Rising disposable incomes have meant that younger individuals – even those in their 20s who might have just started working – too feel the need to keep their tax outgo in check.
This category of taxpayers could be vulnerable to financial advice driven by commissions rather than meeting their requirements, given that they are inexperienced when it comes to managing finances. The rush to exhaust the Rs 1.5 lakh deduction limit under section 80C before the last date too can push them towards making investments that fail the utility test.
Moreover, it is easier to fall prey to wrong advice if the deadline for submitting investment declaration to your employer is just a few days away. Here are five points such individuals need to bear in mind while planning investments to save on taxes this year:
Do not treat tax planning as an isolated activity. Devise a financial plan, after seeking advice from professionals if needed, taking into account your long and short-term goals, returns expectations and risk appetite. Let your tax-saving investments complement your planned, regular savings aimed at achieving your goals.
Instead of asking friends, colleagues and relatives for investment suggestions, do your own research. First, figure out when you’d need the money you are directing towards tax-saving instruments, as they come with lock-in periods. If you plan to buy a house or a car three years later, do not direct the entire Rs 1.5 lakh towards say public provident fund (PPF) that allows withdrawals only from the seventh financial year of having made the investment. Instead, you can look at equity-linked savings scheme (ELSS) funds or tax saver fixed deposits that come with lock-in periods of three and five years respectively.
Typically, many tend to blindly ‘invest’ in life insurance-cum-investment plans like endowment and unit-linked insurance policies, either because they have seen their parents do so or due to hard-selling by agents and bank officials. However, do not forget that the primary aim of life insurance is to protect your loved ones financially in your absence. If you do not have dependents, avoid buying life insurance policies, particularly the ones with savings component – you have to make recurring premium payments to keep them in force, which means that any failure to pay premiums because of the financial crunch in future could result in lapsation. Even if you have to buy, go for pure term covers that are much cheaper. On the other hand, consider buying health insurance even if your employer provides it. It will be useful in case you switch jobs, something that the younger generation tends to do frequently. An accidental death and disability cover will come in handy too.
Section 80C has a provision for claiming tax breaks on housing loan principal repaid. Also, section 24 allows deduction of up to Rs 2 lakh on interest paid on loan. While it could be tempting to buy a house – considered a must-have in India – and gain from the tax benefits too, it would be unwise to take the call solely to maximise the tax incentives. It is a massive investment that can stifle your finances and spends at an early stage in your career, so you need to weigh your options carefully.
Since those in their 20s are prone to running up huge bills, it is likely that they realise that they do not have adequate funds to make tax-saving investments only towards the end of the financial year. However, make sure you do not let the desperation to utilise tax reliefs get the better of your good sense. Under no circumstances should you take a personal loan to make such investments. Neither should you use your credit card, unless you are sure that the subsequent month’s salary will be sufficient to clear the dues. The high rates of interest – ranging from 15-44% – on such unsecured form of debt can wreak havoc on your finances – your investments are unlikely to deliver returns to match these rates, pushing you into a debt trap.