Every person likes to have a stable income that helps them create wealth for the future. However, there is scarcely any person in the world that loves paying taxes. Taxes must essentially be paid for a range of nation-building activities; however, one does feel the pinch when income tax returns are filed and one may shell out money towards taxes every year.
At the close of the financial year, there is normally a mad scramble to invest in last minute schemes so that taxes may be saved. This is not the right approach: it results in mistakes since one may invest in the wrong instruments just to save money, and end up with a portfolio that does not further one’s financial aims. Tax planning must be done at the start of the financial year instead of random investments at the end! But then the question is: Which tax saving options can one use, and how does one judge if the ones being offered to them are useful or not.
This article serves as a short primer for young salaried individuals who may not be fully aware of the range of tax saving instruments available to them under various sections of the Indian Income Tax Act. We list 3 of the best tax saving options for young investors for the year 2022:
#1 ELSS (Equity Linked Savings Scheme)
This is a mutual fund investment, an equity linked scheme, and the only mutual fund to get tax deduction under Sec 80C of the Income Tax Act, 1961. It allocates up to 65% of the total corpus towards equities and equity-linked securities (for example, listed shares) while the remaining is diverted towards fixed-income securities. The ELSS tax saving scheme has a lock-in period of just three years, and it offers tax savings up to Rs 1,50,000 under Sec 80C, per year. Your investment in the ELSS is one of the best tax saving options, since your money is locked for just three years but you can choose to reinvest it. Besides, the tax saving ELSS fund does not cap the amount of money you may invest in the fund – this helps beat inflation as well as accrue wealth over time. Being majorly exposed to high grade equities also ensures good growth of the fund. However, the fund’s performance and your eventual earning from it are dependent on market forces. You also cannot make a premature exit from the ELSS before three years.
#2 Interest on education loan.
The job market is currently in a state of flux, and while unemployment figures are at a high, the competition among job holders is intense. Upgrading your skills to meet the demands of a dynamic market is important. For this, you might wish to enrol in an expensive MBA course or take up a two- or three-year course to acquire valuable new skills that will propel your career in the desired direction. For this, you will require an education loan that you can easily get since you are a salaried person. However, a hidden benefit of taking this education loan for yourself is that you can save tax by doing so. Sec 80E of the Income Tax Act, 1961 allows for a deduction on the interest paid for education loans that one takes for themselves, or for their spouse or children. The deduction is given for 8 years, from the time the interest is first repaid or when the entire interest is repaid, whichever happens earlier. There is no cap on the interest deduction you can claim under this head. Thus, not only can you get the education you need to shape your career towards success, but you can also save tax while doing so.
#3 Medical insurance premiums.
Securing one’s future with the right insurance policies is key in today’s turbulent times. This entails investing in life and health insurance policies, apart from home insurance, fire insurance, car insurance, and so on. You know that your life insurance policies fetch tax deductions towards the premiums paid – did you know that this applies to medical insurance, too? Buying a good health insurance plan safeguards not just your money against future health concerns, but also fetches you tax deductions under Sec 80D of the Income Tax Act, 1961. An individual can claim a deduction against medical insurance premiums paid per year up to Rs 25,000. This deduction is granted for premiums paid for oneself, and/or spouse and dependent children. If you buy insurance for your parents and pay those premiums, you can claim an additional Rs 25,000 deduction if they are less than 60 years old, and Rs 50,000 if they are over 60 years old. Thus, it pays to secure your health and finances with health insurance, with tax benefits thrown in.