Individuals, especially young earners, may take advantage of the numerous benefits offered under the Income Tax Act, 1961. By doing so, you may reduce your total taxable amount to a great extent.
Income tax in the country is levied on the basis of income tax slab system. Different rates are prescribed under each slab. In order to reduce your tax liability under any of the slabs, you may avail of various exemptions and deductions.
Following are five great tax savings tips for young individuals.
Consider an investment in Equity Linked Saving Scheme
Equity Linked Saving Scheme (ELSS) are diversified equity mutual funds. The performance of this investment vehicle is directly linked to market performance. Besides offering high returns, ELSS funds aid in saving tax. Investments in ELSS are allowed for income tax deduction up to INR 1.5 lakh in a financial year under Section 80C.
Purchase term insurance
As the name suggests, a term insurance offers coverage for a fixed period of time. In case of an unfortunate death during the policy period, the insurer pays the beneficiary the â€˜Sum Assured.â€™ A term insurance plan is a highly-beneficial tax-saving financial instrument. You may enjoy tax deduction of up to INR 1.5 lakh under Section 80C on the premiums paid for self, spouse, and dependent children. Additionally, the death benefit amount is tax-free under Section 10(10D).
Invest in health insurance
Given the rising medical inflation, it only becomes necessary to purchase a health insurance cover. By doing so, you may enjoy peace of mind knowing that your hospitalization expenses will be taken care of in case of a medical contingency. Besides enjoying health coverage, you may avail of tax benefits on the premiums paid towards your policy. You may enjoy tax deduction up to INR 25,000 for self, spouse and dependent children. Senior citizens may enjoy a higher deduction of INR 50,000 according to Budget 2018.
Repay education loan
An education loan helps you finance your higher education. An increasing number of students borrow education loans and repay these loans through regular Equated Monthly Installments (EMIs). Recognizing this issue, the interest factor of education loans has been made eligible for tax benefits. You may, therefore, enjoy tax deduction on the interest component under Section 80E for eight consecutive years from the beginning of the loan repayment. You may note that there is no upper limit on the amount deductible.
Enjoy benefits under Section 80TTA
Young earners parking their funds in a savings account may avail of tax benefits. According to Section 80TTA, interest on savings account up to a limit of INR 10,000 is tax-free. You may, therefore, earn tax-free income and enjoy liquidity through your savings account.
Tax saving is an important part of your financial planning. You need to be aware of the income tax slab 2020-21Â and exemptions and deductions allowed under the Income Tax Act. It is also imperative to have knowledge about the income tax rates, in order to be a well-informed taxpayer.
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"The thumb rule for retirement planning is - the earlier you start, the more you save. However, with age, your priorities change too. So, you need to factor in the cost of living in the present vis- a -vis future."
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