In the month of March, you may have already received correspondence from the Human Resources or Finance Department prompting you to furnish investment declarations to avoid TDS deductions from your salary. This marks the juncture in the fiscal year when many individuals scramble to explore avenues for tax savings, seizing the final opportunity to do so. Often, such tax planning endeavors are conducted hastily, with the sole objective of minimizing tax liabilities. However, undertaking tax planning in isolation is not the optimal approach.
While tax planning holds significance, it should be seamlessly integrated into a holistic financial planning framework. Let us delve into the sequential process of comprehensive financial planning and explore strategies to select tax-efficient financial instruments, thereby optimizing tax savings throughout your financial journey.
Establishing an Emergency Fund
The primary step in financial planning entails establishing and maintaining an emergency fund to navigate unforeseen financial exigencies. These may encompass medical emergencies, job loss, delayed salary disbursements, salary reductions, and the like. The emergency corpus should ideally cover expenses for a period ranging from 3 to 6 months, contingent upon individual circumstances.
Mitigating tax on interest earnings: The funds allocated to the emergency corpus can be parked in a bank savings account. While interest accrued on savings accounts is subject to taxation, taxpayers are eligible for deductions on the interest earned under Section 80TTA of the Income Tax Act. The maximum deductible amount in a financial year is either the interest earned or Rs. 10,000, whichever is lower.
The interest earned from savings accounts maintained with banks and post offices qualifies for deductions. Senior citizens can avail themselves of deductions under Section 80TTB.
Securing Life Insurance for Breadwinners
It is imperative for all primary breadwinners within a family to procure life insurance, serving as a financial safeguard for their dependents in the event of an untimely demise. Opting for a term life insurance policy is advisable, as it offers a substantial coverage at nominal premiums.
Tax relief on life insurance premiums: Contributions towards premiums for term life insurance policies are eligible for tax deductions under Section 80C of the Income Tax Act. The maximum deductible amount in a financial year is either the premium paid or Rs. 1,50,000, whichever is lower. Taxpayers can extend this benefit to cover themselves, their spouses, and their children.
To avail of tax benefits, the term life insurance policy must be held for a minimum duration of 2 years. However, it is advisable to retain the insurance coverage over the long term, typically until retirement or upon attainment of all financial objectives.
Securing Health Insurance for Family Members
In addition to individual life insurance coverage, it is equally crucial to procure health insurance for all family members. While employers may offer health insurance benefits, it is prudent to acquire a comprehensive personal health insurance policy for the entire family. Even a single hospitalization event can deplete significant financial resources and derail one’s financial planning trajectory.
Tax mitigation on health insurance premiums: Premiums paid towards health insurance policies qualify for deductions under Section 80D of the Income Tax Act. The maximum deductible amount in a financial year is either the premium paid or Rs. 25,000, whichever is lower. This benefit extends to coverage for self, spouse, and dependent children. For senior citizens, the maximum deductible amount increases to Rs. 50,000.
Taxpayers can claim additional deductions for premiums paid towards parental coverage. The maximum deductible amount in a financial year is either the premium paid or Rs. 25,000, whichever is lower. In cases where one or both parents qualify as senior citizens, the maximum deductible amount rises to Rs. 50,000.
To qualify for deductions on health insurance premiums, payments must be made through non-cash modes. Taxpayers can also seek deductions for preventive health check-ups for themselves and their families. The maximum deductible amount in a financial year is either the expenditure incurred or Rs. 5,000, whichever is lower. This deduction is inclusive within the overall deduction permitted for health insurance premiums under Section 80D.
Investing Towards Financial Objectives
With the groundwork laid for emergency funding, life and health insurance coverage, the subsequent phase in financial planning involves investing towards predetermined financial objectives. These may encompass funding a child’s education and marriage, retirement planning for oneself and one’s spouse, annual family vacations, vehicle purchases, entrepreneurial ventures, among others.
While earmarking investments for specific financial goals, prudent asset allocation is paramount. This entails diversifying investment portfolios across various asset classes such as equity mutual funds, fixed income instruments, gold, etc.
Availing tax benefits on equity mutual funds: For the equity segment of investment portfolios, investors may consider channeling funds into Equity-Linked Savings Schemes (ELSS). ELSS investments qualify for deductions under Section 80C of the Income Tax Act. The maximum deductible amount in a financial year is either the investment made or Rs. 1,50,000, whichever is lower. Opting for a systematic investment plan (SIP) is advisable, given that ELSS investments are subject to a lock-in period of three years.
Investing in equities offers the potential for compounding returns. While equities entail higher risk owing to market volatility in the short term, they have the propensity to deliver inflation-beating returns over the long haul, fostering wealth accumulation.
Availing tax benefits on fixed income instruments: For the fixed income segment of investment portfolios, individuals can explore avenues such as the Employee Provident Fund (EPF) facilitated by employers, Public Provident Fund (PPF), National Savings Certificate (NSC), 5-year tax-saving bank fixed deposits, among others.
All aforementioned financial instruments qualify for deductions under Section 80C of the Income Tax Act. The maximum deductible amount in a financial year is either the investment made or Rs. 1,50,000, whichever is lower. Investors are advised to acquaint themselves with the features of each product, encompassing aspects like minimum and maximum investment thresholds, liquidity, lock-in durations, tax treatment upon maturity, etc.
Repayment of Home Loans
The aspiration to own a dream home is ubiquitous among individuals. Banks facilitate the realization of this aspiration by extending home loans at comparatively low interest rates vis-à-vis other forms of financing. The Government supplements this endeavor by offering tax concessions on home loans.
Tax exemptions on home loan EMIs: Contributions towards the principal component of home loan EMIs are eligible for deductions under Section 80C of the Income Tax Act. The maximum deductible amount in a financial year is either the amount paid or Rs. 1,50,000, whichever is lower. Similarly, interest payments on home loan EMIs qualify for deductions under Section 24 of the Income Tax Act. The maximum deductible amount in a financial year is either the amount paid or Rs. 2,00,000, whichever is lower.
Financial planning serves as the linchpin for realizing financial objectives, with tax planning serving as a catalyst in this pursuit.
We have elucidated the myriad steps entailed in the comprehensive financial planning continuum. By adhering to a systematic approach encompassing each step, individuals can be assured of attaining their financial objectives. Concurrently, by selecting tax-efficient financial instruments at each juncture, individuals can propel themselves towards financial success while maximizing tax savings along the way. Thus, financial planning serves as the cornerstone for achieving financial objectives, with tax planning furnishing the requisite impetus to realize them.
