Come March and all of us will be busy in calculating our tax
liabilities. In fact, most organisations start asking for proofs of investment
under tax exempted instruments by January itself.
Thus, this is the time when one can review his or her tax
liabilities and take necessary actions. As you may already be aware that this
year the income tax exemption limit towards life insurance has increased from
Rs 1 lakh to Rs 1.50 lakh. It is a significant jump of flat 50 per cent. This
exemption can be claimed under section 80C of the Income Tax Act.
But, are you going to take advantage of this move? Of
course, you should. Unfortunately, there are millions of people who had been
investing in insurance as per the previous limit of Rs 1 lakh. But it is still
not late and you can take a corrective action.
What about pension
funds?
If you are thinking of investing in a long-term pension
fund, then you can claim tax benefit under section 80CCD of the Income Tax Act.
The deduction under this section can be availed up to Rs 1 lakh.
Although, the pension which you receive after the policy
tenure is applicable to income tax. The percentage of tax depends upon the
amount of your gross taxable income.
Section 80 CCE of the Act specifies that the total limit of
deduction under the abovementioned sections – 80C and 80CCD comes to Rs 1.50
lakh.
Deduction under
health insurance
After life insurance, you can further claim income tax
deduction with respect to premium paid towards health insurance. There is a
provision of deduction up to Rs 15,000 towards health insurance.
This is further added up by Rs 20,000 towards health insurance
premium paid for parents above 60 years of age. If parents are below 60 years,
then the tax deduction would be Rs 15,000. Tax payers, who fall in the category
of senior citizens, can also claim the deduction of Rs 20,000.
Are you worried about
low returns?
A large number of people appreciate life insurance plans
because of their dual benefit of risk coverage and tax exemption. But there is
always a concern on the low rate of returns offered by these plans. It is
observed that most plans offer annual returns in the range of 5-8 per cent.
This rate of return is even lower than average rate of
inflation. Thus, investing in insurance is not preferred by people who wish
high return on investment. They may invest some amount to cover risk and get
some exemption but they always aspire to invest in other instruments such as
equities and real estate. Is there a solution?
Well, we cannot say anything about real estate, but yes, you
can always invest in equities and insurance altogether. Unit Linked Insurance
Plan (ULIP) are the potential solution.
These plans are also recognised for Tax
Saving Plans exemption under section 80C and there is an added benefit of
investing in equity markets. You can always the allocation of your premium in
traditional debt instruments and equities to balance risks. For instance, you
can specify that 40 per cent of your premium should be invested in equities and
the rest in government securities. This helps is enhancing the average rate of
returns on you investment.
For instance, you invest Rs 1 lakh in ULIPs, specifying that
Rs 60,000 should be invested in government securities and the rest in equity
markets. Now, in a year if your plan generate 9 per cent on government
securities and 15 per cent from equity markets, your total return will be as:
Rs 5,400 from securities and Rs 6,000 from equities. This will bring you a
return of Rs 11,400 in total – 11.4 per cent returns per annum.
In the long run, you are able to enjoy the power of
compounding. ULIPs have a lock-in period of 3-5 years, and you are somehow
bound to think long term. If you tend to withdraw the premium before this
period, the deductions are as high as 30 per cent.
From these perspectives, all the insurance plans have such
conditions in place. That means, if you withdraw premium amount before a
certain period, which is generally 3-5 years, then the penalties fall in the
range of 30 per cent. Thus, it is better to invest in insurance from a long
term perspectives, and it really works, providing you a sizeable corpus.
