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 Health Insurance and Investment

February 2010
It's Tax Proofs Time
Anil Rego
If you have not already planned your tax saving investments, dear salaried class, it is high time to pull up your socks. After the New Year party hangover, if there is one thing dangling right above your head, it is the last date for proof submission. Here's a quick wrap on the various items that can help you reduce your tax liability, that too by quite a significant number.

You can avail the benefit of 'tax saving without investing' – exemptions, tax–free perquisites and other items, for deductions. This can help you go a long way in saving taxes. Someone with about a three lakh package can prudently plan and reduce his tax liability to nil with exemptions alone!

Exemptions There are four avenues to claim exemptions.
  • House Rent Allowance: You can claim up to 10 percent of your basic salary as your rent paid. Or, if you are staying in a metro, it can be 50 percent of your basic salary, and 40 percent, if you are in a non-metro. Or, you can claim your actual HRA, whichever of these three are lowest.
  • Conveyance Allowance: Up to Rs. 800 per month can be claimed here.
  • Leave Travel Allowance: This covers only travel costs, but include family members. While there is no value limit, it is restricted by some conditions. You can avail two trips in a block of four years. The amount claimed should not exceed Economy Class by air or First AC by rail and the fare claimed should be for the shortest distance, and for a single destination.
  • Medical Allowance: You can claim up to Rs. 15,000 per annum on this one. With the abolishment of the Fringe Benefit Tax (FBT) regime, the number of tax free perquisites has drastically reduced. If you have availed a company car lease, the EMI would also help reduce your tax, despite the perquisite value that one needs to pay.
5 Tips for Tax Planning
  1. Understand your long term financial goals – this is the starting point for any form of investment
  2. Minimise risk on your health/life hazard
  3. Avail medical insurance for your parents if they are still within the insurable age
  4. Use all your tax breaks
  5. Invest inline with your goals. Focus on your financial goals with a long-term perspective and your tax planning will be taken care of!

Invest and Increase Your Take-home
The most popular deductions are Section 80C and Section 80D which are typically applicable for all individuals. These two sections alone can help you save upto Rs. 41,715/- (Rs. one lakh on Sec 80C; Rs. 35,000/- on Sec 80D).

Your child's tuition fee will also qualify under Section 80C under the overall bracket of Rs. one lakh. The interest earned on your existing National Savings Certificate deposit will also avail the benefit of Section 80C. However the interest earned will also be treated as income, thus nullifying the benefit on the same.

Avenue Investment
Term With drawal Returns Risk Profile
  Min Max.     Pre-Tax Post-Tax  
Public Provident Fund (PPF) 500 70,000 15yrs 7th yr onwards (Partial) 8% 8% Low
National Savings Certiuficate (NSC) 100 No limit 6yrs None 8% 5.6% Low-Med
Infrastructure Bonds 5,000 No limit 3-5yrs None 5%-6% 3.5%-4.2% Low-Med
Fixed Deposits 1,000* No limit 3-5 yrs
(for tax benefit)
None 7% 4.9% Low-Med
Traditional Insurance 10,000 No limit Min.10yrs None 5.5%-6.5% 5.5%-6.5% Low-Med
Pension Plans 10,000 No limit Depends on your age and investing None 5.5%-6.5% 5.5%-6.5% Low-Med
Unit Linked Insurance / Pension Plan 10,000 No limit Min.10yrs 4th yr onwards (Partial) 10%-15%* 10%-15%* Moderate
Equity Linked Savings 500 No limit 3yrs lock-in None 10%-15%* 10%-15%* Scheme Moderate-High

Section 80D: Medical premiums would qualify for deduction under Section 80D to a maximum of Rs. 15,000/-. One can also avail a medical insurance for his aging parents and claim additional Rs. 20,000/- as deduction under Section 80D.

Home Loans
Home loans provide attractive tax savings. The EMI that you pay towards such a home loan has two components – Interest and Principle. Both these components qualify for tax breaks. The Interest part helps save upto Rs 1.5 lakhs for a self occupied property. The principal part is included under section 80C which has an upper limit of Rs 1 lakh as stated earlier. The limit of Rs 1 lakh is for all avenues put together under Section 80C.

Don't let the tax benefits slip by. Save taxes and grow richer!
Anil Rego is Founder and CEO of Right Horizons, an Investment Advisory and Wealth Management Company

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