Just started making money. First Job, first month salary. How do you feel when tax is deducted from your salary? obviously the feeling is not good. The best you can do is to start at a right note. Start tax planning in right way as per your future financial goals and aspiration. The objective of tax planning should not be only to save taxes but also to help you to create corpus or wealth for your secured financial future. Government has encouraged savings and investment through tax exemption and deduction to save for various financial aspect of individual’s life.
Lets discuss few of the best suitable strategies for salaried youngsters in early 20’s to save taxes.
One of the most common mistake youngsters make in the initial years of their career is to just invest for tax savings. Ideally investment should be done with an objective to save for specific purpose of your life like retirement planning, wealth creation for future goals etc. not just for tax savings. Getting into wrong commitment of savings and investment just to save taxes harm your financial life. Tax savings is never a primary objective of investment. Right way for tax planning is to set your investment objective first and then select an instrument which helps to achieve that objective along with tax savings. For example, a youngster wish to create wealth by investing in equity and wish to save taxes, ideally the best way to do investment and tax planning is to invest in Equity Linked Savings Scheme (ELSS) of MF.
Don’t buy insurance policies to save taxes
Insurance is a must have product in anyone’s financial portfolio. But buying insurance just to save taxes is not the right way to plan taxes or insurance. The main purpose to buy insurance is to insure life and medical risk. There are tax benefit on Life insurance premium payment u/s. 80C and Mediclaim premium payment u/s. 80D. If you need insurance and additionally if there is tax benefit then it’s bonus point. But to create wealth and for saving taxes if you invest in insurance policy without understanding it’s real benefit in your financial life, then it can have negative impact on your financial life.
Investment in NSC, Tax savings FD etc. to save taxes
Many youngsters take advice from their parents or seniors in their office. There is no harm in investing in NSC or tax saving FD. If it matches your financial objective then it is one of the best tax saving choice with guarantee and tax benefit. Youngster can take risk in their early part of their career. By investing in theses safe investment we may guarantee return of interest and capital but loose chance of making higher return on investment. For long term investors like youngsters in 20’s there are better choices with higher possible returns and tax savings. For example investing in ELSS MF scheme, Investing in RGESS, Investing in Equity pension scheme etc
Don’t follow someone blindly just to save taxes
My friends has invested in a ULIP policy to save taxes that’s why even I have purchased same ULIP policy to save taxes. One of the common tax saving & investment style is to copy someone as it is. But it’s a very big financial blunders which an investors makes. Ideally every person financial needs and goals are different. Even if your age or salary is same still your investment needs are different. It is always advisable to understand your financial objective first and accordingly investment and tax savings instrument should be identified.
Claim Expenses to save taxes
Income Tax Act allows you to claim your expenses for tax savings purpose. Not all but some specific expenses like rent paid, interest on educational loan etc. By showing rent receipt to your employer based on a calculation salaried people can claim HRA exemption to save taxes and increase in hand salary.
Increase your future tax exempt income
Tax planning is not a onetime activity but it’s a multiyear activity. We can invest and save in an instrument which will generate tax efficient income. By creating legal entity like HUF or by diverting your income to other members of your family, we can reduce tax on income earned through interest or dividend. Other way we can invest in an instrument which generate tax free income instead of taxable income. Interest earned on NSC or FD is taxable but dividend earned from ELSS scheme or interest from PPF is tax free.