- Date : 02/07/2019
- Read: 6 mins
Here are some tax planning tips for every age group
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.
It is also a good time to mention that insurance products have some of the highest charges across all financial products. Depending on the type of insurance selected, your corpus starts out at a discount of anything between 5% and 12%.
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.
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.
Equity Linked Savings Schemes (ELSS) have a lock-in period of three years. Considering that time is a crucial element for equity investments to generate returns, ELSS products provide a great combination of investment planning with an additional tax benefit.
Using a Systematic Investment Plan (SIP) for a Section 80C investment not only lets you average the returns over the business and economic vagaries but is also a lot easier on the pocket.
At this stage, it is advisable to avoid investing in endowment plans and unit-linked insurance plans (ULIPs).
In Your 30s and 40s
During this period, 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 insurance coverage 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 for at least two to five years after the primary breadwinner is no more.)
- Health Insurance Plan for self, spouse, children and dependent parents too accord for tax benefits. A comprehensive health plan helps prevent a financial burden in the event of a major health scare while ensuring that there is no compromise in the healthcare provided to the patient.
- Tuition fees (for your children's schooling)
- Home loans (interest repayment can be claimed under Section 24B and principal repayment under Section 80C)
In your 50s and 60s
This could well be the golden period from a professional point of view. Your incomes levels will ideally be at their highest and most essentials for the family are taken care of. Having said that, there could also be impending expenses such as children’s college education, marriages and of course your retirement planning.
For most salaried people this also means that there are limited years left for active income generation, hence tax planning during this phase plays a very important role. The focus at this stage should be on maximising savings and not chasing higher returns.
You could look at the following tax-saving instruments:
Fixed Deposits with a tenure of 5 or 10 years are specifically offered by all banks for tax-saving purposes. No partial or pre-mature withdrawals are allowed, but you could nominate someone for withdrawal in the event of an untimely demise.
National Pension Scheme allows you to build for a robust retirement corpus. The tax friendly investment ensures that a portion of the maturity proceeds are reinvested towards an annuity plan while a small percentage can be withdrawn lump sum on retirement.
The tax laws of our country are geared to promote investments in insurance, home building and retirement products. It bids well to take a pro-active approach towards tax planning and use the rebates and exemptions offered to maximise our potential to save and to live a better quality of life.