One step that helps in wealth creation is having an effective tax saving strategy. As per the Aspiration Index, a survey conducted to understand how Indian millennials view personal finance, the top priority for most Indian millennials is wealth creation. The survey further added that 91% of the millennials prefer being in control of their financial health. Since tax saving is an important aspect of wealth creation, it makes sense, especially for millennials to understand how they can save their hard-earned money from turning into tax payments.
If you have recently started earning, it is possible that you don’t pay heed to saving and investing. This is not wise. Investing not only helps you in creating wealth, but also saves you from paying a good amount of money as taxes. And the earlier you start, the sooner you will achieve your various financial goals, securing a sound future for yourself.
In case you are still wondering how to begin the tax saving process, don’t fret as we provide some handy tips that can make this entire process a breeze.
Start Early As Possible
Since tax planning is a long-drawn process, it makes sense to start as early as possible. This would save you from financial burden and will also give you enough time to make prudent choices. You will also get time to review your investment products by beginning early and may not commit any mistake in the last minute rush.
Start With A Safe Investment Product
For beginners, it is important to invest in instruments that are safe and provide assured return. Public Provident Fund (PPF) is one such traditional risk-free investment product that only guarantees returns but is also a good option to provide deductions under Section 80C for amount up to Rs. 1.5 lakh. The interest paid on tax and the returns are tax free. Currently it provides returns at 8% per annum and PPF accounts are convenient to open. For millennials, this comes across as an apt choice, as the hard-earned money they invest remains with the government, making it risk-free.
Make Best Use Of Available Deductions
Not many millennials are aware that they can avail deduction for rent they pay for the house they live in. However, the condition is that house rent allowance should be part of your salary component and you should be not be staying in a house of your own. You can claim tax exemption by furnishing rent receipts for each month of the financial year or submitting your rental agreement. Do note that if the rent exceeds Rs. 1 lakh annually, you would be required to submit your landlord’s PAN. You can also claim tax deductions for the interest payment on education loan, if any, under Section 80E. Ensure that you make timely repayment to reduce the interest burden and reduce your tax outgo too. In case you have bought a property through a home loan, claim tax benefit under Section 80C for principal repayment for up to Rs. 1.5 lakh and deductions under Section 24B for interest payments for amount up to Rs. 2 lakh.
Don’t Just Focus On Tax Saving, Diversify Your Investments Too
While it is a good idea to start with risk-free instrument for investment, you should not invest all your money in one product only. Diversifying will help you get the best of all the worlds and will let your money grow in an effective way. Choose PPF, but do not ignore market linked products like Equity Linked Saving Scheme (ELSS), which have the potential to provide long-term returns of 12-15% per annum. But a word of caution here: do not overinvest in any product as that may increase the risk exposure and you may get subdued returns. A good portfolio for investment is the one which has a mix of both debt and equity products. So understand the returns and taxation aspect of an investment product before taking a call. Seek help of a financial advisor to make informed decisions.
Do Not Buy Insurance For Tax Saving Purpose Only
According to the Aspiration Index survey, millennials spend one-third of their money on investments, with insurance being a predominant choice. Insurance works as protective cover that helps you and your family deal with unforeseen circumstances like death and disease. However, often people commit mistake of buying life insurance for tax saving purpose without taking the cover into consideration. As a result, they remain unprotected or inadequately covered. As a millennial, continue with your insurance shopping keeping protection your primary focus followed by tax saving.
Besides the above mentioned points, it is good to be financially aware about the changes in the personal finance world. Keep yourself updated so that you remain ahead in this race for building a strong financial future for yourself.
The writer is CEO, BankBazaar.com