Tax saving investment tips for young earners

If you are a young and upwardly mobile professional, then the one thing you need to really worry about is how to save tax. Now there is a small dilemma here. You need to save tax to the extent possible. At the same time you also need to ensure that in the process you don’t invest in the wrong type of assets. Here are 8 key tax saving tips for young earners.

Paying tax is not always bad, because it is a trade-off
You are really not obliged to save the last possible penny of tax. You have to make a trade-off. Instead of locking in the funds for a period of 3-5 years, would you be better off paying the tax and putting the funds to better use? After all, this idea precedes all tax saving tips; and that is whether you should save tax at all? At times it makes a lot more sense to just pay the tax and put the funds to better use rather than locking it up. Showing some tax paid in your returns gives a good impression in regulatory filings.

Align your tax planning with your financial plan
This is an important tax saving tip that a lot of youngsters tend to miss out. A tax plan should begin within your long term financial plan in mind. Don’t have a tax saving plan that is independent of your overall financial as it would create over-investment, wrong allocation and a tax plan that is misaligned. Also, adopt a SIP approach to tax planning, so that it syncs with your income flows.

Structure your compensation in a tax efficient manner
This is, perhaps, where your tax planning starts. When you sit with your prospective employer to structure your package, make it tax efficient. For example, make the best of the EPF that gives you the best tax breaks. Build HRA into your package adequately, so that your rental accommodation can become really tax efficient for you. One of the best tax saving tips is to make the best of non-monetary compensations provided.

Tax saving is much beyond Section 80C
A lot of very young earning members still equate tax saving with Section 80C. While that is the most popular method, it is not necessarily the most productive. For example, you have Section 24 for home loans, Section 80D for medical insurance, Section 80TTA for bank interest, Section 80G for donations, etc.

Life insurance should only be term cover
When you buy life insurance to save tax, don’t purchase endowment and money-back policies. A much smarter way to do it is to take a pure risk (term) cover and invest the money saved into an equity fund. You start off by separating your insurance business and your investing business.

Get the powers of equity tax saving through ELSS!
If you are young and have a higher risk appetite as well, make the best of it. ELSS funds offer a number of advantages. They create wealth over the long term and lock in your funds for just 3 years. Above all, the mandatory lock-in ensures that fund managers are able to take a longer term view of their stock selection and fund management.

Fund your studies within an education loan
Nowadays a lot of young men and women work for a few years and then decide to pursue higher education like a Masters or a Doctorate. Instead of dipping into your savings, opt for an education loan. You can repay the loan in 8 years and get tax exemption on the interest on the education loan under Section 80E. There is no upper exemption limit.

Above all, don’t forget documentation and timelines
In our enthusiasm to understand the nuances of taxation, most of us tend to forget that there are a lot of mundane aspects to tax saving tips, which are equally important. For example, maintain proper documentation of your Form 16, Form 26AS, salary slips, investment statements etc so that you don’t run around at the last minute. If you are employed in a company, meet their deadlines for submission of proofs of investments, failing which you have to pay extra tax and claim the refund. Lastly, if you have any other income like capital gains, make it a point to pay advance tax on time to avoid regulatory hassles.

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