Updated: Nov 21
A few months into another financial year and you are still worrying about the taxes that you could have saved from your previous year’s income!
You also have some important goals to achieve, but your fixed deposit investments are not yielding the desired income. You tried your hands at trading but hardly booked a few attractive profits. You have some savings but always linger in doubt if they are adequate.
Resonating with all or most of the above situations? It’s not new, most of us sail in the same boat except for those who use the magic tool along with a financial expert’s guidance. They are not just saving their yearly income taxes, but are also building a wealthy corpus in the long term in addition to taking the necessary steps to create a monetary reserve in times of unexpected emergencies.
Read on to know more about Tax Saving, Equity Linked Savings Scheme (ELSS), National Pension System (NPS) and Health Insurance...
INTRODUCTION - TAX SAVING
Is there a way you can pay minimum tax and still accumulate more wealth?
Yes, you can.
All thanks to the magic tool - “Teen Ka Fayda”!
The Teen Ka Fayda is a power tool that combines the benefits of three important financial instruments - Equity Linked Savings Scheme (ELSS), National Pension System (NPS), & Health Insurance. With Teen Ka Fayda, you will be able to save taxes up to Rs. 85,800/- a year easily as per the relevant income tax provisions. Not just that, it will also help you build your wealth with long-term investment discipline, help you with your retirement financial planning, and assist you in creating a financial reserve to use in case of unexpected emergencies.
For example, you are a salaried individual with an income of Rs. 12,00,000 per annum. In your Income Tax Form 16, even without any additional effort, you’ll get a standard deduction of up to Rs.50,000 because of your employment. If you have some bank deposits, then an additional Rs.10,000 can be claimed as a deduction. But then you would have saved only 60,000 from your income and you are still over the 30% tax bracket.
This is where Teen Ka Fayda comes into the picture. It will help you claim a deduction of up to Rs.2,75,000 and save Rs.85,800 from your yearly income taxes.
While the main purpose of Teen Ka Fayda is to prevent your income from the trap of a higher tax bracket, it also provides a number of additional benefits that you will be thankful for. A few to list are,
Saving taxes up to Rs.85,800/-*
Transparent and real-time performance of your investments.
Assisting you in planning a financially secure retirement.
Allowing exposure to the equity markets.
Helping to create a monetary reserve in times of unexpected healthcare emergencies.
ELEMENTS OF TEEN KA FAYDA:
Teen Ka Fayda uses 3 investment tools to fulfill its purpose of saving tax & building wealth. Let us now dive into these 3 tools and explain how you can optimize them to minimize your taxes and maximize wealth.
Equity Linked Savings Scheme (ELSS)
What is ELSS?
ELSS is the only tax-saving mutual fund that allows you to save tax while also offering the opportunity for long-term wealth creation. It offers exposure to the equity markets and encourages you to utilize the advantages of risk-to-returns strategy in your investments.
How ELSS works?
As per section 80C of the Income Tax Act, 1961, you can save up to Rs.46,800 by investing a maximum of Rs.1,50,000 in ELSS. It is important to note that the maximum permissible deduction under section 80C is Rs.1,50,000 which includes investments made in ELSS, premium paid for life insurance, and other government-recognized investments like NPS, NSC, and PPF.
ELSS has a mandatory 3-year lock-in period which is also the lowest among other tax-saving investment alternatives. This three-year period allows your wealth to compound over time.
Investments in ELSS can be made in two ways:
Systematic Investment Plan is a popular way to invest in Mutual Funds. It helps you navigate market volatility and promotes disciplined investments by allocating a fixed amount at regular intervals toward your goal. For instance, if you plan to invest Rs.1.5 lakhs in ELSS for a year, you can start with monthly investments of Rs.12,500. However, it is important to note in the case of ELSS, each SIP has a definite 3-year lock-in period.
The Lumpsum method allows you to invest any sum at any point in time, unlike SIPs. While this method offers flexibility in your investments, most people try to time the market while making lump-sum investments which is not the right investor behaviour. This is because timing the market can turn risky and may not yield the desired results as markets are subject to volatility.
How to use ELSS to save taxes?
Investing in ELSS comes with a handful of tax benefits.
Firstly, Section 80C of the Income Tax Act allows a maximum deduction of rRs. 1,50,000 per year which will help you save up to Rs.46,800* of your taxes.
(*assuming you fall under the 30% tax bracket)
Next, at the time of redemption, they are taxed as long-term capital gains because of their mandatory three-year lock-in. These gains are totally exempt from tax up to Rs.1,00,000 in a financial year. Any gains over and above Rs.1,00,000 are taxed only at 10%.
Benefits of investing in ELSS:
Only tax-saving mutual fund category.
Shortest lock-in of just 3 years compared to other tax-saving investments.
