The Importance of Tax Saving Investments in Your Late 20s

2024-04-10

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If you have just got your first pay cheque and are thinking of going on a spending spree, take a step back. While the urge to splurge might be tempting, do you know that this is also the time to inculcate money management habits that could help you save for your future? Putting some funds aside to invest in tax-saving schemes now can not only reduce your tax outgo but could also help you grow your wealth in the long run.

You can take more risks with your money when you are young unlike when you are approaching retirement. This strategy has the potential to generate higher returns allowing you to accumulate a bigger corpus over the years. It is important to sit down and chalk out an investment plan taking into account your ability to take risks and expected returns keeping your financial goals in mind. Here are a few tax-saving investments that can come to your rescue in your 20s:

Life insurance: You might not feel the need to protect your life given that you do not have any dependants or debt. However, buying a life insurance policy early in life can not only cost you less but also provide a longer cover against any uncertainties. Additionally, premiums paid annually towards your life insurance plan can be claimed as deductions when filing your income tax return. Under the old tax regime, a maximum exemption of ₹ 1.5 lakh is allowed as per Section 80C of the Income Tax Act. This benefit is not applicable if you opt for the new tax regime (as per FY 2024–25 rules).

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Equity Linked Savings Scheme(ELSS): A long term investing option that allows you to invest in equities while letting you save tax makes ELSS funds the most sought-after tax-saving schemes. This is the only category of mutual funds that allows you to save tax. Opt for a Systematic Investment Plan(SIP)to benefit from market movements and grow your money slowly and steadily. Section 80C provisions allow for tax deductions upto ₹ 1.5 lakh on investments made in ELSS allowing you to take high risks to reap higher rewards with these market linked instruments.
Public Provident Fund(PPF): PPF belongs to the category of tax saving investments that fall in the EEE category. The current interest rate on PPF is 7.1% per annum (compounded annually) for FY 2024–25. This means that the amount invested annually, interest earned as well as the amount on maturity are all tax free. The earlier you start investing the more tax you save while multiplying the returns. A minimum amount of ₹500 is required to keep the account active while a maximum of ₹ 1.5 lakh can be invested which can be claimed as a tax deduction as per Section 80C. You can make partial withdrawals as well as avail a loan against your PPF account.
Unit Linked Investment Plan(ULIP): A ULIP not only provides life insurance but also helps generate wealth in the long term. Choose from equity, debt, and hybrid funds as per your risk taking capacity and watch your funds grow. Although ULIPs come with a 5-year lock-in period, they are flexible tax saving investments allowing you to switch between funds and redirect future premiums as per your needs. You can choose the premium frequency, policy term and also get protected with a life cover. Annual premiums paid qualify for tax relief under Section 80C up to ₹ 1.5 lakh under the old tax regime. However, if the premium paid in any year exceeds ₹ 2.5 lakh across one or more ULIPs (issued on or after 1 Feb 2021), the maturity proceeds become taxable as capital gains.

These are a few tax-saving schemes which you should include in your investment plan in order to build the discipline of saving for the future. Design a monthly budget and plan your expenses while setting aside funds for saving. This helps your money work for you, the same way you are working hard to earn money.

Check out your financial goals and invest accordingly as you manage your money in your 20s. Learn from your mistakes and take risks as you grow on your path to becoming a savvy investor in the next few years. Do not forget to include investments that save tax and allow you the advantage of building your corpus with better returns.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.

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