With the financial year drawing to an end, many would be scurrying to submit their proofs of tax saving instruments or making tax saving investments to further reduce their tax outgo. While the older lot would be better informed, it may be a confusing time for younger earners and they may be more prone to financial mistakes. Remember that tax saving should never be seen in isolation; it should form a part of the overall financial planning aimed at generating wealth and reducing financial risks.
Here are some tax savings tips for young earners.
Buy term insurance to secure your family’s future
Irrespective of whether you fall under the tax bracket, the first thing to do as a young earner is to buy a term insurance plan. The objective is to provide a replacement income to your dependents in case of your untimely demise. Ideally, your life cover should equal at least 10-15 times of your annual income and term plans allow you to buy such covers at very low premiums. For example, a 25-year-old can buy a 35-year term cover of Rs 75 lakh for annual premiums of as low as Rs 6,000. Moreover, buying term plans early also helps as insurance premiums keep increasing with age. As far as tax saving is concerned, term plan premiums qualify for tax deductions under Section 80C.
Repay your education loan within 8 years
Rising cost of higher education is forcing most students to avail education loans to finance their higher education. As a result, an increasing number of young earners are burdened with education loan EMIs. Acknowledging the problem, the interest component of education loan EMI has been made eligible for tax deduction under section 80E. Although there is no upper limit on the amount deductible, the deduction is available only for 8 successive years from the start of loan repayment. Hence, aim at repaying your entire loan obligation within 8 years to avail optimum tax benefits.
Invest in ELSS for long-term goals
Equity linked savings scheme (ELSS) are tax saving mutual funds that are eligible for tax deductions under Section 80C. Among all Section 80C items, these schemes have the lowest lock-in period of 3 years. Moreover, being invested in equities, they are best equipped to beat inflation rates by a wide margin. Hence, identify your long-term goals, such as arranging for your home loan down payment and creating your retirement corpus and then, invest in ELSS to simultaneously save tax and achieve those life goals. Young earners must consider ELSS strongly as their primary investment tool, as with time on their side; they have an opportunity to build big corpuses in the long run through disciplined investments.
Buy health cover for you and your family
Rising healthcare expenses poses a significant risk to your finances. The only way to reduce such risk is to buy health insurance policies for yourself and your family members. These policies cover whole or part of your, and/or your dependents’ medical expenses and their premium amount is eligible for tax deductions under Section 80D. Currently, you can claim a deduction of Rs 25,000 for premiums paid for yourself and additional deduction of Rs25, 000 for insurance premiums paid for your parents. The deduction allowed for parents’ health insurance policy increases to Rs 30,000 if your parents belong to the senior citizen’s category. This year’s Budget has proposed to increase this limit from Rs 30,000 to Rs 50,000.
Maximize Section 80TTA benefits through high yield savings account
Most are unaware of the fact that savings account interest of up to Rs.10,000 is tax-free under Section 80TTA. Earlier, availing this benefit to the maximum was not advisable as savings account did not yield more than 4-4.5% p.a. However, this started to change after the deregulation of savings account interest rates encouraged many banks to offer high-yield savings accounts paying interest rates of up to 7.25%. The returns from these savings account are even higher than the highest fixed deposit rates offered by most banks. The tax savings would certainly be higher for those falling under high tax brackets. Park your emergency funds in these savings accounts to earn tax-free income and avail the highest form of liquidity.
<<This article was originally published in The Financial Express>>