Invest In Equity Through Mutual Funds Early In Career

I am 25, single, and earn about Rs 5.50 lakh per annum. I haven’t made any investment for tax saving till now, except for the Rs 2,500 that gets deposited in my Employees’ Provident Fund (EPF) account. Please advise how can I save tax by investing in mutual fund or by taking health insurance policy for my parents? I do not have any other income.

Answer: I have presumed that the Rs. 5.50 lakh you earn is your taxable salary. After Standard Deduction of Rs. 50,000, and another Rs. 30,000 for your PF contribution under Section 80C of the Income-tax Act, 1961, the taxable comes below Rs. 5 lakh, thus making you eligible for tax rebate up to Rs 12,500 available under Section 87A. 

So, you do not have any tax liability, as it is below the amount of rebate available. In that respect you do not have to make any investments for saving any tax. 

That said, I would advise you to buy health insurance for yourself, as well as for your parents. This will take care of any future hospitalisation expenses, if needed, as the cost of medical treatments are very high and can upset your other budgets.

Since you are willing to spare some money for investment, I would advise you to start investing in either Sensex or Nifty Index Fund through systematic investment plans (SIPs). As you are just 25 and have the ability to take risk, you can invest only in equity for the time being, as your PF contribution will take care of the debt portion to ensure that there is some asset allocation in your investment strategy. 

Once you are no longer eligible for rebate under Section 87A, you can start investing in equity-linked savings scheme (ELSS) through SIP to save tax.

My mother is a retired senior citizen. She has a health insurance policy. We heard of income tax exemption for preventive health check-up for up to Rs. 5,000. How do we claim this? Is it available for those who pay health insurance premium? Under which section is this exemption available? 

Answer: Under Section 80D of the Income-tax Act, 1961, every individual is entitled to claim deduction of Rs. 25,000 in respect of insurance premium paid for buying health insurance policy for his/her family, which includes self, spouse and dependent children. 

An extra deduction of the same amount is available in respect of health insurance premium paid for parents. Deduction in respect of parents can be made whether they are financially dependent on you or not. 

The amount of deduction goes to Rs. 50,000, if the payment is made for a senior citizen. Within this overall limit of Rs. 25,000 and/or Rs. 50,000, one can claim deduction of up to Rs. 5,000 for amount spent on preventive health check-up of the eligible category. This deduction is available to you whether you have a health insurance policy or not. 

Your mother can claim up to Rs. 5,000 within the eligible deduction of Rs. 50,000 provided she has actually paid the same for her preventive health check-up. 

Please note that the deduction for health insurance can only be claimed if the payment for health insurance premium has been made by means other than cash. However, in case of preventive health check-up, this deduction can be claimed even if the payment is made in cash.

The author is a tax and investment expert

(Disclaimer: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.)