Rakhi Mehta, 31, is a successful marketing manager working in a top mobile handset company. Her salary is Rs 1 lakh a month. But when it comes to cash in hand, she gets Rs around 82,000 a month. Half of the deduction goes to Provident Fund, which anyway adds to her savings.
But, what about the rest? Well, that’s about Income Tax. Very easily and silently, income tax sweeps off a substantial amount from your salary.
Professionals working in corporate houses generally have this common dilemma. Whenever they get their salaries every month, they wonder that a sizeable amount of their earnings is deducted in the form of income tax. Yes, that is a reality!
Now, you would wonder whether there is any way out? Is there any solution? Can I save on tax? Yes, of course. The government of India has made several provisions through which you can save tax. Life insurance is the major instrument at your disposal.
Under section 80C, you can claim deductions of up to Rs 1.50 lakh on investing in insurance policies which are eligible for the same. However, there are some myths and issues due to which people tend to avoid life plans and rather prefer to keep cash in hand and invest somewhere else.
Myth: Life plans generate low returns!
This is true in some cases. If you buy a traditional life policy, then there are all the chances that it generates returns in the range of 4-8 per cent. But you can always for other types of life insurance plans.
Insurance plans have an inherent advantage of tax savings. For instance, if you are falling in the bracket of 30 per cent income tax, then whatever amount you invest in protection plans you get direct saving of this 30 per cent outflow.
Thus, if you invest Rs 1 lakh in a protection plan, then your taxable income is reduced by this amount. Therefore, you do not have to pay tax on the premium of Rs 1 lakh. Later on, this amount is paid to you back, along with returns.
This way you can ensure a certain amount of savings which could have otherwise spent in the form of income tax.
Myth: Life policies impose high charges
There was a time when insurance companies were free to decide on mortality charges, administrative charges, etc. But now the Insurance Regulatory and Development Authority of India (IRDAI) has set benchmarks and insurance companies cannot charge more than a defined limit.
So, be assured that your rights cannot be exploited.
Can I generate superior returns through insurance policies?
Definitely, you can invest in Unit Linked Insurance Plans (ULIPs), which are able to generate much better returns that traditional policies. However, you have to be patient and invest from a long term perspective.
ULIPs invest in stock markets and as you know stock markets are volatile in the short term, and if you keep looking at the rates of returns every now and then, then you might feel depressed.
Invest in ULIPs but keep a time horizon of at least 3-5 years. In this period, you may find that the returns are higher than the average returns generated by conventional life insurance plans.