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Income Tax Benefits on Different Financial Products


  • Want to know how you can make the most of income tax deductions/exemptions?
  • Read this post that tells you income tax benefits on investments, loans and insurance

One earns his/her salary after slogging hard for a month. But the in-hand income that comes is quite shorter than the gross income as EPF and other statutory deductions are deducted from the same. When taxes are applied, the in-hand income reduces further. This can make it challenging for many who are already struggling amidst increasing inflation. However, tax exemptions/deductions applicable under different sections of the Income Tax Act can reduce your tax liability. These benefits apply to numerous investments and loans. We will demonstrate the tax benefits across different financial products in this post.

Let’s Talk About the Investments First

Income tax benefits apply to several investments such as Equity-linked Savings Scheme (ELSS), Public Provident Fund (PPF), tax-saver bank fixed deposit, national savings certificate (NSC), etc. One can get tax deductions upto INR 1.5 lakh in a financial year investing in any of these products under Section 80C. The other commonality between these products is that there’s a lock-in period during which you can’t withdraw money. Barring ELSS, each of the investment products written above comes with a lock-in period of 5 years. ELSS comes with a 3-year lock-in period.

Who Should Invest in What?

The decision to choose the investment will depend on the kind of investor you are. If you have a high risk-appetite and eyeing an inflation-adjusted corpus, ELSS is the one you should look to invest in. It doesn’t have any investment limit like the way its competing tax-saver investments have wherein you can’t invest more than INR 1.5 lakh a year. However, the rate of return here is not fixed and is greatly dictated by the movement of the stock market and the economy in general. Investors with a low-risk appetite can choose any of the other tax-saving products mentioned above. Bank fixed deposit rates have come down rapidly over the last couple of years. FD rates are now down to 3%-5% on average. The government recently cut the interest rate on PPF and NSC to 7.10% and 6.80%, respectively.

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Let’s Discuss Income Tax Benefits on Loans

As far as tax benefits on loans are concerned, it’s home loan borrowers that make the most of it. Principal repayments of the home loan enable individuals a tax deduction of upto INR 1.5 lakh a year under Section 80C. Whereas, tax deductions on interest repayments are capped to INR 2 lakh a year under Section 24. There’s no maximum tax deduction limit on interest payments if the property is let out. Additional tax deductions of INR 1.5 Lakh will be given on affordable housing projects having stamp value within INR 45 lakh as per Section 80EEA. The deduction is over and above INR 1.5 lakh deduction on interest payments that you get under Section 24. If you take a home loan to renovate your home, you get a tax deduction on interest upto INR 30,000 on a self-occupied property. Whereas, there’s no maximum limit of tax deductions on interest if the property is rented.

Apart from a home loan, tax benefits apply to education loans taken for higher studies in India or abroad. Section 80E of the IT Act allows a tax deduction on interest payments made towards an education loan. However, the benefits apply for only 8 years from the time you start repaying the education loan, which can be given for a maximum of 15 years.

Tax Benefits on Insurance Products

You can get tax deductions on life insurance and health insurance products. Premiums payable on life insurance gives you tax deductions upto INR 1.5 lakh under Section 80C. However, to get the tax deduction under Section 80C, the premium paid must not be more than 10% of the sum assured if the policy is issued after April 1, 2012. For policies issued before April 1, 2012, the premium paid must not be more than 20% of the sum assured. Tax exemptions are given on the maturity amount if the premium paid does not exceed 10% and 20% of the sum assured for policies issued after and before April 1, 2012, respectively. This benefit is provided under Section 10(10D) of the IT Act.

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When it comes to health insurance, tax deductions can be claimed upto INR 25,000 on the insurance of self, spouse and kids. Additional deductions of upto INR 25,000 can be claimed for the insurance of parents aged below 60 years. If the parents are aged above 60 years, the additional deduction can be upto INR 50,000. And when both the taxpayer and his/her parents are aged above 60 years, the maximum deduction limit goes upto INR 1 lakh. The benefits are provided under Section 80D. This section also offers tax benefits to individuals opting for single premium health insurance policies. In case you have paid a single premium which will be valid for more than a year, you can claim a deduction equal to the fraction of the amount. The fraction is obtained by dividing the lump sum premium by the number of years for which the policy will be there.

How Do These Tax Benefits Work Out?

The eligible tax deductions are deducted from your annual gross income. This makes the taxable income lesser and hence lowers the tax liability. All you need to do is show the proof of tax-saving investment, insurance premium payments, or a home loan/education loan if you have availed. Just when a financial year is about to end, your company may give you an investment declaration form wherein you can submit the details appropriately. Proof of investment, loan or insurance, whatever the case may be, will need to be accompanied with that form. If the details are found genuine, tax deductions will be granted and help you reduce your tax liability.

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