Have you wondered why your take-home salary is not what the offer letter said? Well the taxman is at work! Based on your income bracket, your employer deducts a tax (TDS) from your salary and pays the same, on your behalf, to the government. Luckily, a bit of smart financial planning can help you make the most of the tax benefits available.
From home loans to bank fixed deposits, and mutual funds to life insurance policies - several tax saving instruments are available in India. However, one size never fits all.
Here is a quick guide to help you identify the tax saving instrument that best suits your life stage.
Between 20-30 years of age:
In your early 20s, as you start your professional life, you would probably be single with less financial responsibilities as compared to married individuals. At this stage, the risk versus return equation works in your favour. You can try investments such as Equity Linked Saving Scheme (ELSS) that offer high returns while risk is higher too. For example, Axis Long-term Equity Fund is a consistently outperforming ELSS fund that has offered a 22.42% p.a. return in the last five years (as on 31st August 2016).
Another wise choice is opting for a term life insurance policy. When availed at a young age life insurance is cost-effective. You can get a higher cover at a lower premium. A Unit Linked Insurance Plan (that invests in an equity market-linked fund) will give you the benefits of compounding and help you build long-term wealth. It will also provide financial protection for your family. The premium paid is eligible for tax deduction under Section 80C, subject to a maximum of Rs. 1,50,000 per annum.
Between 30-40 years of age:
At this life stage, you are probably married and have a family to take care of. Hence, along with tax efficiency, you should look for long-term returns to create a secure future for your family. Some of the investment ideas are:
- Public Provident Fund(PPF), which is backed by the government and offers an attractive interest rate (8.1% compounded annually, effective from 1st April 2016). This is a safe and popular investment vehicle, but the returns are not as attractive as some other avenues.
- In case you have loans or liabilities, you can avail a term insurance plan that offers a large cover for a relatively small premium, and ensures the financial security for your family, even in your absence.
- In addition, if you have not planned for your retirement, it is not too late to get started. You can invest in a retirement plan and choose from several types of pay-out options like - lump-sum pay-out/ option to reinvest your retirement corpus and get monthly pay-outs (fixed or increasing)/ a combination of both. You can also nominate your spouse so that even if you are not there, he/ she continues to receive the pay-outs.
- During this stage, you can also start investing towards long-term goals such as your child's higher education, his wedding, a second home, etc. You can choose a Unit Linked Insurance Plan (ULIP) that facilitates disciplined savings and offers market-linked returns. This is a smart mode of investing because along with capital appreciation, you can also avail life insurance to protect your family's financial goals.
Between 40-50 years of age:
You are now at the peak of your career and would want to secure your retirement corpus. You can invest in retirement plans to ensure sufficient cash flows after retirement, and to safeguard your spouse in your absence. A retirement plan with increasing monthly income will help you combat the rising cost of living and medical care in the years to come.In addition, if you have debts or liabilities, you can opt for a term insurance policy and avail a life cover that covers your liabilities. This will ensure that even if you are no longer there, your retirement corpus is intact for your spouse.
National Pension Scheme is also a good investment tool at this age. A deduction up to 10% of the salary/ gross total income can be claimed under Section 80CCD. You can claim an additional deduction of Rs. 50,000, which is over and above the limit of Rs. 1,50,000, subject to terms and conditions.
Above 50 years of age:
You are now nearing retirement and probably do not have dependants. At this age, your investments should be conservative (ideally), and not only tax efficient.
You can invest in short-term instruments such as debt-based mutual funds to get better returns as compared to bank FDs. If you are above the age of 60 at retirement, or 55 in case of voluntary retirement, you can opt for Senior Citizen Savings Scheme (SCSS). It is risk free and ensures capital protection and regular interest pay-out. The amount invested in SCSS is eligible for tax deduction under Section 80C.
The ideal investment option may vary across different age groups and from person to person; however, life insurance is one such investment tool that will ensure financial security of your family at all times. Click here to know more about comprehensive insurance plans from Max Life.