How to choose the right tax deduction - by age and stage

Last week we discussed in detail the 80C tax deductions that an individual tax payer can take. But with over 10 options available, how do you decide which is the optimal instrument for you. This week we shed some light for you on suitable income tax deductions based on your age and stage in life. However, please keep in mind that these are suggestions only, and not customized advice based on your personal financial situation. Also, not all the below stages are exclusive to a certain age. Finally, may of these suggested instruments can be combined in value up to the annual limit of Rs 1 lakh for the tax year.

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Age	Life Stage	Suggested Financial Priorities	Suitable instrument to meet the Priority
Up to 25	Single	Start creating financial assets Long-term capital appreciation Protection against accidents	ELSS funds - through a SIP all year round Life Insurance with personal accident and permanent disability coverage
26-35	Married with no children	Have a written financial plan to start the process of sustainable wealth creation Buy a house Capital appreciation Protection for spouse in case something happens to you	Claim home loan related tax benefits ELSS funds Life insurance
36-45	Married with dependent children	Start saving for childrens' education and marriage and your own retirement Update your insurance coverage for financial security of spouse and children	Continue to claim home loan benefits ELSS funds Retiral investments such as PPF Life insurance
46-55	Married with independent children	Start preparing for retirement - pay off all outstanding debts Revisit your portfolio to reduce exposure to risky investments Your most likely do not need to add to your life insurance coverage	Pension plans National Savings Certificate and 5-year FDs ELSS for those who have already taken care of other financial priorities
56-75	Retirement	Financial stability and predictability of assured returns from retiral accounts	Senior Citizen Savings Schemes 5-year FD schemes Annuities

While thinking of your financial priorities according to your age and stage in life, it is also important for you to keep the following factors in mind:

Liquidity and Time Horizon: How quickly do you need access to your money? Some 80C investments come with fairly long lock-ups where you might not have access to your money for anywhere between 3 to 15 years.
Inflation: Do you understand what happens to your investment in case reported inflation rises? Your money will lose its purchasing power. A lot of the 80C investments are fixed income in nature, where they do not offer good protection in times of rising inflation, so understand whether you want capital appreciation or a fixed return.
Risk Tolerance: As with any investment decision, invest according to your risk profile. Don't invest into a high risk ELSS fund, if you don't have the financial or the emotional capacity to take on the risk of losing your capital. Similarly, don't choose a 5-year FD if you are in your early 20s and have the capacity to take on more risk by virtue of most of your economic life being ahead of you.
Adequate Life Cover: As you buy life insurance please keep in mind that you are indeed getting sufficient life cover. Buying a policy every year and making large premium payments do not necessarily mean that you have adequate coverage.

80C is not the only deduction you can take. Did you know that you can also take a deduction for your health insurance premium and for interest payment on an education loan? Here is a quick summary of these:

Nature of Deduction	Conditions and Caps	Suitability
Health Insurance Premium
Health insurance premium paid for: Self, Spouse, Dependent Parents, Dependent Children Or, any member of HUF Is eligible for deduction under section 80D.	Rs.15,000 for Self, Spouse and Dependent Children Rs.15,000 for Parents, Rs.5,000 additional if Senior Citizen. Deduction is restricted to amount paid or above limits whichever is less Payment may be made by any mode other than cash.	For all tax payers
Interest Payment on Education Loan
Interest payment on higher education loan taken: For higher education of Self, Spouse, Children or Students for whom individual is a legal Guardian From any financial institution or approved charitable institution Is eligible for deduction under section 80E.	100 % of interest paid during the previous year is allowed deduction Deduction is allowed for 8 years starting with the year in which interest is first paid or until interest on such loan is fully repaid, whichever is earlier Higher education means full time studies for any graduate or post-graduate course in engineering, medicine, management, sciences including mathematics or statistics This year onwards vocational studies pursued after passing the Senior Secondary Examination are also covered	For all, especially those who intend to take education loan for higher education for Self, Spouse or Children

In addition to the well known and popular deductions under 80C, there are other lesser known deductions as well, that if applicable to you, can help you save money. Here is a quick summary of these.

Nature of Deduction	Quick Description of Deduction	Section
Medical Treatment and Disability
Maintenance including medical treatment of a handicapped dependent with disability	Rs.50,000, irrespective of the amount incurred or deposited. However in case of disability of more than 80% a higher deduction of Rs.1 lakh is allowed.	80DD
Person suffering from disability	Rs.50,000, irrespective of the amount incurred or deposited. However in case of disability of more than 80% a higher deduction of Rs.1 lakh is allowed.	80U
Deduction in respect of medical treatment	Actual incurred, with a ceiling of up to Rs.40,000.	80DDB
Donations and Charities
Contribution to Charities	Deduction for contribution to certain charities can be claimed for entire amount of contribution while to others there is a restriction of 50% of amount contributed.	80G
Contribution / Donation to Eligible Scientific Research and Rural Development projects	Entire amount contributed is eligible for deduction.	80GGA
Donation for contribution given by any person to any political party.	Amount donated to political party is fully exempt.	80GGC
Rental Payments
Deduction in respect of rent paid by self-employed or those not receiving HRA in their employment.	Maximum of Rs.2,000 per month.	80GG

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How to choose the right tax deduction - by age and stage

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