No matter what stage of life you are in, if you plan your taxes intelligently, you can significantly lower your liability. Here's how to go about it, so that you can get a step closer to achieving the life you want
How often do we cringe at the mere mention of the words ‘income tax’? Commonly, you’d say. Well, there’s nothing unusual about that. We all work hard at our jobs, and therefore, don’t find giving away a portion of our salaries to the government particularly rewarding. But, consider this: If only you plan your taxes intelligently, you can significantly lower your liability, thereby helping you meet your financial goals?
In India, the Income Tax Act, 1961, governs the provisions for income tax. While the tax is charged under different slab rates, there are also various exemptions allowed to a taxpayer under Sections 80C and 80D, among others. You can take advantage of these to claim multiple deductions. Here’s a rundown on how to prepare your tax-saving portfolio depending on what age bracket you fall under.
For people in their 20s
Most youngsters don’t take tax planning seriously. This is very imprudent, given that an early head start brings them closer to their dreams. Therefore, if you are in your 20s and have just started earning, don’t make the mistake of waiting too long to take control of your money. At this age, it bodes well to go for high-risk investments, so invest in equity fund instruments, which you can claim as tax deductions under Section 80C (e.g ULIPs, ELSS, etc), as it can help beat inflation and generate high returns.
Another popular tax-saving tool under Section 80C is the Public Provident Fund (PPF), which offers guaranteed returns and capital protection. Your 20s is also the time when you should opt for life insurance, as it covers you against financial loss resulting from premature death at lower premium rates and brings you tax benefits under Section 80C. If you live in a rented accommodation and Housing Rent Allowance (HRA) is not a part of your salary, you can claim deduction under Section 80GG. All young earners should also avoid falling into the trap of withdrawing their Employees’ Provident Fund (EPF) before five years of the opening of the account, as the interest earned becomes taxable.
For people in their 30s
Assuming that this is the time when most professionals have higher-paying jobs, tax-saving tools other than insurance should also be given a thought. For example, if you are in your 30s and planning to buy a house with a loan, you can claim the principal repayment under Section 80C and interest repayment under Section 24B. At this stage, you may also have future plans in mind, such as funding your children’s wedding or buying a plush villa for retirement. So, why not set aside some money towards the New Pension Scheme (NPS), which will also get you covered under Section 80CCD? NPS is regulated by the Pension Funds Regulatory and Development Authority and has low fund management charges. You can also invest in a balance of equity and debt funds, together with ULIPs for wealth generation.
In the midst of all this, don’t forget to purchase or upgrade a life insurance policy for your family and dependents. It is an important tax-saving tool under Section 80C. It is also essential at this stage to opt for health insurance; the same is also eligible for tax exemption under Section 80D and will protect you against giant medical expenses. Remember: it’s not just your own insurance that qualifies for tax relief. Health premiums paid for one’s dependent children or parents are eligible for deduction up to Rs. 25,000.
At this stage of your life, you will have more household responsibilities, and can’t expose yourself to a lot of risk. Therefore, while it’s important to continue to invest for future retirement, one should also lower risk as far as possible. One can continue to seek tax benefits on the principal repayment on home loans, employer and self-contribution to PF, and tuition fee of your children under Section 80C. If at all you want to invest, you can do so in debt funds.
The charitably inclined should also look into Section 80G, which allows you to claim deductions against the amount donated in certain relief funds and charities.
For people in their 50s
This is the time when most people have hit the peak of their careers and are looking at financial security after retirement. Therefore, investment-based tax-saving tools mostly go out of your portfolio, and options such as home loan, and tuition fee under Section 80C go in. If your children have availed an education loan, you can use Section 80E to claim the interest amount being paid on it to enjoy tax benefits. Getting a health insurance cover once you hit 60 is also difficult. So, if you haven’t taken one, now is the time. It is also advisable to open a PPF account now if you haven’t done it already, given that the cut-off age for opening an account is 60 years.
No matter what stage of life you are in, you can achieve your goals while making the most of your taxable income, with just a little amount of planning. Looking for a place to begin? HDFC Life offers you a range of investment options to choose from. Click here to know more.