How to save on tax

Do you have any dependents?

In your twenties, the best insurance to opt for is term insurance. It is the purest and simplest form of life insurance.

You pay the company a premium for a certain number of years. Should you die during this time, the beneficiary (person you name in the policy) gets the money.

Should you live, you lose the premiums paid and you get no money at all.

Let's say you are 25 years old and you take a term insurance policy for 20 years. The amount you get insured for is Rs 10 lakh (Rs 1 million).

If you outlive your policy, you get nothing.
If you do not outlive your policy, the person you nominate will get Rs 10 lakh.

In the first scenario, you pay; you get nothing; your beneficiary gets nothing.
In the second scenario, you pay; you get nothing; your beneficiary does.

Either way, you personally do not benefit.

That's the bad part about term insurance.

The good part about term insurance is that it is the cheapest life insurance available, so you pay the least amount of premiums. For the above policy, you should pay just around Rs 1,988 per annum. This is just an average, you could be paying more since each insurance company will set their own premiums.

If you have absolutely no dependent family (parents, spouse, children), then there is no need to opt for this policy. But, if you do, term insurance is a must. No other policy will offer you as much value for money as this one.

The premium you pay for this policy will be available for deduction under Section 80C.

Play safe, insure your health

A Mediclaim policy is a must because should you fall sick or meet with an accident, your medical bills could wipe out your savings.

As in term insurance, the premium rates will vary among the insurers and will also depend on your age. The older you are, the more hefty the premium.

For instance, Mediclaim policy from General Insurance Corporation has a fixed premium till 35 years and then it changes in 10-year slabs.

Let's say you take a Rs 1,00,000 medical insurance cover.

Age (years)	Annual Premium (Rs)
Till 35	1310
36 – 45	1425
46 – 55	2039
56 – 65	2322
66 – 70	2589
71 – 75	2784
76 – 80	3445

The premium you pay for your Mediclaim is eligible for tax benefits under Section 80D of the Income Tax Act, 1961. This is in addition to the Section 80C benefit of Rs 1,00,000.

This premium is deducted from your gross income. Let's say your gross annual income is Rs 5,00,000 and you pay a premium of Rs 5,000. Your gross will drop down to Rs 4,95,000 for tax calculations.

Even if you do have a medical cover provided by your employer, it makes sense to take out a cover for yourself. Read Why office Mediclaim is not sufficient to understand this better.

Have you thought of buying a home?

It is something you will have to eventually consider. And, you get great tax benefits on a home loan.

When you repay a home loan, you do so via an Equated Monthly Installment. This EMI is a combination of interest payment and principal repayment. Read What you must know before taking a loan to understand how EMIs work.

Principal payments upto Rs 1,00,000 on your home loan are eligible for deduction under Section 80C.

The interest you pay also gets a tax benefit. Under Section 24, the maximum amount of interest that can be deducted from your income is Rs 1,50,000. As a result, your taxable income decreases by that amount.

Let's say your salary income is Rs 3,50,000 and the interest payment on your home loan is Rs 1,60,000. Your taxable income will drop to Rs 2,00,000.

Taxable income = Rs 3,50,000 - Rs 1,50,000 (maximum limit for interest on home loan) = Rs 2,00,000

Summing it all up

Let's take an example to see how the tax is deducted.

Salary income: Rs 3,20,000
Home loan interest payment: Rs 1,20,000
Home loan principal repayment: Rs 80,000
ELSS investment: Rs 30,000
PPF: Rs 5,000
PF: Rs 32,000
Premium on Mediclaim policy: Rs 5,000

Salary (a)	320,000
Income from house property (b)*	-120,000
Gross total income (c) (c = a + b)	200,000
Less: Section 80 deductions
Section 80C deductions
Home loan principal repayment	80,000
ELSS investment	30,000
PPF	5,000
PF	32,000
Sub Total	1,47,000
Limit for Section 80C deduction (d)	1,00,000
Section 80D deduction (Mediclaim Premium) (e)	5,000
Taxable income (c - d - e)	95,000
Tax on taxable income	Nil

* The tax man views the home loan interest payment as negative income.

When doing your tax planning, look at it comprehensively. Take a look at your insurance needs, your investment needs and whether or not you are servicing a home loan.

If you do not have a home loan, you will have to increase your investment allocation. If you do have a home loan, then you can accordingly decide how much to invest in PPF and ELSS.

Try your best not to compromise on your insurance. Once you decide how much to insure yourself for, stick with it. Don't let your tax outgo determine that.