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ImageA tax plan is not only to save taxes, it should also assist you in achieving your other financial goals such as buying a home, a car, children’s education, retirement to name a few. Here are some top ways in which you could plan for your tax savings.

Tax planning is a very important step towards securing your financial future, and there are several ways ranging from tax saving instruments, to donations to charitable organisations, to health insurance and so on.

While a certain tax outgo is essential, one can benefit from various schemes offered by the government to save on taxes.

For example medical expenses of dependent parents, interest on housing loan and loan for home renovation, are tax deductible over and above the 80C limit of Rs 1.5 lakh.

Health insurance

Premiums paid towards a health insurance policy qualifies for a deduction of Rs 15,000 for an individual and Rs 20,000 for a senior citizen under section 80D (If one’s dependent parents are below 60 years of age you get an extra deduction of Rs 15,000 and if they are older you get Rs 20,000). If your premium is less than Rs 15,000 you can claim a deduction of up to Rs 5,000 on account of preventive health check-up.

Note: This limit has been revised to Rs. 25,000 for an individual and Rs. 30,000 for a senior citizen.

Public Provident Fund (PPF)

PPFs are another good method to invest and save tax, as they give a return of around 8.8 per cent, and one can avail a Rs 1.5 lakh deduction from investments under Section 80C. Maturity proceeds are tax-free as well.

Fixed deposits

There are notified FDs of five-year tenor or more that also give you the 80C deduction. The interest is taxable though. So it works if you are in the lower tax bracket or need an assured income in the short term.

Life insurance

If you are married and have kids, risk cover is something you must consider. The premium that you pay qualifies for a tax deduction so long as the sum assured is at least 10 times the annual premium. This is very important, and ideally one should have a minimum of ten times their yearly income as the insured amount, i.e. if one’s annual income is Rs 10 lakh, one should have a minimum insurance cover of Rs 1 crore. Other factors such as age, medical condition, etc, also play a role in deciding the life insurance policy, which can ensure the financial stability of your family.

Housing loan

Individuals intending to buy a house should consider opting for a home loan. Interest payments of up to Rs 150,000 per annum are eligible for deduction under Section 24. In cases where the home loan is for a substantial sum, it is not uncommon for the interest and principal repayment to exceed the stated limit.

To ensure that the tax benefit is optimally utilised, an individual can consider opting for a joint loan with her/his spouse or parent or sibling. This will ensure that both the co-owners can claim tax deductions in the proportion of their holding in the loan.

The co-owner falling in the higher tax bracket should hold a higher proportion of home loan to ensure that the tax benefits are maximised.

Equity-linked savings scheme (ELSS)

If you are planning for the long term and can stomach short-term volatility that stock markets bring to your portfolio, equity investments are the ideal investment choice. Investments in ELSS offer better returns as it is based on stock market returns, and it also offers a deduction of up to Rs 1.5 lakh under section 80C.

You can either invest a lump sum or through systematic investment plans (SIPs). In order to encourage first-time investors, the government has notified a new scheme called the Rajiv Gandhi Equity Savings Scheme (RGESS). This comes under a separate deduction limit of Rs 25,000 under section 80CCG.

Summary:
    It is advisable to understand one’s risk appetite and investment horizon prior to selecting a tax saving instrument.
    One should always opt for a judicious mix of different kind of investments to benefit from better returns, while saving tax.
    Each instrument has positives and negatives, study these carefully before locking in your money in any one instrument.

Writer: Anil Rego is the founder and CEO of Right Horizons, an investment advisory and wealth management firm that focuses on providing financial solutions that are specific to customer needs.
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