Is tax planning a last minute job for you? Are your budget and finances a mess because of this last minute tax planning?
Start your investments in tax saving instruments as early as possible and in a staggered manner (Small sums of money invested in tax saving instruments throughout the year) instead of a single one time investment at the last minute.
Buy life Insurance which matches your needs
You are newly married and soon plan to start your family. You plan to buy a life insurance policy to save on tax .Your insurance agent advises you to pick up an endowment life plan.
But should you pick up an endowment life plan? You are young in your career and most probably do not have much savings. If you die early your spouse or young children will not have much money to meet their expenses.
Tax evasion is a crime. Tax avoidance isn't. Saves your salary by making using of tax deductions and exemptions.
Helps you make the right investment in financial products, based on your risk profile which save your income from tax.
Helps you save on tax by using the home loan you must avail, to buy your dream home or apartment.
Uses tax saving instruments to save your money and invests it in financial products, which ensure you have money for retirement.
An endowment life plan charges you a very high premium (Commission to be paid to the life insurance agent as well as charges for the policy).
An endowment life plan means
Insurance + Savings
This means you have to pay a very high premium on the endowment life plan.
The returns over a year are a meager 5-7%. Most of the premiums you pay are swallowed as charges for the plan.
If you purchase a term life insurance the premiums are low as it is a pure insurance policy. There is no survival benefit in the plan.
Simple : Pure insurance with a very low premium when you are young in age.
You need to invest in a term life insurance plan which has a low premium with a high sum assured which means that if you die young your family will get a huge sum of money to meet their living expenses.
Your insurance agent wants to pocket a high commission and will advise you to pick up an endowment life plan rather than a term life insurance plan.
Remember : Both life insurance plans (term or endowment) enjoy tax deductions up to INR 1.5 Lakhs under Section 80 C on the premiums paid.
Your risk profile is very important when you make an investment in tax saving instruments. Remember both PPF and ELSS enjoy tax benefits under Section 80 C .
If you are a conservative investor (Want your principal invested to be safe and earn an interest on it) basically less returns at low risk you must invest in a PPF or a 5 year tax saver FD.
If you invest in an ELSS (Which has over 80% in equity) suitable for an aggressive investor then you risk losing money when the stock markets crash.
You might get a high return if stock markets rise but you face great risks and this means your investment does not match your risk profile.
Even if you pick up tax saving instruments which match your risk profile you need to check the lock in period of the investment.
A PPF has a lock in of 15 years whereas a NSC has a lock in of 5-10 years. A tax saver fixed deposit has a lock in of 5 years. You need to note the lock in period of your tax saving investments even if they match your risk profile as a lock in of 10 or 15 years means you cannot touch your money for that time period.
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