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3 Important Financial Goals You Can Meet with Tax Saving Investments

3 Important Financial Goals You Can Meet with Tax Saving Investments

Unit linked insurance plan

When it’s about investments, we should have at least two clear expectations from them, first they will improve our wealth, and second, they will cause minimum tax liability. Fortunately enough we have several tax saving schemes available in India. However, you need to keep in mind that each tax-saving investment is different and invest accordingly.

Different Features of Tax Saving Investments

Almost all the tax-saving investments we see today are a result of the government trying to promote specific investment behaviours. These behaviours may range from financial safety from unfortunate events to post-retirement life. However, you will commonly find the following features in all tax-saving investments:

  • Lock-in period for withdrawals
  • Investment reduces your tax liability under section 80 of the IT Act

This is what has put every tax-saving scheme in India more suitable for specific goals. Also, the scheme risk profiles and tax-saving status differ. Therefore, you should carefully select these investments based on your financial goals and investment risk appetite.

The Efficiency of Tax Saving Investments

Any investment can offer tax saving at the following three levels:

  • On the invested money, at the time of investment
  • On the accrued or paid interest
  • At maturity

For example, investment in both Public Provident Fund (PPF) and 5-year tax saving deposit will reduce your tax liability in the year of investment under section 80C. However, while any growth in the PPF will remain tax-free, interest accrued on the FD is taxable.

Similarly, the maturity value from PPF is tax-exempt but will be taxable for the 5-year FD.

Investments which offer all three tax saving are the most tax-efficient schemes. Fortunately for the most important financial goals in our life, we have multiple such investment options. These investments are also called EEE investments where ‘E’ stands for exempt, and three Es mean all three transactions as exempt from tax.

benefit of tax saving

Three Important Financial Goals

Although you will have many financial goals in life, few stand out because of their long-term nature and impact on your family’s future. Following three financial goals are common for almost every investor and have a significant impact on life.

  • Retirement
  • Children’s Higher-Education Goals
  • Wealth Building Goal

To meet such long-term goals you need investment options where you can:

  • Invest money regularly for a very long time
  • Invest small amounts
  • Allocate your money according to your risk appetites
  • Increase your investment amount in future
  • Maintain tax-exempt status of investment at maturity

Investment Needs for Retirement Goal - Growth

Financial safety of workers has been the prime concern of authorities in India. Regular efforts in raising awareness and offer attractive retirement investment plans have given us several great retirement schemes. Also, unlike other financial goals, retirement goal has two very distinct phases of investment:

  • Accumulation phase
  • Distribution phase

If you are a 30-year-old investor, you will start to save for your retirement goal which is 30-35 years away from now. Until you reach your retirement goal, your retirement investment will be in the accumulation phase.

Once you retire, you will stop investing in the retirement corpus and start the distribution phase for a pension.

You will need to use two different investment plans for both phases of your retirement goal. While in the first phase you need high-growth tax-efficient investment, in the second you need safety and regular income.

Investment Needs for Child’s Higher-Education Goal - Safety

Goal safety should be your top concern when it comes to your child’s future. Your early demise will affect your children the most unless you can ensure the safety of goal achievement.

You need to invest the money in their goal in such a way that they can receive the intended money at the time of the goal, even when you are not there.

Investment Needs for Wealth Building Goal - Automation

Wealth building goal is where you would want to take additional risk on your investment for faster growth. But more than that, you will need to automate the investment as much as possible. Putting your wealth goal on auto mode is important unless this is your full-time dedication.

For example, invest via account auto-debit option, automatic portfolio management for adjusting the asset allocation according to market.

Most Efficient Investment Option for the Goals

When it comes to tax-efficiency and diversity of investment options, nothing beats ULIP investment plans. Whether you want to invest aggressively towards a prosperous post-retirement or want to secure your child’s education goal, ULIP plan has it all.

