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Why tax saving schemes are a must have if you are in your late 20s?

Why tax saving schemes are a must have if you are in your late 20s?

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. A maximum exemption of ₹ 1.5 lakh is allowed as per Section 80C making life insurance an integral part of your investment plan.
  • 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 allow 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. 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 as per provisions under 80C upto a maximum of ₹ 1.5 lakh.

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.

Invest 4G plan from Canara HSBC Oriental Bank of Commerce Life Insurance not only allows you to reduce your taxable income, it also can be an effective tool for long term wealth creation. It offers 4 different strategies to build your portfolio keeping different risk appetites in mind. Each investor has a choice of 7 fund options which range from equities to debt and even hybrid funds.

Chalk out your financial goals and invest accordingly as you start managing 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.

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Annual Income (In Lacs)

FAQs Related to Tax Saving

First of all, your gross total income is taken into account and all applicable deductions/exemptions are deducted out of it, the resultant amount is the net income, upon which the Income Tax is calculated, on the basis of income tax slabs that are announced each year in the Union Budget.

How much tax you can save depends on your financial portfolio and profile. The most common avenue for tax-saving is Section 80C, which allows you deductions up to Rs 1.5 lakh in your taxable income. The implication is that you can save up to Rs 46,800*in taxes in a year, depending upon the income tax slab you belong to. Similarly, other avenues like interest on loans, health insurance etc also provide deductions capped at a certain amount.

*Tax saving of Rs.46,800/- is calculated at the highest tax slab of 31.2% (including 4% Cess) for an individual assessee on life insurance premium of Rs.1.5 lakh, who is having taxable income upto Rs.50 lakhs.

You can choose from many investments that are tax-exempt: not an exhaustive list, but includes Equity Linked Saving Scheme (ELSS), Public Provident Fund (PPF), life insurance plans, Unit Linked Insurance Plans (ULIPs), Sukanya Samriddhi Yojana, Senior citizens Savings scheme, National Pension Scheme (NPS), tax-saving bank FDs.

First of all, make investment of Rs 1.5 lakh in investments instruments covered under Sections 80C to reduce your taxable income. Claim deductions for the interests paid on home loan and/or education loan if any. Get a health insurance policy and claim for other medical expenditure like preventive medical healthcare check-up, expenditure on rehabilitation of handicapped dependent relative, among others. Mainly, the idea should be finding out which tax saving avenues fit well with your larger financial goals and invest in them!

The maximum limit of investment that will reap the benefits of deduction from taxable income under Section 80C is Rs 1.5 lakh.

There is no limit to the number of tax-exempt investments one can have in a financial portfolio. However, it is important to note that there is a limit to how useful any instrument can be for the purpose. This is because the amount of deduction that can be claimed for specific instruments is capped at a maximum value. At the same time, keep your financial portfolio balanced so that it also provides safety, returns and liquidity.

First of all, make use of the Rs 1.5 lakh deduction allowed under Section 80C. This can be done by making investments in life insurance premium, Equity Linked Saving Scheme (ELSS), Public Provident Fund (PPF), Unit Linked Insurance Plans (ULIPs), Sukanya Samriddhi Yojana, Senior citizens Savings scheme, National Pension Scheme (NPS), among others.

Second, make use of the deductions available in respect of health insurance and other medical expenses. Under Section 80D of the Income Tax Act, 1961, a deduction of up to Rs 25,000 is allowed in a year in terms of the premium paid towards a health insurance policy of Self and your family i.e., Spouse and children. This can include preventive healthcare check-ups too upto Rs 5000/-. Under section 80D you can also claim additional deduction upto Rs. 25000/- (Rs. 50000 in case of senior Citizen) for health insurance of your parents.

Apart from Section 80C, various deductions and exemptions has been provided under the provision of Income Tax Act, 1961 like deduction under section 80D can be claimed for the payment of health insurance, deduction upto Rs 50,000 on home loan interest under Section 80EE. Any donations you make to charitable institutions are also allowed as deduction under Section 80G, subject to condition prescribed therein.

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