By the time you reach your forties, you are well settled in your respective careers. Your income is much higher than in the previous stages of life. Your children are also growing up and their education is an important goal at this stage. Retirement planning is also a very important financial planning objective in this stage of life. The risk tolerance of the investor in the forties is moderate to high. Non investment related tax savings should comprise a major portion of the 80C deductions of the tax payers in the age group of 40 – 50. Here are some tax-planning ideas for this age-group.
- If you have a home loan, you should try to prepay part of your home loan principal on a periodic basis. By prepaying your home loan principal you will reduce the interest burden on your home loan (please read our article, Should you Pre Pay your Home Loan). Home loan principal payment qualifies for deduction under Section 80C of the Income Tax up to a limit of Rs 1.5 lacs as per the new Budget. One should note that for calculation of principal payment, both principal payment under Equated Monthly Instalments (EMIs) and principal prepayment should be considered. Prepaying principal is always a good idea since it reduces your interest cost. Interest rate on home loan is almost always higher than interest earned on fixed income investments. Also by prepaying the principal, you will be debt free in a shorter period of time. Hence, principal prepayment should be a priority.
- You should also claim deduction for interest paid on home loan for a self occupied property under Section 24 of the Income Tax Act up to a limit of Rs 2 lacs as per the new Union Budget
- With increase in salary the 80C deduction on account of contribution to the employee provident fund is also substantially higher.
- If you have children, you can claim 80C deduction towards their school tuition fees.
- As discussed in our previous article, Tax Planning at different stages of life – Part 1, your life insurance premiums will also qualify for 80C deductions. At every stage of life you re-evaluate your life insurance cover and make sure they are adequate for your needs.
- With your contribution to EPF, home loan principal payment, children’s tuition fees, insurance premium and home loan principal payment, you should be able to meet the 80C tax saving limit and therefore you may not have to make any tax saving investment. In case you have to make tax saving investment under section 80C, you should make retirement planning your investment objective. Tax saving mutual funds (ELSS), National Pension Scheme (NPS) and Public Provident Fund (PPF) are preferred investment choices. You should ensure optimum asset allocation in your tax saving investments.