Buy health insurance when you don’t require it
Link tax planning with retirement goal
New financial year has already started and you will have to submit investment declarations for the current financial year to your employer to save tax. You must be panicking for investment to save tax. Why should you wait till year-end for tax planning?
One way to have disciplined tax planning is to link your tax-saving investments to your retirement goal. The idea for linking tax planning to your retirement goal is important since all tax savings instruments have a lock-in period of 3 to 15 years. Firstly, you should calculate the required inflation adjusted retirement corpus depending on your current household and health insurance expenses. Once you have calculated your required retirement corpus, you should calculate the required monthly investment to accumulate the desired corpus and then start investing. It should depend on your risk profile and time remaining for retirement.
Looking at the long-term nature of investment that can be linked to your retirement, here are some of the tax savings instruments that you can choose:
Public Provident Fund
Public Provident Fund is one of the best debt investment instruments with tax benefit and attractive rate of interest. It is a long-term investment, since you have to hold it for a minimum period of 15 years. Partial withdrawals and loans are allowed in PPF, though only up to certain percentages of your PPF balance in a particular year. Since the liquidity is poor, you cannot allocate it for short-term goals, and thus it is suitable to allocate it for your retirement. The government declares the rate of interest of PPF every year. Current rate of interest for financial year 2013-14 is 8.7% p.a.
Employee Provident Fund
Employee Provident Fund is one of the most disciplined ways of savings, since the contribution to EPF is made directly from your gross salary. You as well as your employer make equal contributions in the EPF account. Just like PPF, EPF also has poor liquidity since there are some restrictions on withdrawal from EPF account. Your EPF account is active till you are working and regular contributions are made. So, it is advisable that you don’t touch the money in EPF and hold it till retirement. It serves as a cushion for retirement along with your other savings for retirement. The government declares the rate of interest of EPF every year. Current rate of interest for financial year 2013-14 is 8.75% p.a.
Equity-Linked Savings Scheme (ELSS) funds of Mutual Funds have the shortest lock-in period of 3 years. ELSS funds have major exposure to equity. Though the lock-in period is only for 3 years, you are advised to invest in ELSS funds only if your investment time horizon is at least 10 years. It is one of the best instruments for taking equity exposure with tax benefits. You should always invest in ELSS funds via SIP, just like you invest in equity-diversified funds. Since ELSS funds are market-linked, they are highly risky with higher returns and have the capability to beat inflation. Thus, it can help you build a healthy retirement corpus. You should review your portfolio periodically, though you will not be able to switch or redeem before the lock-in period, but you can at least stop your existing SIPs of non-performing funds and start fresh SIPs in performing funds.
National Pension System
In National Pension System (NPS), you can claim tax deduction only under Tier I account. You have two options under NPS — ‘Active’ and ‘Auto’ option. Under Active option, you have the choice to select investment proportion in equity, fixed income instruments other than government securities and Central Government and State Government Bonds. Under Auto option, there is fixed schedule of investment allocation as per your age group. You need to compulsorily deposit a minimum Rs 500 per month contribution and Rs 6,000 per financial year; and minimum four contributions per year. Thus, investing in NPS helps you invest regularly. Only issue with NPS is you can withdraw only up to 20% (before age 60) and 60% (after age 60) of the accumulated funds in your NPS account, the balance amount should be compulsorily utilised to buy immediate annuity. The pension/annuity receivable is taxable as per your tax slab rate. Thus, NPS is not recommended from tax perspective.
You should invest in a mix of these instruments depending on your investment time horizon and your risk appetite. The younger you are higher is your ability to take risk, and thus higher should be your investment in ELSS funds. You can avail tax deduction up to Rs 1 lakh under Section 80C. But retirement planning is not restricted to Rs 1 lakh that you invest to save tax under Section 80C; you should invest the additional required amount required to accumulate the corpus in other investment instruments. Allocating tax savings investment to your retirement goal helps you maintain discipline for investing under Section 80C. With this you can design your financial life with two-in-one benefits — tax planning with retirement planning.
The author is a research analyst, ApnaPaisa.com. The views expressed in this article are his own.
Buy health insurance when you don’t require it
Even though you are in fantastic health, you will need to use the healthcare system at some point in your life. You certainly don’t know when an accident may take place or your family member may get ill and needs to visit a doctor/ hospital. Health insurance provides you with an affordable method to get a necessary medical care when you actually need it.
Most importantly, it also shields you and your family from the soaring healthcare cost. The cost of treatment for a major illness or an injury can be shattering and can put you under severe financial strain.
One essential health insurance tip: Buy health insurance when you don’t require it, for the reason that you may not get it when you require it.
