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 on the right note. Start tax planning in the 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. The government has encouraged savings and investment through tax exemption and deduction to save for various financial aspects of an individual’s life.
Lets discuss few of the best suitable strategies for salaried youngsters in early 20’s to save taxes.
Don’t Just invest to save taxes, invest for wealth creation
One of the most common mistakes 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 a specific purpose of your life like retirement planning, wealth creation for future goals, etc. not just for tax savings. Getting into the wrong commitment of savings and investment just to save taxes harm your financial life. Tax savings is never a primary objective of investment. The right way for tax planning is to set your investment objective first and then select an instrument that helps to achieve that objective along with tax savings. For example, a youngster wishes to create wealth by investing in equity and wishes to save taxes, ideally the best way to do investment and tax planning is to invest in the Equity Linked Savings Scheme (ELSS) of MF.
Must Read: Tax Planning For Beginners: 3 Key Principles Explained
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. The youngster can take risk in their early part of their career. By investing in theses safe investments we may guarantee return of interest and capital but lose 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 the 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 investor makes. Ideally, every person’s financial needs and goals are different. Even if your age or salary is the same still your investment needs are different. It is always advisable to understand your financial objective first and accordingly investment and tax saving instruments 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.
Must Read: Five heads of Income eligible for Income Tax Computation
Increase your future tax exempt income
Tax planning is not a one-time activity but it’s a multi-year activity. We can invest and save in an instrument that will generate tax efficient income. By creating a 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 that generates 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.
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