Thread by @myfinology

Are you buying Insurance this year just to save taxes?

DON'T. 🤫

It could cost you more than it saves in taxes!

Here's how ⤵️

Suppose there is a Mr Rahul who gets Rs 7.5 Lakh a year as his salary (with no other sources of income).

➡️ In India, if you earn more than 5 Lakh, you have to pay taxes.

#taxpayers

But there are ways by which you can reduce your Taxable income. Some of them are:

° By investing up to 1.5 Lakh in PF, NSC, ELSS, Insurance, etc (80C)
° By investing up to 50 Thousand in NPS (80CCD)

Mr Rahul has invested Rs 112400 in the above tax-saving options, except Insurance.

Salary 750000
-Standard Deduction -50000
-Tax Savings Deduction -112400
-------
Taxable income = 587600

Now, Mr Rahul has to pay tax on the income exceeding 5 Lakh, i.e. on Rs 87,600

#IncomeTax

An agent approaches Mr Rahul & tells him that if he takes an insurance policy by paying a premium of Rs 87,600, he won't have to pay any tax. 🤯

#insurance

Mr Rahul agrees and buys a "LIC New Jeevan Anand" Endowment Plan with a maturity amount of Rs 53.5 Lakh after 25 years.

Here's how he will save taxes ⤵️

#LIC

By buying the Insurance policy, Mr Rahul is able to save Rs 31,221 in taxes every year. A great deal, isn’t it?

But the reality is different ⤵️

Rahul's savings -

In Scenario 1: Rs 87,600 (by not buying insurance)
In Scenario 2: Rs 31,221 (by not paying taxes)

Suppose you invest these savings for the next 25 years in Equity mutual funds that generate returns of 15% p.a.

Here's how much he will realize after 25 years ⤵️

#StockMarket

Wealth after 25 years

Scenario 1: Rs 1.69 Cr.
Scenario 2: Rs 1.14 Cr.

Even by not using insurance to save taxes, he generates 1.5X wealth in just two decades! 🤯

So, now you know why Insurance policies aren’t always good tax-savers as they are mis-sold to be. 😒

This is not to say that Insurance is not important. Ofcourse, it is. You must have a Term Insurance. But an Endowment plan just for saving taxes makes no sense.

Anyways, what to consider while selecting the best tax saving instrument for you?

1. Age
2. Financial Condition
3. Goals
4. Returns
5. Lock-in period
6. Exemption status

#TaxPlanning

Here's one comprehensive chart on tax saving instruments for your reference ⤵️

To make tax-saving easier for you, for varying age & investment objectives, we have recommended three different instruments for our users in Recipe.

➡️ Access them in the ‘Recommendations’ section of Recipe.finology.in

P.S. It's FREE 🤩