How do popular tax savings instruments score?
*for the year 2016-17
Life insurance companies are often found advertising that investing in insurance policies are also a great way to save taxes. Anecdotal evidence thus suggests that come the last quarter of a financial year (January to March) there is a frenzied activity to buy best life insurance policy as it is the “season” to save taxes, when taxpayers clamour to buy insurance policies. Section 80 C of the Income Tax Act currently allows an individual a total exemption of ₹1.5 lakhs for various investments. But the question that needs to be asked that is investing in insurance policies to save taxes the right thing to do? The answer is a clear resounding NO! Here’s why.
It is a fact that premium that is paid for a life insurance policy is eligible for a deduction in taxes under Section 80C of the Income Tax Act. This deduction is available on any form of a policy be it an ULIP, a traditional insurance plan or a pure term insurance so long as the premium does not exceed 10% of the sum assured. However, the cardinal mistake people make by investing in life insurance policies to save taxes is that they ignore the fact that any life insurance policy is essentially to be used as a protection tool first and tax saving feature is only a by-product.
If tax savings are the primary objective, there are a plethora of instruments available to do the same. Apart from many small saving schemes such as (Public Provident Fund) PPF, National Savings Certificate (NSC) NABARD Rural Bonds, post office deposit schemes POTD there are attractive investment avenues such as ELSS or Equity Linked Savings Schemes of mutual funds that not only help in saving taxes and also enhance one’s capital.
Those with daughters, can also consider an investment in Sukanya Samriddhi Account, a special investment scheme for the girl child, which can be opened at any time after the birth of the child till she is 10 years old. Interest on this account is fully tax exempt in the years of accrual as well as in the year of receipt. The benefit of most of these investments is that they not only cheaper, they earn higher yields that life insurance policies but you can invest in such schemes at any time of the year according to your flexibilities.
Apart from investments in such avenues, an individual can also claim tax deduction on the amount he pays as stamp duty and registration in the year in which he decides to when he purchases a property. Further, when he starts paying an EMI on his home loan, the principal component of the same also becomes eligible for a deduction under Section 80 C. That apart, education fees of children are also eligible for tax deduction and with the rising cost of education, the ₹1.5 lakh limit may well be taken care of by the home loan one pays and the education fee of his children.
Investing in the life insurance policy or any other policy on the other hand is a long term commitment one must make towards the purpose of protection of his family from various risks. In a country like ours where an universal social security is amiss, insurance policies play the key role of providing the necessary security blanket that an individual needs to safeguard the financial obligations and ambitions that he has. A life insurance policy for instance, ensures that his all his financial responsibilities are taken care of even if he were to meet with an untimely death.
This is the main reason why an insurance policy must be bought and not for mere tax savings. Despite a lot of awareness campaigns being carried out by the media and financial experts, insurance still remains secondary for most taxpayers and they invest in policies to fulfil their tax deduction limit, although that is the first thing to be considered while making a financial plan.
So if you were considering buying an insurance policy at random to save taxes, do re-consider your decision for in every which way investing in insurance policies for tax saving purposes is a bad idea and must be shelved. If you must buy life insurance policies or any other insurance policies for that matter, do so for the right reason, i.e to protect yourself against risks.
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