The thirties is an important stage of life. This is the stage of life when we are likely to have a family. Incomes and responsibilities increase in this phase. The risk tolerance of the investor in the thirties is still high. Tax saving investments should be made with a long time horizon. However, during this stage of life you can also benefit from other tax saving options
- As your salary increases, your contribution to the employee provident fund will also increase. Since your EPF contribution automatically goes to your 80C, you will be able to save more taxes.
- If you have children, you can claim a deduction towards their school tuition fees. Please note that, fees paid for private tuition or coaching classes are not eligible for 80C deduction.
- You should continue with your life insurance policy. Evaluate if the sum assured of your policy is sufficient for the needs of your dependents. You need to consider several factors in deciding how much insurance cover is adequate. These factors are:-
- Repayment of your entire outstanding debt (e.g. home loan, car loan etc.) in the event of an unfortunate death
- After debt repayment, the insurance cover should have surplus funds to generate enough monthly income to cover all the living expenses of your dependents, factoring in inflation
- After debt repayment and generating monthly income, the insurance cover should also be adequate to meet the future needs of your dependents, like your children’s higher education, marriage etc.
For more details on determining the amount of life insurance cover, please refer to our article, How much life insurance is adequate). If you bought a life insurance plan ten years ago based on your income back then, the sum assured will not be enough to meet your family’s current lifestyle and needs, in the unfortunate event of your untimely death. You should buy additional term cover, if the sum assured of your current policy is not sufficient for your needs. If you are buying Unit Linked Insurance Plans (ULIPs), you should clearly understand the various charges in the policy. Suffice to say, ULIPs will give much lower returns in the short term compared to mutual funds, due to premium allocation, policy administration and other charges. You should not buy ULIPs just to maximize tax savings. If you are not clear about how ULIP charges will affect your investment returns, you should avoid ULIPs.
- Most Indian homeowners make their first property purchase in their early thirties. You can claim a home loan principal payment up to the maximum 80C limit (Rs 1.5 lacs in the new Budget). You can claim the benefit irrespective of whether you occupy the property or not. 80C deduction can be claimed on home loan principal payment, only after you get possession of you property from the real estate developer.
- You can also claim deduction for interest paid on home loan for a self occupied property under Section 24 of the Income Tax Act. In the previous tax regime, you could claim a deduction of up to Rs 1.5 lacs per annum on account of interest paid on home loan for a self occupied property was. The new Finance Minister has also raised the limit of deduction for interest paid on housing loan under Section 24 of the Income Tax Act by Rs 50,000 to Rs 2 lacs per annum. Please note that if you have rented out the property, then there is no limit and the entire interest paid can be deducted from you rental income to calculate the net income from your House Property for Income Tax purpose.
- You should also re-evaluate your health insurance cover since you may have more dependents now. The group health insurance plans of many companies provide a cover of Rs 2 lacs. But it may not be enough. If you are living in a metro city, a major illness in your family can cost you Rs 4 – 5 lacs. If you have a family it makes more sense to buy a family floater plan. In this type of plans, the entire family is covered for the amount they share and the benefit is that, per person premium is lower. As discussed earlier, you can avail deduction of Rs 15,000 (Rs 20,000 if you have dependent parents) for Mediclaim premium under Section 80D.
- After claiming deductions for EPF, children’s tuition fees, insurance premium and home loan principal payment, if you can still make 80C investment, then you should plan your investment according to your risk tolerance level and your optimum asset allocation strategy. Since your risk tolerance level is likely to be high your tax saving investments should be weighted to equities. So continue to invest in ELSS through the SIP route.
- It is also advisable that you open a PPF account at this stage, unless you have one already. You should start making PPF deposits, even if you have exhausted your 80C limits. As discussed earlier, PPF offers, probably the highest risk free tax free returns in the long terms and as such is an excellent investment option