Helps in long-term wealth creation.
Creates an investment discipline through SIP.
Navigates market volatility in the long term.
Benefit of power of compounding to build wealth.
Allows you to stay invested even after the three-year lock-in.
Offers exposure to the equity markets.
National Pension System (NPS)
What is NPS?
NPS is a government-recognized retirement planning scheme launched and regulated by the Pension Fund Regulatory & Development Authority of India (PFRDA). Besides allowing tax benefits, NPS allows you to plan your retirement finances and ensure a financially secure future. It provides market-linked returns with moderate risk exposure making it a safe investment alternative.
How NPS works?
Investments in NPS can be made under two accounts namely, Tier-1 & Tier-2. While Tier-1 is a mandatory account and is also eligible for tax benefits, it has a longer lock-in of up to the individual’s 60 years.
Tier 2 is an additional account where you can make additional investments into NPS. while this account does not have a longer lock-in period, it is also not eligible for tax exemption. You can use this account as a backup if you wish to park your excess funds.
Post the lock-in period or after you turn 60, you can redeem a maximum of 60% of the accumulated corpus as a lumpsum which is entirely tax-free. The remaining 40% must be converted into an annuity where you will receive the amount at fixed intervals to ensure a regular flow of post-retirement income.
Investments in NPS are made either as “Active Choice” where you decide the asset class to diversify your investments or “Auto Choice” where investments are automatically made based on your age and risk profile. NPS investments are made in the following asset classes: Equity (E), Corporate Bonds (C ), Government Securities (G), and Alternative assets (A).
How to use NPS to save taxes?
As per section 80C of the Income Tax Act, you can claim a maximum deduction of up to Rs. 1,50,000 and save taxes up to Rs.46,800.
Additionally, you can also claim an additional deduction of up to Rs.50,000 u/s. 80CCD (1B) which will help you save tax up to Rs.15,600 a year. (this 50,000 is over and above the permissible limit allowed under section 80C.)
Further, once you attain 60 years of age, 60% of the accumulated corpus can be withdrawn as a lump sum which is exempt from tax.
Benefits of investing in NPS:
1. Develop an investment discipline.
2. Plan your retirement finances.
3. Enjoy additional tax benefits.
4. Save on cost structure.
5. Choose safe asset allocation.
6. Professional management of funds.
7. Experience the Power of Compounding.
8. Hassle-free investment process.
What is Health Insurance?
Health insurance is a financial safety net that helps cover medical expenses. When you have health insurance, you pay regular premiums to the insurance provider, and in return, they assist in paying for your healthcare costs. This includes expenses like doctor's visits, hospital stays, prescription medications, and preventive services. Health insurance provides peace of mind, ensuring that you can access necessary medical care without the burden of hefty bills, ultimately promoting your overall well-being.
How does Health Insurance work?
Health insurance works by individuals or employers paying regular premiums to an insurance company. In return, the insurer covers a portion of their healthcare expenses. When you need medical care, you visit a healthcare provider, and the insurance company typically pays a portion of the bill, while you may be responsible for deductibles, copayments, and coinsurance. This system helps individuals manage healthcare costs and ensures access to necessary medical services when needed.
How to use Health Insurance to save taxes?
Premium paid for health insurance can be claimed as a deduction under section 80D of the Income Tax Act. The below table will help you understand the conditions and eligibility for claiming the medi-claim premium deduction u/s.80D.
Benefits of Health Insurance:
Secures wealth against unexpected medical emergencies.
Access to quality healthcare at affordable cost.
Overcomes the impact of rising medical inflation.
Avail complimentary health check-ups.
Encourage the adoption of healthy lifestyle habits.
TEEN KA FAYDA: Minimize Taxes & Maximize Wealth - a Practical Illustration
*80D deduction assumed Rs.25000 for self & spouse + Rs.50,000 for senior citizen parents.
Tips & Tricks To Optimize Teen Ka Fayda:
Invest at the beginning of the financial year to benefit from the power of compounding.
It is recommended to stay invested for a longer term to witness the real growth of your investments.
Continue investing different amounts based on your ability to avail of tax benefits.
Start investing at an early age with small amounts and gradually increase your investment. This will help reap the benefits of compounding.
Consider the guidance of a financial expert before deciding the investment mode i.e. auto choice or active choice.
Continue investing to avail of tax benefits.
Get a health insurance policy that covers a comprehensive list of diseases and offers coverage for you and your family.
Consult an expert to compare different health insurance schemes and choose the policy that best suits your requirements.
Don’t just rely on corporate insurance. Get a standalone insurance policy.
Avail of the complimentary health check-ups included in your policy every year.
Why worry when you can invest, grow your money, protect your wealth, and also save taxes?