Best Tax Saving Investments with Life Insurance

NUTAN GUPTA

05 Oct 2016

During this time of the year, one of the major cause of concern for most people is how to maximize their tax savings. So, even if they get a small advise from someone which can save some tax, they might want to consider it. The problem with this approach is that, even though one might get short-term benefits of lower tax, it might lead to long-term losses (or lower profits). Tax saving should always be a side effect of implementation of a long-term wealth creation and preservation program.

It can be proven by data that most people in India buy life insurance for the sole purpose of tax saving. In spite of this being financially foolish, it’s a real fact. People forget that the main purpose of life insurance is to protect the future of dependents and cover all current and future expenses, in case of death of the policyholder.

The best and cheapest option to buy an insurance cover is to purchase a term plan It’s very cheap and gives big-enough payout in case of death of the policyholder. Some people do not consider term plans as a good option, as it does not have any survival benefits. But simple maths suggests that money saved by not buying traditional insurance plans like money back, endowment, etc. and instead buying term plan, can be invested in other assets. This separate investment grows into a bigger corpus with passage of time.

Another mistake which people make is that they only consider tax benefits at the time of purchasing the policy. Most people don’t think about taxation of amounts at the end of the policy. In case of death of insured during the policy period, the amount paid to the family is 100 percent tax-free. For policies with survival benefits, the amount is also tax-free at maturity. But in case of surrender of policy before maturity, the tax liability will depend on the number of premiums paid. If five premiums or more have been paid, there won’t be any tax liability.

This is how policies are taxed in India. As you can see, it does not make sense to buy a life insurance policy only for the purpose of tax saving.

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Why to Choose Mutual Funds Instead of Directly Investing Into Equities?

Whether to invest in equities or mutual funds is a question that has plagued every investor. As someone who needs the best value for his/her investment should you invest in equity directly or via mutual funds?

Let’s start by first understanding what these two terms ‘equities’ and ‘mutual funds’ stand for-

Equities- Equities generally represent ownership of a company. If you own any equity in a company, you are a part owner of the said company (depending on how much equity you own).

Mutual Funds – It is an investment scheme which is professionally managed by an asset management company. It pools together the resources of a group of people and invests their money in equities, debentures, bonds and other securities.

Why choose mutual funds over equities?

For people who’ve never invested in either stocks or mutual funds, it is hard to know which is better and where to start. Broadly speaking, if you are a novice investor, mutual funds are not only less risky but also way easier to manage. Here are some ways in which investing in mutual funds is beneficial as opposed to investing in equities -

Diversification

Mutual funds provide more diversification as compared to an individual equity stock. When you invest in equity, you are investing in a single company which has its inherent risk. For example, if you invest Rs.20,000 in buying equities of one company, you could face a total loss if that particular company performs poorly in the market.  

If you invest the same amount in mutual funds, it will be invested in different kinds of stocks and financial instruments, high-risk and low-risk both, so you might not face total loss even if one company does poorly.

Scale of Investment and Lower Costs

For an individual investor buying and selling stocks is a difficult task due to its high price. Thus, any gains made from stock appreciation are nullified if the overall trading costs are considered. Comparatively with mutual funds, as the money is pooled from a large number of investors, the cost per individual is lowered.  

Another advantage of mutual funds is that you don’t need to invest large sums of money. Buying equities for a profitable venture needs huge amounts of money, a minimum of few lakhs. With mutual funds, you can start with Rs.1000 and earn profits on that as well.

Convenience

Keeping an eye on the markets everyday is a time-consuming business, especially if you are investing as a side gig. There are people who spend their lives studying the market and still end up sustaining heavy losses. Though investing in mutual funds does not guarantee high returns, it is stress-free and needs less work as compared to investing in equities.

To sum it up

It is important to remember that mutual funds have their own disadvantages as well. Thus, as with any financial decision, educating yourself and understanding the suitability of all the available options is the ideal way to invest. 


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Best Tax Saving Investments with Life Insurance

NUTAN GUPTA

05 Oct 2016

During this time of the year, one of the major cause of concern for most people is how to maximize their tax savings. So, even if they get a small advise from someone which can save some tax, they might want to consider it. The problem with this approach is that, even though one might get short-term benefits of lower tax, it might lead to long-term losses (or lower profits). Tax saving should always be a side effect of implementation of a long-term wealth creation and preservation program.

It can be proven by data that most people in India buy life insurance for the sole purpose of tax saving. In spite of this being financially foolish, it’s a real fact. People forget that the main purpose of life insurance is to protect the future of dependents and cover all current and future expenses, in case of death of the policyholder.

The best and cheapest option to buy an insurance cover is to purchase a term plan It’s very cheap and gives big-enough payout in case of death of the policyholder. Some people do not consider term plans as a good option, as it does not have any survival benefits. But simple maths suggests that money saved by not buying traditional insurance plans like money back, endowment, etc. and instead buying term plan, can be invested in other assets. This separate investment grows into a bigger corpus with passage of time.

Another mistake which people make is that they only consider tax benefits at the time of purchasing the policy. Most people don’t think about taxation of amounts at the end of the policy. In case of death of insured during the policy period, the amount paid to the family is 100 percent tax-free. For policies with survival benefits, the amount is also tax-free at maturity. But in case of surrender of policy before maturity, the tax liability will depend on the number of premiums paid. If five premiums or more have been paid, there won’t be any tax liability.

This is how policies are taxed in India. As you can see, it does not make sense to buy a life insurance policy only for the purpose of tax saving.