Five best ways to save on tax in your 20s!

By abhishekdwivedi | November 5, 2014

Tax

Today 20s is considered as the best time of one’s life as unlike yesteryears today’s youngsters get highly paid jobs fast. Twenties is also a care free period with less dependants and responsibilities to worry about. But many youngsters often commit the mistake of spending their earnings lavishly and are least bothered about the money lost as tax.

While paying income tax is a legal and moral duty of every individual including youngsters, paying more than the bare minimum tax due is financial hara-kiri. Let us look at various tax saving options that youngsters can make use of to maximize their tax saving and to start their independent financial life on the right foot.

Utilize Section 80C: Section 80C offers income tax deductions for all salaried individual tax payers up to a maximum limit of Rs. 1 Lakh. With most tax saving instruments offering tax incentives under section 80c of the income tax act, it is imperative that each individual choose the right option. The earlier one commits to tax planning, the better the chances to picking up the right instrument. People who leave tax planning till the last month often end up choosing the wrong tax saving instrument and often end up paying more than the minimum tax due for them.

Since younger individuals like those in their 20’s to even early 30’s have a higher risk taking capacity, tax planning using market linked instruments offer good option to create wealth as well as save tax under section 80c of the income tax act.  Equity Linked Savings Schemes, commonly known as ELSS is one such market linked instrument that must be used by youngsters for tax saving purpose. ELSS funds are essentially mutual funds with 100% diversified equity funds providing tax saving benefits for the investor. ELSS funds have a three year lock in period which is amongst the shortest amid all tax saving instruments covered under section 80c.Unit Linked Insurance Plans or ULIPs are another market linked insurance schemes that offer tax saving options with the amount received at maturity is tax free as per the provisions of Section 10(10D) of the Income Tax Act.

Use the power of Indexation: Indexation is a common tool that can be a useful tax saving tool for young investors. Indexation allows investor to bypass the heavy inflation that ruins their investments. Individual tax payers have an option to either pay 10% tax on long term capital gains for equity market investments like mutual funds or pay a 20% tax after indexation. Only certain capital assets, including debt funds, FMPs, debt-oriented hybrid funds and gold ETFs are available for tax indexation benefit.

 

Gift Money to Your Non Working Spouse for Investments: Youngsters with a non working spouse can increase their tax saving umbrella if they invest through their spouse. If any individual gifts money to his wife or wife gifts money to her husband and the money is invested, the taxman clubs the earnings with the income of the earning member for the year. The good news is that any gift given from the working member to the spouse is tax free. The clubbing of income also happens at the first level and any money reinvested from earnings of any investments are considered to be money earned by the non working spouse which does not seek any further clubbing.

So one can gift money to one’s wife if she is non-working and she can invest the money in one or multiple tax saving instruments. The earnings would be clubbed to your earnings but since the money has been invested in tax free instruments, tax obligations remain zero. The gains received from all such investments once reinvested will not be further clubbed to your earning and become the earnings of your wife thereby allowing savings on income tax.

Invest Through Your Parents: Youngsters can take help of their parents while saving some tax obligation in case one or both parents are not having a relatively higher income. Senior citizens above the age of 60 years enjoy an income tax exemption of Rs. 2.5 Lakhs without any tax implications. Individuals can gift money to their parents who can invest the money in various tax saving investment instruments. Unlike investing in the name of a non working spouse, there is no clubbing of income in case of parents. Youngsters can also invest through their grandparents above the age of 80 years which increases their basic tax exemption limit to almost Rs.5 Lakhs.

Donate for a Good Cause: Donating for a good cause is a good idea irrespective of one’s age. While donating for a good cause can bring a satisfaction of doing something for the society at large, it can also be a helpful tax saving instrument. All philanthropic donations any individual making towards any charitable cause to various trusts and approved charitable institutions qualify for deduction under Section 80G of the income tax Act. Depending on the charitable institutions, donations can be either eligible for 50% deduction of complete 100% deduction.

Donations Towards/Institute Tax Deduction Allowed under Section 8G
Prime Minister’s National Relief Fund 100%
National Defense Fund 100%
Chief Minister’s Relief Fund 100%
Prime Minister’s Drought Relief Fund 50%
The Rajiv Gandhi Foundation 50%
Jawaharlal Nehru Memorial Fund 50%

 

 

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Category: Featured articles Tax Tax savers Yahoo
Abhishek Dwivedi

About Abhishek Dwivedi

Abhishek is responsible for BankBazaar.com’s Business Operations and Partner Management activities. Abhishek has a Master’s degree in Business Administration from S.P. Jain Institute of Management & Research and is a University rank holder in Engineering from Punjab Technical University. Prior to joining BankBazaar, Abhishek worked with the retail banking division of ICICI Bank and was handling diverse functions like Sales Operations, Customer Relationship Management and Cash Management, along with coordinating best practice projects like 5s,Six Sigma etc. Abhishek is also a green belt trained in 6-Sigma from KPMG and has a number of certifications from NSDL.

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