If you plan it out, instead of rushing it in the last moment, you will realise how much you have saved and the difference it makes to your personal wealth.
You go for walks, take part in marathons, lift weights in the gym, turn vegan and swear on sweets and fried goods, all with an aim to improve our physical health. But what about your financial health? What are you doing to improve that?
Your financial fitness depends on the growth of your personal wealth. There are a number of factors that will help you determine this, but it is primarily dependent on your assets and debts. Factors like housing expenses, credit card payments, car loans, mortgages etc form the first half of your assessment. They help you determine where you are losing your money and how you can curb it.
Factors like saving for an emergency fund or retirement form the next half of your assessment. These are, in many ways, your investment for the future and an absolute necessity.
One major aspect of financial planning is saving on your 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 maximise tax savings and benefits.
Insurance goes a long way in saving your taxes, but not many people are aware of this. Different policies offer different tax benefits. In order to take advantage of that, it makes sense to be covered from all respects. Just like how we take stock of our debts and assets, we should also make sure our insurance policies are up-to-date and don’t become redundant.
What are the tax benefits available?
Under Section 80 C of the Income Tax Act, 1961, life insurance premium paid by an individual for keeping insurance on the life of himself or his family can be claimed as deduction from the total income. The overall limit is Rs 1.5 lakh. The deduction will be only amount to so much, if the premiums are not in excess of 10 per cent of the actual capital sum assured.
As per section 10 (10D) of the Income Tax Act, 1961, any sum received under a life insurance policy (other than sum received under section 80 DD (3) or section 80DDA (3) or under a Keyman Insurance Policy) will be exempt provided the annual premium payable under any of the years during the term of the policy does not exceed 10 per cent (20 per cent in the case of polices issued till 31-03-2012) of the actual capital sum assured.
When it comes to health insurance, Sec 80D of the Income Tax Act, 1961 provides that you are eligible for a deduction of up to Rs 15, 000 paid towards health insurance premium for keeping insurance on the health of you and your family, in a financial year. 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 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 per cent 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 that much closer to a good financial fitness. If you plan it out, instead of rushing it in the last moment, you will realise how much you have saved and the difference it makes to your personal wealth. We moan and groan about taxes and how we are robbed of our hard-earned money. 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 per cent 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.
Illustration: Uttam Ghosh/Rediff.com
Sanjay Tripathy is Senior EVP -- Marketing, Product, Digital & E-Commerce, HDFC Life
