We go for walks, participate in marathons, and avoid sweets and fried foods, all with an aim to improve our physical health. But, what about our financial health? What are we doing to improve that?
The most important aspect of financial planning is growing your wealth along with saving taxes. But that doesn’t just involve opting for a few insurance policies at the end of the year. It is a complete process, just like physical exercise, that requires us to take stock of our situation and invest wisely throughout the year, in order for us to see any difference in our personal wealth. It’s called taxercise – a disciplined way of exercising taxes in order to maximize tax savings and benefits.
Insurance goes a long way in saving taxes, but not many people are aware of this. Certain life insurance policies may offer dual tax benefits. In order to take advantage of that, it makes sense to be covered in all aspects. Just like how we take stock of our debts and assets, we should also make sure our insurance policies are up-to-date and haven’t become redundant.
What are the tax benefits available?
Under Section 80C of the Income Tax Act, 1961, life insurance premium paid by an individual can be claimed as a tax deduction of up to Rs 1.5 lakhs from the total income. The overall limit is Rs.1.50 lakhs.
When it comes to health insurance, you are eligible for a deduction of up to Rs. 15, 000 paid towards health insurance premium under section 80D of the Income Tax Act, 1961. If you have taken out a health cover for your parents, you will be eligible for an additional amount of Rs. 15, 000. If even one of your parents is a senior citizen, the amount will become Rs. 20, 000. The health insurance premium is to be paid on any mode other than cash to avail this benefit.
These limits can include expenses of up to Rs 5,000 on preventive health check-ups. Cash payments for health check-ups are eligible for income tax deduction. Sec 80CCC of the Income Tax Act, 1961 makes you eligible for a deduction of pension contributions from the total income. Sec 80CCD (2) of the Income Tax Act, 1961 gives you additional tax benefits for the contributions paid by the employer to National Pension Scheme (NPS) subject to 10% of the salary.
How does taxercise work?
Every time you opt for one of the above covers, a weight is lifted from your tax burden and you are a step closer towards financial fitness. If you plan thoroughly, instead of rushing in the last moment, you will realize how much you have saved and the difference it makes to your personal wealth. We moan and groan about taxes but the truth is that the government has given us enough avenues to save. We just need to read the fine print and plan.
What to watch out for?
Due to a false assumption that all insurance policies offer tax rebates, in a hurry, many people tend to opt for covers that do not offer any. This leads to a person, more often than not, getting saddled with unwanted and unnecessary insurance products.
Be aware of the following exceptions:
In the Budget 2014-15, the Government introduced a new provision with respect to tax deduction at source (TDS) on the payouts made from life insurance policies. The provision states that all life insurance policies that are not eligible for tax exemption under Section 10 (10D), will have 2 percent tax deducted at source on the sum paid to the policyholder.
Always do your homework before making a financial decision, as no decision is trivial.