Wealth Creation Through Tax Saving

Written on Friday, September 16, 2016
By Team Bajaj Capital

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Income Tax is the absolute truth of every salaried person's life, if he/she is earning more than 2.5 Lac INR annually in India. If you too feel that a big chunk of your hard earned money is swiping away in the name of income tax, then in this blog you can learn how to save tax on your income.  There can be no hiding or abstaining from tax paying but certainly there are ways through which you can minimise the taxes levied on your income.

Government of India has confirmed certain sections under which you can claim tax exemption for a part of your income.


Understanding Income Tax

If you have recently started making incomes, then it is important for you to understand how taxes are levied on income.

For the Income Tax Department, your income has two parts: Taxable income and Non-taxable income. Tax is exempted for the part of your income that you justify as non-taxable income. Government of India has limit down 2.5 Lac INR has the tax exempted salary slab. It means, your salary is taxable only if your annual income is more than 2.5 Lac INR.


But, don't worry, even if you are earning more than 2.5 Lac INR annually, then also you can justify some part of your salary, above that 2.5 Lac slab, as non-taxable income.

The part of your salary under components like HRA, Travel Allowance, Medical Allowance, Entertainment Allowance (applicable only to government employees), and some more allowances falls under non-taxable income. But it is completely your employer's choice to consider or not consider these components. If your salary doesn't have these components, then you can't claim tax exemption under these components. Also, each component has a capping amount beyond which tax saving is not permitted.


Tax Saving is a Wealth Creation Opportunity in Disguise

Tax saving is not just a liability but also a wealth creation opportunity in disguise. Section 80 C, 80CCD, 80CCG, are some important sections approved by Govt. Of India, under which you can claim tax exemption by justifying your income as non-taxable. Investments done under these sections, combined, can help you in availing tax exemption of up-to 2.15 Lac INR (1.5 Lac under 80C + 50,000 INR under 80CCD + 15,000 under 80 D).

But tax benefit is just the additional advantage here, as investments made under these sections give you the opportunity of financially securing your future through wealth creation.


Investments for Wealth Creation and Tax Benefits

Under 80 C

Life Insurance : Life Insurance is the right product to ensure the financial security of your loved ones in case of demise and to gain high returns on maturity if the investor survives the policy term period. Various leading companies offer highly lucrative insurance plans offering high sum-assured
and various endowment benefits. To get proper insight of various Life Insurance plans, you must take assistance of some good financial product distributor.

Pension Fund: Post-retirement life (usually after the age of 60) is a key concern for one and all. Knowing that earning will stop, people want to retire wealthy. There are very good pension plans that can even help you retire with crores of rupees apart from providing the tax benefit through out  your service period. It is always recommended to start investing on pension funds from an early age to avail maximum return on maturity.  

ELSS: It is an equity mutual fund (MF), and just like other mutual funds it is highly preferred for capital appreciation or wealth creation. ELSS funds have the lowest lock-in period  i.e 3 years and that is the reason of its mass acceptance. Even the returns or dividends received from ELSS funds are tax free. Here also, you may need the assistance of your financial relationship manager, who can analyse the performance of various Mutual Funds in the market and recommend you the best. But, like all Mutual funds, ELSS is also subject to market risks.

Unit Linked Insurance Plans: ULIP is a life insurance product but along with protection benefit, it offers investment benefits as well. It allows the policy holder to invest in various qualified investments such as mutual funds, stocks and bonds. ULIPS are subject to market risks.

Other available options for tax exempted investments under 80 C are Provident Fund, Bank FDs for term deposits of 5 years, Home Loan (principal), POTD Scheme, Senior Citizen Savings Scheme, etc.

Note: You can invest on these financial products as much as you want, but tax benefit is permitted to the maximum investment of 1.5 Lac INR only.

Under 80D

Health Insurance: Having a health insurance avoid financial crisis during unexpected health emergency. Paying small premiums not only gives you high financial coverage against critical illness but also helps in tax benefits and provides peace of mind.  

Note: You can have a health insurance policy of any amount but tax benefit is permitted for the maximum annual premium of 15,000 INR.

Under 80CCD

National Pension System: If you have exhausted the 1.5 Lac limit under 80 C, then you can invest additionally in NPS and ensure a monthly income and lump sum money return after your retirement.

Note: Maximum you can invest 50,000 INR for NPS.  

So, next time you plan your tax savings don't see it as a liability. It is the opportunity that allows you to make the right investments for financially securing your future apart from saving taxes on your hard earn money.

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