The key things you must know before you buy your health insurance cover:
Buy early in life
Purchasing a health insurance cover is not expensive when you are young and healthy. The insurance premium is less and you can get wide-ranging coverage in contrast with a policy that you buy at an older age. As you grow older, the premium increases and if you contract a disease, the insurance company excludes pre-existing disease/s which beat the entire rationale of buying a health cover. A majority of insurance companies have an entry age limit in their health plans. This indicates that you would have restricted health insurance options as you turn older like as you near retirement. In addition, you can gain from cumulative bonus in the form of no claim benefit if you renew the policy with no claims.
Seek I-T rebate, but don’t buy it for tax benefit
Premium paid towards health insurance is eligible for tax deduction under Section 80D of the Indian Income Tax Act. If you are less than 65 years of age, then you can claim a deduction of up to Rs 15,000 for the health insurance premium paid for yourself or for your spouse, children and parents. Furthermore, you can claim maximum benefit of up to Rs 20,000 in case coverage is opted for your parents (and parents are senior citizens).
Nevertheless, tax benefit should not be the deciding factor while you buy a health insurance cover.
Group mediclaim insurance
Group mediclaim insurance provided by your employer — is it good to completely depend on it?
Most of the organisations provide a basic health insurance cover. It is wise to buy a personal health insurance policy because...
* Even if your employer covers you under a group mediclaim, the sum insured of such policies is very low. In most of the cases, this amount is inadequate in current times where the cost of treatment is rising every year.
* If your employer makes a decision to slash cost then you may no longer be covered
* If you leave the company due to potential job change, job loss and retirement, then you may no longer be covered
* Most of the group mediclaim policies have clauses of co-pay and deductibles built in and due to these the insured person has to pay from his pocket
* Age is a critical parameter and has a bearing on premium. Premium goes up as you turn older. The sooner you buy a personal health cover, better it is.
Types of health insurance covers
There are chiefly two types of health insurance covers:
Individual health plan: The simple health insurance cover is the individual health plan. It covers the hospitalisation expenses for an individual for up to the sum insured limit. Example: If you have four family members, you can buy an individual cover of Rs 3 lakh each. Here each one of you is covered for Rs 3 lakh. If all four family members need to get hospitalised, all of them can get an expense reimbursement of up to Rs 3 lakh as all four policies are self-governing.
Family floater plan: Family floater plan is a better version of the health insurance. The sum insured value floats among the family members. Like, each opted family member comes under the policy. It covers expenses for the entire family up to the sum insured limit. The premium for family floater plan is in general less than that for a separate insurance plan for each family member. Family floater makes logic for a family because everyone in a family gets a huge cover under one plan and probability of more than one member getting hospitalised in a same year is low.
The author is senior vice-president, Retail Sales, SBI General Insurance. The views expressed in this article are his own.
I do online currency trading business and such trading is done through a New York-based brokerage firm. Are the profits earned on such trading flexible in India? — Parminder
The taxability under the Income-tax Act 1961 (the Act) depends on the residential status of an assessee. Therefore, in case you are a Resident in India for the year for which you have earned income from online currency trading business, you will be liable to pay tax on the profits earned in carrying on outside business. The determination of the profits will have to be done in accordance with the applicable provisions of Section 28 to 44DB of the Act. The Income-tax in India is required to be charged for any assessment year at the prescribed rates in accordance with the provisions of the Act in respect of the total income of the previous year of a person. I do not find any section in the Act which exempts the income from online currency trading from the taxability.
On the basis of figures given in the query, your total income after taking into account deduction available under Section 80C of the Income-tax Act 1961 (The Act) and under Section 24 of the Act should work out at Rs 4,11,625. Assuming that you are a person who is of 60 years or more but less than 80 years, tax of Rs 21,798 would work out as payable on the total income. Therefore, you should have been entitled to a refund of Rs 5,162.
However, the computations sent by you indicate that the Assessing Officer has not allowed deduction for interest paid on housing advance. The facts given in the query do not indicate as to why such disallowance has been made by the Assessing Officer.
In case the house has been constructed and self-occupied, the interest paid would be treated as loss under the head ‘income from house property’ and adjustable against the income from various other sources. In case the house has not been constructed such an interest would be allowable in five equal instalments after the house is complete.
It seems the Assessing Officer has not allowed interest because of the reason that the construction of the house is not complete. If that be the factual position, the calculation made by the Assessing Officer seems to be in order. Interest under Section 234B and 234C would be chargeable as advance tax does not seem to have been paid by you.
I have been allotted Permanent Account Number from Chandigarh and currently I am working at Baddi (Himachal Pradesh). My query is where I should file my income tax return as per the Income-tax Act? — Davinder
The return of income will have to be filed on the basis of your permanent address which had been indicated in the application for the allotment of Permanent Account Number. It seems your permanent address is that of Chandigarh and if it is so, the return should be filed at Chandigarh.