If you’ve just started earning, tax planning might seem daunting. However, it’s important to start early to save more and avoid last-minute hassles. Employers often ask for an investment declaration at the beginning of the financial year, so it’s wise to be prepared. Here are some smart ways to save on income tax and invest wisely.
Why Start Early?
The earlier you begin investing, the more you benefit from compounding and tax-saving opportunities. Young earners have time on their side, allowing their investments to grow significantly over the years. Planning your finances from the start ensures a stress-free tax season while helping you achieve long-term goals.
1. Invest in ELSS for High Returns and Tax Savings
Equity-Linked Savings Schemes (ELSS) are a popular tax-saving investment option under Section 80C of the Income Tax Act. These are equity mutual funds with a diversified portfolio that offer:
- Tax Deduction: Up to ₹1.5 lakh in a financial year.
- Lock-In Period: Only three years, shorter than other tax-saving instruments like PPF or FDs.
- High Returns: ELSS invests in equities, offering potential for higher returns over the long term.
This option is ideal for young investors with a higher risk appetite and long-term financial goals.
2. Buy Health Insurance for Tax Benefits and Security
Medical emergencies can be financially draining, especially for young earners without substantial savings. Investing in a health insurance policy provides:
- Coverage for Medical Expenses: Including hospitalization and treatment costs.
- Tax Deduction: Premiums paid are deductible under Section 80D.
Limits for Deduction:
- Up to ₹25,000 for premiums for self, spouse, and dependent children.
- Additional ₹25,000 for insuring parents (₹50,000 if parents are senior citizens).
A comprehensive health insurance policy not only ensures financial security but also offers significant tax savings.
3. Plan Investments Even If You’re Below the Taxable Limit
Even if your income doesn’t fall under the taxable bracket, you should start financial planning early. Here’s why:
- Avoid Unnecessary TDS: Tax Deducted at Source (TDS) may be deducted even if your income is below the exemption limit. Filing an ITR ensures a refund of the deducted amount.
- Goal-Based Investing: Define your financial goals and choose investments accordingly. Early investing helps achieve targets like buying a house, higher education, or building an emergency fund.
- Leverage Compounding: The earlier you start, the more your money grows due to compounding.
4. Understand Taxable Limits and Choose the Right Regime
Tax-free income thresholds depend on the tax regime:
- Under the Old Tax Regime, income up to ₹2.5 lakh is exempt.
- Under the New Tax Regime, income up to ₹3 lakh is exempt.
Choose the regime based on your income and eligible deductions.
5. File ITR on Time to Avoid Penalties
Filing your Income Tax Return (ITR) is mandatory if your income exceeds the exemption limit. Even if it doesn’t, filing ITR helps:
- Claim refunds for excess TDS.
- Establish financial credibility for loans or credit cards.
The deadline for filing ITR is usually 31st July of the assessment year. Filing early minimizes errors and last-minute stress.
6. Seek Professional Guidance for Better Planning
Tax planning and investment decisions can be overwhelming for beginners. Seeking help from:
- Financial Planners: For creating a customized investment strategy.
- Tax Advisors: For understanding deductions and exemptions.
- Insurance Consultants: For selecting the right policies.
Professionals can guide you through complex financial terms, ensuring better decision-making.
Popular Tax-Saving Investments for Young Earners
Here are some instruments to consider:
| Investment Option | Tax Benefit (Section) | Key Features |
| ELSS | 80C | High returns, 3-year lock-in |
| Public Provident Fund (PPF) | 80C | Tax-free interest, 15-year lock-in |
| Fixed Deposits (FD) | 80C | Safe, 5-year lock-in |
| Health Insurance | 80D | Covers medical expenses |
| National Pension System (NPS) | 80CCD(1B) | Additional ₹50,000 deduction |
Quick Tips for Tax-Saving Success
- Start with small, regular investments through SIPs (Systematic Investment Plans).
- Keep track of your expenses and maintain a budget to save more for investments.
- Use online tools and apps to calculate taxes and identify potential deductions.
- Stay updated on changes in tax laws to maximize benefits.
Young earners can turn tax-saving into a stepping stone for financial growth. By starting early and using these smart strategies, you’ll not only reduce your tax burden but also build a strong financial future.
