce tax liability. How can an assessee reduce his tax liability? Answer to this question is deductions.
Government of India has provided certain investment avenues through which we can reduce tax liability and 80D is one of
them.
What¶s 80D?
80D is one of the sections which come in the income tax act of 1961. This refers to deduction which an assessee can claim
to reduce his tax liability. Like 80D there are other deductions such as 80C, 80DD, 80E, 80G,80GGB etc. some of these are
in connection with individual assessees (80C, 80D), some with Hindu Undivided Family (80C,80D), some applicable only to
companies (80GGB) and some to all irrespective of whether assessee is an individual or HUF or company (80G).
Claiming deduction to reduce tax liability is neither very easy nor is difficult. All you need to do is go according to the rules
and regulations prescribed. For example you can claim 100 % or 50% deductions on donation made provided the trust or
the fund or institution is recognized by government of India, if the fund is not in the list or in unrecognized then all the
donations that an assessee has made cannot be taken as deduction. Hence it is very important for an assessee to ensure
that he follows every rules and regulations. Most of the deductions have certain Do¶s and Don¶ts.
Assessees¶ who are paying the tax as individuals and those who are paying under the head Hindu Undivided Family (HUF)
can claim this deduction. Companies be it domestic, Indian or foreign cannot avail this deduction.
Amount deductible under this section is 15,000 in case of assessees below age of 65 (to keep in effect the insurance of
assessee or his spouse or children) and 20,000 in case of senior citizens. Previously insurance amount paid on behalf of
parents was not given as deduction, but since financial year 2008- 2009 even if the parents are independent premium paid
can be claimed as deduction. Hence the total amount of deduction an assessee can claim under this category is 30,000.
In case of HUF (Hindu Undivided Family) if an assessee can claim insurance premium paid by him on behalf of family
members.
This insurance premium paid cannot be claimed if an assessee has paid it by cash. It has been clearly stated in the income
tax act that assessee needs to pay the insurance premium through any other means except by cash. Hence payment
taxable income because all that¶s said above is just the half part. The other half part is that the actual amount as insurance
premium paid or 15,000 whichever is lower is deductible. For example an assessee who has paid 3,000 rupees as his
insurance premium, 2500 rupees to keep in effect his wife¶s insurance and 2000 each in case of his two children out of his
= Rs 9500
= Rs 2,15,500
It also holds good when its reverse, which is insurance premium, is more than 15,000 then the deduction will be taken as
15,000 and not the total amount of insurance premium paid. For example an assessee Mr. Z has annual income of 2,00,000
rupees and has paid 6000 rupees as his insurance premium, 5000 as his wife¶s premium and 4,000 for his elder son¶s
= Rs 17,000
In this his taxable income will be Rs 1,85,000 (2,00,000-15,000) and not Rs 1,83,000 (2,00,000-17,000)
For whom«..?
This is useful for assessees who are not insured by their employers. Some companies insure their employees and some do
not believe in that so depending on that an assessee can make judgment. If your employer has already taken care of your
insurance then make sure that you have insured your wife and children.
My answer to all the assessees¶ who have this question is absolutely yes. Not only the premium paid to keep in effect your
or your spouse¶s or children¶s health insurance, but also the premium paid on your relatives in your undivided family.
Provided it is within the upper limit (15,000 for individuals below 65 years and 20,000 in case of senior citizens.
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