Unit Linked Insurance Plans (ULIPs) Features

ULIP plans are one of the most tax-efficient and capable investments. You can customize your ULIP investment to meet all three goals using the following features:

  • EEE Investment: If your annual investment remains below 10% of the sum assured in the plan. Investment up to Rs 1.5 lakhs is exempt under section 80C
  • Multiple Asset Allocation options: Invest in a combination of equity, debt and liquid funds as per your risk appetite
  • Multiple Portfolio Strategies: Make the most of the equity market investments with automatic portfolio management options. ULIP will automatically allocate more funds to equity when markets are not doing well so that your portfolio grows faster when it does.
  • Financial Safety for Family: Life cover in this plan will make sure your family receives financial support in the event of your early demise.
  • Goal Safety: Protect your spouse from inadequate retirement corpus in case of your early demise. The insurer will continue to invest on your behalf until maturity, and your family will receive the maturity value at the intended time.
  • Boost Your Portfolio: ULIPs such as Invest 4G from Canara HSBC Life add bonus units to your portfolio if you are a long-term investor. You can benefit from these boosters if you invest regularly for more than five years in the ULIP. The longer you keep investing the more bonus units you receive in the portfolio.

You can use the feature-rich ULIP plans to conquer any long-term financial goal you have. Also, if you follow the tax rules, maturity value or any partial withdrawals from ULIPs will be completely tax-free.

You can even use a single ULIP investment plan to meet multiple goals. See How to Use a Single ULIP Plan to Meet All Your Life Goals for more details.

Speak to an insurance specialist now!

FAQs Related to Tax Saving

First of all, your gross total income is taken into account and all applicable deductions/exemptions are deducted out of it, the resultant amount is the net income, upon which the Income Tax is calculated, on the basis of income tax slabs that are announced each year in the Union Budget.

How much tax you can save depends on your financial portfolio and profile. The most common avenue for tax-saving is Section 80C, which allows you deductions up to Rs 1.5 lakh in your taxable income. The implication is that you can save up to Rs 46,800*in taxes in a year, depending upon the income tax slab you belong to. Similarly, other avenues like interest on loans, health insurance etc also provide deductions capped at a certain amount.

*Tax saving of Rs.46,800/- is calculated at the highest tax slab of 31.2% (including 4% Cess) for an individual assessee on life insurance premium of Rs.1.5 lakh, who is having taxable income upto Rs.50 lakhs.

You can choose from many investments that are tax-exempt: not an exhaustive list, but includes Equity Linked Saving Scheme (ELSS), Public Provident Fund (PPF), life insurance plans, Unit Linked Insurance Plans (ULIPs), Sukanya Samriddhi Yojana, Senior citizens Savings scheme, National Pension Scheme (NPS), tax-saving bank FDs.

First of all, make investment of Rs 1.5 lakh in investments instruments covered under Sections 80C to reduce your taxable income. Claim deductions for the interests paid on home loan and/or education loan if any. Get a health insurance policy and claim for other medical expenditure like preventive medical healthcare check-up, expenditure on rehabilitation of handicapped dependent relative, among others. Mainly, the idea should be finding out which tax saving avenues fit well with your larger financial goals and invest in them!

The maximum limit of investment that will reap the benefits of deduction from taxable income under Section 80C is Rs 1.5 lakh.

There is no limit to the number of tax-exempt investments one can have in a financial portfolio. However, it is important to note that there is a limit to how useful any instrument can be for the purpose. This is because the amount of deduction that can be claimed for specific instruments is capped at a maximum value. At the same time, keep your financial portfolio balanced so that it also provides safety, returns and liquidity.

First of all, make use of the Rs 1.5 lakh deduction allowed under Section 80C. This can be done by making investments in life insurance premium, Equity Linked Saving Scheme (ELSS), Public Provident Fund (PPF), Unit Linked Insurance Plans (ULIPs), Sukanya Samriddhi Yojana, Senior citizens Savings scheme, National Pension Scheme (NPS), among others.

Second, make use of the deductions available in respect of health insurance and other medical expenses. Under Section 80D of the Income Tax Act, 1961, a deduction of up to Rs 25,000 is allowed in a year in terms of the premium paid towards a health insurance policy of Self and your family i.e., Spouse and children. This can include preventive healthcare check-ups too upto Rs 5000/-. Under section 80D you can also claim additional deduction upto Rs. 25000/- (Rs. 50000 in case of senior Citizen) for health insurance of your parents.

Apart from Section 80C, various deductions and exemptions has been provided under the provision of Income Tax Act, 1961 like deduction under section 80D can be claimed for the payment of health insurance, deduction upto Rs 50,000 on home loan interest under Section 80EE. Any donations you make to charitable institutions are also allowed as deduction under Section 80G, subject to condition prescribed therein.

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