Time You Reviewed Your Finances, Planned Your Investments

The beginning of the new financial year is an opportune time to review our personal finances and also look at investment planning. This is a good time to consider our various investments and evaluate whether we have a balanced and diversified portfolio. An important part of this exercise would be tax planning.

Financial planning and appropriate investments lead to reduction in tax pay-outs. As one looks at a diversified portfolio of investments, it is important to plan our outlay in a way that will reduce tax outgoes. Tax planning of investments should be done not only from the context of the present financial year but also keeping in mind future income and associated taxes. Money(tax) saved is money earned!

There are various tax benefits that can be availed through investment in insurance products and these should be evaluated while investment planning.

As per Section 80C of the Income Tax Act, 1961, any amount paid to an insurer to buy or to keep a life insurance policy in force can be claimed as a deduction from gross total income by the policy holder. This implies that premium paid for a life insurance policy can be deducted from gross total income before arriving at taxable income subject to certain conditions.

Only an Individual or a Hindu Undivided family ("HUF") can avail tax benefits on premium paid for a life insurance policy. An individual can only claim tax benefit under this Section on life insurance policy(s) bought in the name of self, spouse or children. The benefit of deduction under this section is capped to a maximum of Rs 1.5 lakhs in a financial year. Section 80C provides deduction not only for life insurance premium but also investment in Public Provident Fund, investment in National Saving Certificate, repayment of principal component of housing loan, etc.

Besides life insurance, it is imperative to also have health insurance in your portfolio. Like life insurance, health plans act as a very efficient tax saving tool and provide substantial tax exemption under section 80D. Along with medical benefits and the coverage of health insurance, the policy reduces your annual income tax liability subject to the premium paid for the same.

In fact, the premium paid for not only you and your family but also your parents make you eligible for income tax exemption under section 80D of Income Tax Act, 1961. As per section 80D the premium paid towards health insurance plan is deductible from the taxable income. The upper limit for this deductible amount is Rs 25,000 and is extendable to Rs 50,000 for senior citizens. There is an additional benefit of up to Rs 25,000 for cover extended to parents and that is extended to Rs 50,000 if they are senior citizens. In cases the ages of both the proposer and their parents are over 60 years the deductible amount in such cases will extend to Rs 1 lakh.

While evaluating various investments to build a diversified portfolio we look at the risk and return of the instruments. One of the key aspects to consider is the return net of taxes. While income from instruments like bank deposits (interest), equity or mutual funds (dividends/ capital gains) or any capital gains comes under the ambit of taxation, there is a relaxation that is available to life insurance policies. An insurance savings product with an attractive whole life tax-free return, due to benefits accruing from Section 10(10D) of the Income Tax Act, is recommended for anyone whose taxable income exceeds Rs 15 lakhs and falls under the 30 per cent + tax bracket. It may also be prudent to look at such investments for retirement planning.

As per Section 10(10D) of the Income Tax Act, 1961 any sum received under a life insurance policy, including the sum allocated by way of bonus on the same, paid on maturity or surrender of the policy or upon death of the insured are completely tax-free for the receiver subject to certain conditions. These policy proceeds will be taxable in the hands of the insured in the following situations:

As per section 10(10D) in case of a life insurance policy issued after 1.4.2003 but on or before 31.3.2012 if the premium payable in any year exceeds 20 per cent of the actual sum assured, then the policy proceeds would be taxable in the hands of the insured. The actual sum assured simply means the sum assured which is least in all the policy years and does not include any bonus amount which is to be received over and above the assured amount. This 'actual sum assured' shall also not include any premiums which are to be returned to the policyholder. For policies issued on or after 1.4.2012, the above-mentioned limit of 20 per cent has been changed to 10 per cent.

On that note of sound investment planning, wishing you all a prosperous new Financial Year!

The author is Chief Operating Officer at IndiaFirst Life Insurance Company

DISCLAIMER: Views expressed are the author's own. 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.