Spend, Save and Invest Smartly
There is a famous saying “There is no worse tyranny than to force a man to pay for what he does not want merely because you think it would be good for him”. Think life insurance. One can avail tax deductions under Section 80 C for the premiums paid on life insurance policies. But what if one does not require life insurance? Would one purchase an insurance policy just to avail these benefits? What would happen when one finds his endowment or Ulip policy not suitable to his needs? Would one then surrender this policy at a huge loss? Remember a bargain is something you don’t need at a price you cannot resist.
It is tax season and the first thought in one’s mind are those tax deductions. Think ..Section 80 C. For the life insurance agent an opportunity to make a huge commission and earn incentives. What life insurance policy would one be sold by the life insurance agent? It is obvious. It has to be an endowment life insurance or Ulip policy which command high premiums and commissions for the agent as they are an investment as well as insurance plans. One is hooked by these insurance policies and blindly purchases them to save tax. In life in order to get something one has to give something. Think.. Pay insurance premiums get tax benefits. What happens when one finds the premiums unaffordably high and wants to surrender the policy?
The deductions availed under Section 80 C in the previous year in case of term or an endowment policy or for Ulips the deductions in the earlier years before the policy is surrendered within a 5 year period are deemed to be ones income and one has to pay tax on this amount in the year one surrenders the policy. One has high surrender charges and gets negligible cash value or surrender value on the policy. One suffers a heavy loss as the policy is surrendered very early for a low surrender value and tax is also charged on it. Certainly a double whammy.
One gets a tax deduction on the principal component of his home loan along with registration fees and stamp duty charges up to INR 1 Lakh under Section 80 C .If one sells this house availed on a home loan in a period under 5 years he loses his tax benefits. What happens if one sells his house availed on a home loan before the 5 year period? The tax benefits are taken back. If one sells his house in the third year since the house was taken in possession the tax deductions availed on the principal component in the previous two years will be added to ones taxable income in the year the house was sold namely the third year and taxed as per the tax bracket one falls under. If one claims deductions on the interest component of the home loan under Section 24 (b) these tax benefits stand.
One can invest in the RGESS if one is a first time entrant in the equity market. If one has an income of not more than INR 12 Lakhs per annum and he has never traded in equities and derivatives then he can invest a maximum of INR 50000 in the equity market and he gets a tax exemption of 50% of the amount invested under Section 80 CCG. One has a 3 year lock in period of which 1 year is a fixed lock in and the remaining two years are a flexible lock in. One cannot sell or pledge his shares or equity within the fixed lock in period. If one does not fulfill the set conditions and sells or pledges his holdings in the fixed lock in period then the tax deductions under Section 80 CCG are reversed. One has these amounts deemed to be the income of the previous year. One is then taxed on these amounts.
One makes contributions to the employee provident fund where he is working and the employer also makes a similar contribution towards this fund. Only one’s contribution is considered towards a tax deduction under Section 80 C up to an amount of INR 1 Lakh. What would happen if one withdraws his EPF before he completes 5 years of continuous service? When one changes his job he would withdraw his EPF .But is this a wise idea if it is withdrawn before 5 years of continuous service? One’s EPF amounts are taxed in the year they are withdrawn and the deductions availed in the previous years are reversed. Frankly quite a loss.
One sells his residential property and may obtain a profit called capital gains. If one’s residential property was sold in a period after 3 years of its purchase it is called long term capital gains and tax is charged on this called long term capital gains tax. There are ways to escape this capital gains tax and one of them is to invest in a new residential property within a period of 2 years from the time the property was sold or construct a new residential house within a span of 3 years. But what if one sells the newly purchased or constructed house within a period of 3 years? One has the entire capital gain added to his income and he is taxed as per the tax bracket he falls under. Remember never do things by halves.
If one is a Senior citizen and invests in the senior citizens savings scheme he gets a high rate of interest in excess of 9% as a senior citizen benefit. However one needs to stay invested for a period of at least 5 years. What happens if one withdraws the amount before a period of 5 years? Senior citizens savings schemes are tax deductible up to INR 1 Lakh under Section 80 C of the income tax act. The amount one deposits in the scheme to get a tax benefit as well as the interest amounts accrued on this anount are deemed to be the income of the previous year in which one withdraws the amount .If one has already paid tax on the interest on an accrual basis these amounts will not be taxed.
There is a famous saying “The point to remember is that what the Government gives it must first take away”. One needs to remember that tax deductions or benefits are not permanent and one needs to wisely utilize them. One should not purchase a life insurance policy just to avail a tax deduction. One needs to go the whole way in his decisions and the best way to do so is financial and insurance planning along with a dose of tax planning.