The twenties are the starting points of our careers. Since we are young, our risk tolerance is high. Investments made during this period with a long horizon will benefit from the power of compounding over the long term. Investments should be the major focus of tax planning in the age group of20 – 30. Here are some tax-planning ideas for this age-group:-
- Your contribution to the employee provident fund will go towards the eligible 80C investment. Your employer deducts your contribution to your PF account from your monthly pay cheque (12% of your basic salary). The annual interest earned on your PF savings is 8.5%.
- You should start planning for your long term financial goals, like retirement planning. Since your risk tolerance at this age is high, your asset allocation should be weighted towards equities. Equity Linked Savings Schemes (ELSS) is an excellent investment option for this age group. Equity Linked Saving Schemes (ELSS) is one of the most popular investments allowed under Section 80C, since you can avail triple benefits of tax savings under Section 80C, capital appreciation and tax free returns. An ELSS is a diversified equity scheme with a lock in period of three years from the date of the investment. You should consider investing in ELSS through a Systematic Investment Plan. Compared to other tax saving instruments under Section 80C like PPF, NSC, and Tax saving Bank FDs ELSS has the potential of offering much higher returns over the long term.
- An important part of financial planning is to ensure that you have adequate life insurance cover. While life insurance premium up to the 80C limit is eligible for tax deduction, tax saving should never be the primary consideration in getting life insurance. Tax saving or not, one should always get adequate life insurance. The only way 80C status benefits life insurance is that, it reduces the cost of insurance. Investors should separate insurance and investment objectives, and therefore should avoid savings cum insurance plans. Term plans provide life insurance cover at the lowest cost. The cost saving in premium of a term plan compared to an insurance cum saving plan (like an endowment plan) can be re-invested in tax saving investments that yield higher returns like ELSS or even Public Provident Fund (please read our article, Taking term plan can be a smart Insurance choice)
- You should ensure that you have adequate health insurance or Mediclaim cover. Your employer may provide you health insurance under the group health insurance plan and so you may not need to buy additional Mediclaim. But you should make sure that the health insurance cover in your employer’s group health insurance plan is adequate for your needs. You should check what kind of benefits your employer’s group insurance policy offers. Check what is the total amount and nature of illnesses that your company’s group insurance covers. If you have a family, does the policy cover your spouse, children, parents and other dependents? If your company’s group insurance is not adequate for your needs, then you should buy additional Mediclaim to protect your family’s healthcare needs. Mediclaim premium for self, spouse, dependent children and parents are eligible for deduction under Section 80D. The maximum allowable deduction is Rs 15,000 for self, spouse and dependent children. If an individual pays for Mediclaim premium of parents who are senior citizens, then he or she can claim an “additional” maximum deduction of Rs 20,000.
- If you had taken an educational loan for your higher education and are now repaying the loan, you can claim deduction on the interest paid on the loan under Section 80E of the Income Tax Act. The entire amount of interest paid in the year is eligible for deduction. There is no upper limit. However, there is no tax benefit for principal repayment. You should note that this benefit also extends to loans for higher education of your spouse, if you are paying the interest on her loan as well.
- You can also invest in Public Provident Fund (PPF). PPF is one the most popular choices under Section 80C of the Income Tax Act, since it offers good interest rates, ensures capital safety and tax free returns. The current interest rate of PPF is 8.7%. Though rates will vary from year to year, the yield has been pegged at 25 basis points above the 10 year Government Bond yield. However, investors should bear in mind their asset allocation target. At this stage of life (please read our article, Asset Allocation strategies for different age groups) investors should prioritize ELSS investments over PPF for tax saving, unless they have sufficient equity investments in their overall investment portfolio, over and above tax saving investments.