For those who chose 'Option 1' (and the majority of my friends fall in this category), here's why you should not 'actively' pursue this route.
- As long as you are employed, the employer will ensure that a certain amount of your salary is allocated to your Provident Fund (PF) contribution. Typically, this is 12% of your 'basic pay' which is deducted from your salary and paid to your PF Account. One can increase his / her contribution upto 100% of 'basic pay' and is tagged as VPF (Voluntary Provident Fund).
My personal view - maximize your contribution to your PF account; it is portable (with the new unique account number you need not worry about transferring PF accounts whenever you move jobs), allows for withdrawal, has a 'good' rate of return.
- Public Provident Fund (PPF): Many of my friends build a 'fund' for their children's education by investing in PPF. As per FY 2015, the limit is Rs. 1.5 lakh per year. PPF has a lock-in of 15 years and this perhaps is its greatest disadvantage.
My personal view - instead of PPF, invest in VPF.
With the above two categories, people tend to max out the 1.5 lakh limit available under which you 'save taxes' under Sec 80 C of the Income Tax Act. The other categories are as below:
- Premium paid towards Life Insurance / Pension policies: All of us have some form of life insurance / pension product. Whether the 'Life Cover' is commensurate with the insurance needs of the people who have bought these products is a separate discussion!. They also fall under the overall limit of Section 80 C.
My personal view - buy a high life cover with a term insurance, then an endowment / money back policy and finally, a ULIP.
- Premium paid towards Medical Insurance: This avenue encourages people to support the expenses around medical emergencies. Premium paid is deductible (subject to limits - Rs. 15,000/- per year for non senior citizens; Rs. 20,000/- for senior citizens) under Section 80D.
My personal view - buy medical insurance as early as possible, for self, and parents even if the employer provides you a group medical insurance cover.
A smaller segment 'saves taxes' by donating to charitable organizations under Section 80G. The deduction varies from 25% to 100% depending on the charity you have donated to.
My personal view - if you want to donate, then forget about getting the extra leverage of the 'tax benefit'.
There many more options like 'interest paid on education loan', 'principal repayment for a housing loan', etc. but in all these cases potential to save tax is incidental. One does not take an education loan to study because there's an tax benefit on the interest paid!!
Let me remind you that "Investing to Save Tax is Not Investing'.
Next part is for the minority who chose Option 2.
- As long as you are employed, the employer will ensure that a certain amount of your salary is allocated to your Provident Fund (PF) contribution. Typically, this is 12% of your 'basic pay' which is deducted from your salary and paid to your PF Account. One can increase his / her contribution upto 100% of 'basic pay' and is tagged as VPF (Voluntary Provident Fund).
My personal view - maximize your contribution to your PF account; it is portable (with the new unique account number you need not worry about transferring PF accounts whenever you move jobs), allows for withdrawal, has a 'good' rate of return.
- Public Provident Fund (PPF): Many of my friends build a 'fund' for their children's education by investing in PPF. As per FY 2015, the limit is Rs. 1.5 lakh per year. PPF has a lock-in of 15 years and this perhaps is its greatest disadvantage.
My personal view - instead of PPF, invest in VPF.
With the above two categories, people tend to max out the 1.5 lakh limit available under which you 'save taxes' under Sec 80 C of the Income Tax Act. The other categories are as below:
- Premium paid towards Life Insurance / Pension policies: All of us have some form of life insurance / pension product. Whether the 'Life Cover' is commensurate with the insurance needs of the people who have bought these products is a separate discussion!. They also fall under the overall limit of Section 80 C.
My personal view - buy a high life cover with a term insurance, then an endowment / money back policy and finally, a ULIP.
- Premium paid towards Medical Insurance: This avenue encourages people to support the expenses around medical emergencies. Premium paid is deductible (subject to limits - Rs. 15,000/- per year for non senior citizens; Rs. 20,000/- for senior citizens) under Section 80D.
My personal view - buy medical insurance as early as possible, for self, and parents even if the employer provides you a group medical insurance cover.
A smaller segment 'saves taxes' by donating to charitable organizations under Section 80G. The deduction varies from 25% to 100% depending on the charity you have donated to.
My personal view - if you want to donate, then forget about getting the extra leverage of the 'tax benefit'.
There many more options like 'interest paid on education loan', 'principal repayment for a housing loan', etc. but in all these cases potential to save tax is incidental. One does not take an education loan to study because there's an tax benefit on the interest paid!!
Let me remind you that "Investing to Save Tax is Not Investing'.
Next part is for the minority who chose Option 2.
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