Tax Planning Tips for Gen Y

Being 20 or 30 something is an exciting time. Known as the Gen Y, you have the time to be smart when it comes to investing. You are able to invest in products like equities that deliver the highest returns in the longer term. 

Moreover, you may allow your money to remain invested for several years. This helps you enjoy the power of compounding and see your money grow to a huge corpus. This is beneficial to ensure your financial independence post-retirement.

In addition to investing, you must reduce your tax liability. Tax saved is money earned, which may be used to invest towards building your retirement corpus. Here are three ways on how to save tax.

1. Do not make decisions in isolation

Proper tax planning plays an important role to increase your returns. However, you must not make ad hoc decisions. It is common for people to rarely consider tax planning from an investment perspective.

You may simply invest in the best tax-saving options because of their reduced tax liability. You may not consider if the chosen investment options match your financial goals or strategy. 

Tax-saving instruments are similar to regular financial products. Therefore, it is important that you understand the different options in detail to make an informed decision. You must invest in products that not only help you save taxes but also match your financial objectives. You must approach tax savings with a holistic approach and not in isolation.

2. Do not limit investments to fixed-income securities

You may think that fixed-income products like Public Provident Fund (PPF), National Savings Certificate (NSC), and five-year fixed deposits (FDs) are the best tax saving options. However, there are other options available, which include Equity-Linked Saving Schemes (ELSS) and Unit-Linked Insurance Plans (ULIPs).

ULIPs offer life coverage along with investment in equity and debt products. ELSS is diversified equity funds that invest a majority of the corpus in equities and related securities. Both these investments offer tax benefits under section 80C of the Income Tax Act. ELSS funds additionally offer tax exemptions on dividends and maturity benefits, which makes these funds an excellent investment option.

3. Do not ignore the greater picture

How to save tax goes beyond section 80C of the Income Tax Act. Donations made to eligible charities offer tax benefits. In addition, the premium paid to avail of health insurance is tax deductible. Interest paid on home and education loans also offer tax benefits subject to certain conditions. Furthermore, home loan principal repayment is tax deductible.  

When you invest in section 80C, you need to consider more than ELSS and fixed income securities. Consider a contribution to Employee Provident Fund (EPF), life insurance premium, home loan principal repayment, and much more.

As a young adult, you have several years to build wealth over the long-term. Here are two tips for you.

1. Brave the stock market

If you are unwilling to assume higher risk when you invest in equities, you must remember that such investments go a long way to help build a retirement corpus. Shares have the potential to deliver inflation-beating returns especially when you remain invested for 10 to 15 years. Cash savings and fixed-income securities lose their value due to inflation. Therefore, you must invest at least 70% of your money in equities and related instruments like ELSS funds.

2. Keep a check on your credit score

Even when you pay all your loan installments and credit card outstanding on time, you need to keep a check on your credit score. Your credit score depends on various factors such as outstanding debt amount, type of loan, payment history, and length of credit history. When you have a good credit score, you are eligible for better interest rates in case you need to apply for loans in the future. Remember that interest saved is money earned, which may be used to invest and build your retirement corpus or create wealth to meet your financial goals.

With investments and good financial planning, you are able to achieve stability and security. However, life is uncertain and any unfavorable incident may hit you without any warning. It is important that you are prepared for such situations and must always create an emergency fund.

Investing is not easy and requires taking the time and efforts to evaluate and analyze different options. ARQ, the smart investment engine in Angel Wealth’s mobile application helps you in this. It uses your risk profile and investment goals to analyze a large number of data points in order to provide you with customized investment recommendations, that too without any human bias.