As the financial year 2021-22 draws to a close, the tax-saving fever must have gripped most of the people who fall under the taxable income category. In the last-minute bid to save as much tax as possible, some of us may end up making financial blunders. It is very important to understand that tax saving is not a one-time work, and there is a need to look at tax saving with a broader view. This is similar to the fact that you not only need to build a good credit score but also need to monthly check cibil score by pan card to keep it maintained at a high level.
Tax savings should be merged with your financial goals and investments, but at the same time, it should not overburden your finances, especially liabilities like loan EMI payments, because default or irregularity in that can negatively impact your cibil score range.
To help you avoid any last-minute hassle for tax saving, we list you the options where you can park your money for tax benefits for the coming financial year 2022-23.
For long term goals: Invest in ELSS
Equity-linked savings schemes (ELSS) are equity mutual funds that enable investors to avail tax deductions under section 80C. Amongst all the other saving and investment schemes, ELSS has the lowest lock-in period of 3 years, as compared to those of PPF (15 years), NSC (5-10 years) and Sukanya Samridhdhi yojana (21 years).
Also, ELSS generally offers higher returns than all of these. It is capable of generating consistent long-term returns by investing the majority of its corpus in equity shares. Once you have identified your long term goals, such as building your retirement corpus, invest in ELSS to achieve those goals and simultaneously save on taxes as well. And make sure to side by side timely repay your credit card bills and loan EMIs, as doing so helps your credit score to remain on the higher side of the cibil score range of usually 300-900. Also, remember that the facility to check cibil score by pan card is available across various credit score portals and online financial websites to help you remain credit aware.
Caution- Do not quickly quit or redeem your ELSS when lock-in of three year lapses. Many investors just invest in ELSS to save taxes and redeem their investments as soon as the lock-in period ends. Since equities generally offer high returns when invested for a longer period, such as 5-10 years, those who remain invested in ELSS after the lock-in period are better poised to earn higher returns in future. However, one may redeem their ELSS investments when the fund they are holding isn’t performing well.
To secure your family’s future and take care of their medical expenses: Buy term insurance and health insurance.
Just like knowing the cibil score range and making efforts to keep the score above 750-800 is important for credit health, having term insurance and health insurance is a necessity in today’s scenario of continuous rise in living as well as medical costs. Term insurance saves your family from becoming financially burdened in case of your untimely demise by providing a lump sum cover at the time of death. On the other hand, health insurance assists you in covering the insured’s medical expenses wholly or partly whenever such need arises. Ideally, your life cover should amount to at least 10-15 times your annual income, and term insurance offers such high cover at very low premiums.
And, just like the facility to check cibil score by pan card offers the additional benefit of not filing too many details and getting your credit report just by entering pan card details and at most an OTP, health and term life insurances too, besides providing financial and medical cover, also offer the additional benefit of tax benefits. The premium paid towards term insurance qualifies for tax deductions u/s 80C, whereas health insurance premium is eligible for tax deduction u/s 80D. Currently, you claim a deduction of Rs.25000 each for the health premium paid for yourself and your parents, and in case your parents belong to the senior citizen’s category, this tax deduction increases to Rs.30000. However, this year’s budget has proposed to increase this limit to Rs.50000 from Rs.30000.
Caution (term insurance) – Although buying life insurance for your family’s secure future is a must, make sure you don’t buy too many of these. It won’t make any sense as the basic purpose of term insurance is to get the lump sum life cover at the time of your death, and single-term insurance would serve this purpose. Moreover, in the long run, owning multiple policies will have their own respective expenses, which can burden your finances. Also, the primary reason for buying term insurance should never be tax saving or investment but securing your family’s future financially.
(health insurance)-When you buy a health insurance policy, make sure you don’t conceal any medical history in front of the insurer. Ensure that the insurance company’s Claim settlement ratio (CSR) is on the higher side, which indicates that the insurer has settled a high percentage of claims raised. The tax benefits available for the health premiums shouldn’t be your primary purpose of taking up this insurance.
For twin benefits of liquidity and high yield: Park your funds in a savings account.
Since the deregulation of savings accounts interest rates by RBI, they have been generating interest rates going as high as around 7% p.a., much higher than most of the existing FD rates. Most people are still unaware that savings account interest up to Rs.10,000 is tax-free u/s 80TTA. High yielding savings accounts have led to more and more people parking not only their emergency funds here but also taking advantage of the high-interest rates and tax benefits. Parking your funds in a high yielding savings account gives access to the highest form of liquidity and tax-free returns up to Rs.10,000. Also, do not forget to check cibil score by pan card from time to time, as it is a healthy credit practice besides the good habits of tax saving and investing.
Caution-While parking your funds in a savings account, do keep at least 3-6 months’ expenses as an emergency fund. High-yielding savings accounts are a preferable option to fixed deposits as they offer higher liquidity and ease. Do not use your emergency fund for any reason except financial exigencies such as job loss, severe illness etc. or when faced with difficulty to pay liabilities like loan EMI and credit card bills, defaulting on which would impact your credit score to fall to the lower side of cibil score range. It is important to note that interest earned over and above Rs.10000 is taxable.