TomorrowMakers

Here are some tax planning tips for every age group

Tax planning tips

When it comes to personal finance, people are generally lazy, leaving tax planning – probably one of the most important aspects of financial planning – until the last minute. Moreover, young Indians are the laziest of the bunch. On average, Indians are probably paying more tax than they need to. There are two reasons:

  • They don’t utilise all the tax allowances permissible under various sections of the Income Tax Act

  • Even those who actively invest in tax-saving instruments do so to avoid tax, rather than to achieve long-term financial goals, which involves investment planning and has objectives that are very different to tax planning.

Tax Savings Under Section 80C of the Income Tax Act

People often fail to look at tax planning objectively, and insurance products are usually the first port of call when it comes to tax planning. We tend to forget that life insurance is a financial safety tool and not an investment in the truest sense. Holding a number of insurance products is a highly inefficient method of tax and investment planning.

 

 

Related: How does insurance help you save tax?

As with any investment decision, it is important to analyse your risk appetite, risks involved and returns associated with the investment instrument, lock-in period, and define the financial goal you ultimately want to achieve. This should form the basis of the tax savings instruments you invest in.

Related: Non 80C items that help you save tax

Tax Planning

A fundamental caveat to remember is that your financial goals will change over time, to reflect your changing life circumstances (marriage, children, increments, promotions, home ownership etc.). If your current plan is to maximise savings under Section 80C, you are doing yourself a disservice by not looking to your own long-term future, and you will almost certainly find it harder to meet your financial goals.

In Your 20s

This time serves as the launch pad for the future. As careers begin to take off, we are still willing to take risks, as the sense of responsibility hasn’t taken proper hold.

While Millennials/Gen Y are not known for being regular savers, this is the perfect opportunity to begin investing for the future. Given the extended horizon, it is beneficial to invest in equity-focussed instruments now, then when you are older and have other responsibilities to worry about. And the earlier you begin, the more you will benefit from the power of compounding.

Related: What makes tax-saving exercise an important financial planning tool

At this stage, it is advisable to avoid investing in endowment plans and unit-linked insurance plans (ULIPs).

In Your 30s

During this decade, incomes and responsibilities increase, as you are likely to get married and start a family. While many will still live on rent, some will look at buying their own homes. The risk tolerance of the average 30-something is still high, and most can still take advantage of tax savings, rather than ramping up investments in other products. During this phase, putting money away in the following areas is advisable, all of which also have major tax saving benefits under various parts of Section 80 of the Income Tax Act:

  • Employee Provident Fund (increase your contributions with increases in your salary)

  • Life insurance (secure the financial future of your family in the event of your untimely demise. Your premium contributions should be at a level where it is possible to pay off all loans, take care of your children’s education, and provide living expenses to your family)

  • Tuition fees (for your children's schooling)

  • Home loans (interest repayment can be claimed under Section 24B and principal repayment under Section 80C)