- A working millennial wanting to reduce the tax burden? Start considering investment and insurance products that offer income tax exemption
- Insurance are an absolute must. When it comes to investments, you can compare and choose the one that goes in sync with your risk appetite
Millennials follow the trends religiously even if it means spending huge, much unlike the older generation where the emphasis was more on savings. Having said that, the working class millennials won’t mind saving tax on the earnings they make. The taxes saved will only help them live their life smoothly. There are some tax-saving options such as Equity-linked Savings Scheme (ELSS), Public Provident Fund (PPF), National Savings Certificate (NSC), Life Insurance, Health Insurance, Tax-saving Fixed Deposit that you as a millennial can consider.
Of these, insurance products are an absolute must. All you need is compare and choose the right life & health insurance plan for you. You should pick the respective insurance having the maximum cover, lowest premium payable and several other benefits. The rest of the products mentioned above are sheer investments that can have a fair degree of risk involved. So, there lies the task to assess your risk appetite properly and choose investments accordingly. Let’s start off by discussing investments before focusing on insurance products.
What’s Common Amongst All Tax-saving Investments?
All these qualify for income tax exemption upto ₹1.5 lakh in a financial year under Section 80C of the Income Tax Act. Further, you can invest a maximum of ₹1.5 lakh across all these investments, except ELSS. The next is the lock-in period, which varies from 3-15 years across these investments.
Experts See ELSS as the Most Profitable of All Tax-saving Investments. But Will it Suit All?
ELSS, a type of equity mutual fund scheme, will most likely go in sync with aggressive investors who can afford high risks on their investments. Besides high risk appetite, you also need to invest for long to mop up the desired corpus. The returns can be high but do not remain fixed. Therefore, investors with a low risk appetite may not find it fancy investing through the fluctuations that equities are known to bring. Having said that, a lesser exposure to ELSS can still be warranted for these investors. Remember, the lock-in period is 3 years in ELSS investments. Plus, a 10% tax is also applicable to gains exceeding ₹1 lakh on redemption.
PPF – A Good Wealth Generating Tool for Conservative Investors. But Does it Offer Flexibility?
Seen as a suitable alternative to the Employees Provident Fund (EPF), PPF is arguably one of the best instruments for individuals wanting a regular flow of income. The irony, however, is that you will have to wait for 15 years to withdraw the corpus generated from this investment. Before you get overly concerned, let’s be told that partial withdrawal is permitted from the 7th financial year onward. The government of India sets the rate of interest periodically. As of now, the interest rate is 7.9% per annum. The best part is that there’s no tax on the investment yield.
Tax-saving Fixed Deposits – How Different are They from Regular Fixed Deposits?
Barring the 5-year lock-in period and income tax exemption on investments upto ₹1.5 lakh in a financial year, there’s nothing that separates tax-saving fixed deposits from a regular fixed deposit. The interest rate remains the same and so does the tax rate on gains. The average rate of interest can be around 5%-7% per annum across banks for tenures upto 10 years. When it comes to taxation, gains exceeding ₹40,000 (regular) and ₹50,000 (senior citizens) in a financial year will be subject to Tax Deducted at Source (TDS) at 10%. Individuals not providing PAN Card will have to pay TDS at 20%.
Is NSC Worth the Penny Invested in It?
It’s a post office savings scheme that comes with a lock-in period of 5 years and 10 years, depending on which you choose. If you talk about the interest rate, it is 7.90% per annum.
This was all about investments. Let’s now shift our focus on insurance products and see what they have in store for you.
Reiterating the point made earlier, it’s a must-have product that guarantees the financial protection of your dependents in the eventuality of your death during the policy term. While the premiums paid upto 1.5 lakh in a financial year is exempt from tax, the maturity amount will come completely tax-free to your dependents under Section 10(10D), subject to fulfilling certain terms and conditions.
Terms & Conditions Pertaining to 10(10D)
The terms and conditions are associated with the date of policy issuance.
Policies Issued After April 1, 2003, But on or Before March 31, 2012
If the premium payable in every policy year is within 20% of the actual sum assured (only the sum assured and not the bonus amount receivable over the same), the proceeds of the policy will be exempt from tax.
Policies Issued on or After April 1, 2012
If the premium payable in every policy year is within 10% of the actual sum assured, the policy proceeds would remain free of tax.
In the absence of these, TDS will apply at 2% if you provide PAN Card to the insurer. If you don’t provide that, the tax rate will rise to 20%.
Health insurance plans are available in individual and family floater modes. It comes handy when the insurer pays the hefty medical bills towards your treatment at any of the network hospitals. You can check the list of such hospitals on the policy document. Coming to the tax benefits, you can get the same on the premium you pay, under Section 80D. If there are no family members (including the parents) above 60 years, the tax deduction is limited to ₹50,000 a year. If any of the parents is more than 60 years, tax deduction will be given upto ₹50,000 for parents. For the rest, the tax deduction will be upto 25,000. This adds to a combined total of ₹75,000.