After your April salary is credited, many employees get calls from the human resources department, asking them to update their tax-saving investment plans. For those in their first job, this can be too complicated. If you follow a few simple tips, they can not only help you save tax but can also push you closer to your financial goals.
Figure out where you stand
Many times, young individuals land in their first job with outstanding education loans. These loans do come with moratoriums, and they need to be repaid as per the stipulated terms. If you are one with an outstanding education loan, stick to your repayment schedule. If not, you will earn a bad credit report and you will find it difficult to borrow money in future.
The better part of repaying your education loan is that the interest paid to the lender fetches you tax break under Section 80E of the Income-Tax Act. Obtain a certificate to that effect from the lender.
Also read: Planning to apply for foreign education loan? Know the dos and don’ts
Account for your contribution to the employees’ provident fund (EPF). It is considered for deduction under Section 80C, along with other eligible investments, up to an overall limit of Rs 1.5 lakh per financial year.
If you are living in a rented accommodation, you can claim tax HRA (house rent allowance) benefits within the limits specified by the tax rules.
“To avail HRA tax benefit, submit the rental agreement in the name of the employee and the rent receipts by the landlord to the employer,” says Abhishek Soni, CEO of Tax2Win, an income-tax returns filing portal.
After accounting for these commitments, if you still need to save income tax, you should consider some investments.
Your income and financial goals
Most individuals have some dreams. Some may have plans to pursue higher education after working for a couple of years. Some may want to continue working and rise in their career. Some may want to pay off existing loans and some may want to build wealth. Clearly defining your financial goals will help you save better.
“Do not invest with the sole purpose of saving income tax. Understand various financial products and invest in them, if and only if your financial goals permit you to do so,” says Priyadarshini Mulye, a SEBI-registered investment advisor and founder of arthafinplan.com.
She advises avoiding a mix of insurance and investment, especially traditional endowment plans. If you are in the lower income tax slabs and want to stick to simple products with no credit risk, consider investing in National Savings Certificate (NSC) and tax-saving bank fixed deposits offered by nationalised banks.
Also Read: Six fixed income products for you in this high interest rate scenario
NSC offers an 8 percent assured rate of interest for a five-year tenure. Five-year tax saving fixed deposits from nationalised banks offer lower – around 6.5 to 7.5 percent per year.
Also Read: Fixed deposits: Three pointers to resolve the dilemma of peak interest rates
“An investment in equity-linked saving schemes (ELSS) not only brings a tax break but also helps you to learn to live with market movements,” says Mulye. Ideally, stagger investments in ELSS.
Since an ELSS invests a minimum 80 percent of the money in equities, they offer the highest potential returns. However, investors have to learn to live with volatility. All investments in ELSS are subject to a lock-in of three years – the least among tax-saving investments.
If you are keen on wealth creation, do consider investing in ELSS, with an intention to hold on to the investment for the long term.
If you think it is too early to be serious and plan for the long term, ELSS or NSC can be good investments, as there are no follow-up payments required and you can simply decide, based on your current risk profile.
You may want to consider contributing some money to PPF (public provident fund), if you are keen to keep some money aside without taking any market risk.
Many times, insurance salespersons chase you after you land a job, as you are a good prospect.
“Buy term life insurance if and only if you have outstanding education or other loans. It can also be on the shopping list if you have dependent parents. In all other cases, term life insurance can wait till you get married and have dependents,” says Suresh Sadagopan, founder of Ladder 7 Financial Advisories.
He, however, advocates purchasing adequate health insurance, even if the employer may have provided it. “Young professionals tend to switch jobs. Personal health insurance is a must as it can be of use if a hospitalisation occurs when the insured person is between two jobs. Also, some employers do not provide adequate health insurance,” he adds.
Term life insurance premium is admissible under Section 80C within the overall limit, whereas health insurance premium paid for self up to Rs 25,000 is admissible for deduction under Section 80D.
As the first step towards financial freedom, do build an emergency fund which should help you to take care of at least six months of your expenses. Use fixed deposits and liquid funds. Do consult a financial advisor before making any investment.