Tags: Wealth Management, Investment Lesson, Mutual Funds, Stock market, Budget, Finance, Investing, Personal Finance, Investment, ETFs, SIP, ELSS, Tax Saving
For most young professionals just starting their careers, filing income taxes is an uphill task. As the number of financial aspects increases, navigating through the complex tax system often proves “taxing” - and even intimidating - for those with limited financial knowledge. However, a solid tax planning strategy early in one's career can save a lot of money besides building good financial habits.
Continue reading to learn simple and actionable tax tips tailored for young earners to maximise deductions and optimise the tax outgo.
Save on Taxes with ELSS Investments
Equity-linked savings schemes (ELSS) allow investors to enjoy tax benefits under section 80C of the Income Tax Act. ELSS investments can reduce taxable income by up to Rs 1.5 lakh per financial year. Exemption under section 80C is available to assessees who have opted for the old tax regime and assesses who have opted for the new tax regime will not be eligible to get this deduction.
As an equity-oriented mutual fund, ELSS also delivers potentially higher returns than traditional tax-saving fixed deposits.
Additionally, capital gains arising from ELSS investments are categorised as long term capital gains (LTCG) and taxed favourably at 12.5%. Further, LTCG upto Rs. 1.25 lakh in a financial year from ELSS/equity oriented mutual funds is entirely exempt from income tax.
Young earners may consider allocating a portion of their 80C limit to ELSS funds. The three-year lock-in period aligns well with medium-term financial goals like buying a house, car, vacation, or funding further education. ELSS gives exposure to equity markets and helps construct a retirement corpus through disciplined investing early on.
Secure Your Health with Medical Insurance
Rising healthcare costs make health insurance critical for financial security. Health plans guard against out-of-pocket hospital expenses during medical emergencies and illnesses. Premiums paid are eligible for tax deductions under section 80D up to Rs. 25,000 for self, spouse, and dependent children. An additional Rs. 25,000 deduction applies for buying policies for parents. Exemption under section 80D is available to assessees who have opted for the old tax regime and assesses who have opted for the new tax regime will not be eligible to get this deduction.
Young, healthy individuals can purchase a basic indemnity plan with substantial coverage at a low premium. This prevents future insurability issues and locks in lower premium rates. Buying adequate health insurance not only allows tax savings but also builds a safety net against health contingencies.
Plan Ahead Even If Income is Below Taxable Limit
Young professionals often fall within tax-exempt income limits and wonder if tax planning is required. However, proactive preparation can prevent future hassles. Here's why young earners should plan their taxes in advance.
• Claim back excess TDS: Even if income is below taxable limit, TDS may get deducted on certain incomes like interest or freelance work. Filing ITR helps claim back excess TDS.
• Create income proof: ITR acknowledgement can serve as income proof for applying for loans, credit cards etc.
• Build knowledge: Understanding tax framework from the beginning enables optimising savings when income rises in future.
• Avoid penalties: Planning in advance helps meet deadlines for tax-saving investments and ITR filing. Missing deadlines can lead to fines, interest and loss of benefits.
Invest Aligned to Financial Goals
Tax planning should sync with specific financial goals. For instance, equity-oriented options like ELSS help meet medium/long-term objectives like retirement, children's education, home purchase etc. Debt funds are suitable for short-term needs like an international vacation, wedding, or emergency corpus.
Young earners must identify their goals, investment horizon, and risk appetite first. This determines the appropriate investment type, tenure, and amount. Goal-based investing with a tax-saving approach boosts returns while reducing tax liability.
Stay Proactive on Tax Planning
Instead of last-minute year-end tax planning, proactive measures through the year are more prudent. Important benefits like Section 80C and Section 24 deductions have specified annual limits. Staggering investments in these well in advance helps maximise benefits while reducing taxable income systematically.
Further, rushing to invest without research often leads to poor decisions impacting returns. Tax planning should occur when the financial year begins. This provides sufficient time to evaluate investment options and make informed choices. A proactive approach also ensures all documentation is ready in case of scrutiny.
Don't Miss the ITR Filing Deadline
The due date for filing income tax returns is July 31 for salaried employees. Don't let this deadline slip as delayed filing leads to penalty under Section 234F. For total income above Rs. 5 lakh, the fine is Rs. 5,000; for total income less than Rs.5 lakh, it is Rs. 1,000.
Further, interest also has to be paid on unpaid/delayed payment of taxes. To avoid hassles, file the ITR and pay your taxes well in advance after including all eligible deductions. Double check form 26AS and the e-filed acknowledgement form.
Seek Expert Assistance When Unsure
Many young earners may lack the knowledge to optimise their taxes and investments. Seeking expert help is wise to correctly plan taxes, claim deductions, and avoid mistakes.
Tax consultants can advise on the best tax planning strategies. Financial planners help design goal-based investment strategies with tax-efficiency. Professionals assist in filing error-free returns with maximum benefits. Taking professional assistance ensures long-term effective planning.
Conclusion
Early tax planning is critical to maximise savings for young earners. Starting the right investments and having adequate insurance gives financial security while reducing tax outgo. Maintaining discipline, proactively planning taxes, filing returns and paying taxes on time, and seeking expert help when required goes a long way. Following these tips will help young professionals make smart financial decisions and achieve long-term goals while optimising their tax liability.
The information stated herein is based on our understanding of the tax laws [Income Tax Act 1961 as amended] and is only for the purpose of providing general information to the investors of the Mutual Fund Schemes and is not exhaustive and investors are advised to read and understand the scheme related documents carefully. We shall not be responsible in any manner whatsoever including for any information given herein. The investors should not treat the contents herein as advice relating to legal, taxation, investment or any other matter and are advised to consult its/his or her own tax/legal consultant with respect to the tax implications arising out of his or her or their participation in the Schemes.
Disclaimer:
The information set out above is included for general information purposes only and is not exhaustive and does not constitute legal or tax advice. All complaints regarding Mutual Fund can be directed towards visit www.scores.gov.in (SEBI SCORES portal). Readers are requested to make informed investment decisions and consult Chaitanya Financial Consultants – 9000628943 / mfd.mmr@gmail.com to determine the financial implications with respect to investing in Mutual Funds.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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