Rahul was very happy while working in a multinational organization. He remains out of the country for at least 3 months in a year for official purposes, which he considers an officially paid vacation.
He has got all the benefits and perquisites provided by his company. He lives in employer-provided accommodation, drives employer-provided vehicle. His pay package is also very decent, in fact, more than decent for a bachelor like him.
But Last month when I went to meet him, he was looking worried and depressed. On asking the reason he showed me his salary slip and pointed towards the Tax figure that is being deducted out of his Income.
To add to it he told me that his Chartered Accountant is saying that he needs to deposit some more tax on the income generated out of his investments.
This made me think that this is not only his concern. Everyone who’s earning well wants to save maximum tax possible.
The moment one starts earning start looking for the ways to save taxes. And why not, after all the money you retain as a result of tax saving can earn more money for you. Money saved is money earned.
Though you can’t save on every tax penny, yes through intelligent tax planning you can save a lot of taxes.
There are 4 rules in Tax planning which if followed prudently in different stages of life; you will save considerably on taxes.
A) Spreading the Taxable income among various family members.
B) Taking full advantage of tax exemptions available.
C) Taking full advantage of Tax deductions available
D) Optimum use of Tax-exempted income.
Keeping the above rules in mind, I have figured out some tax planning strategies to save tax for different life stages, which I will be covering in the series of articles. It is not necessary that all of this, you can apply on you but it is for your basic understanding which you can discuss with your employer and tax consultant and to find the suitability of these in your financial profile.(Read more: Tax offender case study)
Tax Planning strategies for Young Unmarried
This is the time when one has started off with his Job and financial life.
This means that there is only a single tax file to take care of. This is the stage we always stress on people to think of long-term and start saving, as the expenses are generally very less at this stage unless one has already burdened self under Loan.
Following are some of the ways one can save income tax through tax planning.
1.) Negotiate with your employer on the changes in the breakup of your salary structure. There are many companies which ask the employees in April to design the salary structure themselves suitable to their individual financial profile. They call it as Flexible benefit plan.
Make the most this opportunity. Sit with your planner, CA or any other Tax professional and find out what amount of HRA benefit is suitable for you, what should be the different allowances that can be added to this breakup. (Read: all you want to know about House Rent Allowance)
You may also ask your Employer to start contributing to New pensions Scheme on your behalf to reduce your in hand salary and thus helps in tax saving. (Read: All about New Pension scheme)
2.) Invest the maximum amount allowed for tax saving u/s 80C and 80D, and other permissible sections. Section 80D is for health insurance. Even if your employer has provided you with some coverage it is advisable to have a separate cover. (Read: don’t ignore health insurance)
3.) Invest in tax-efficient instruments only like Employee provident fund, Voluntary provident fund, Public provident fund, Equity linked Mutual funds etc.
Though Insurance plans also give tax-free income I will not advise to invest in Insurance plans due to the basic structure of those products. If you do not have any financial dependent, practically you do not need any life insurance cover.
If at all you have to buy any insurance policy, better to go with term insurance plans. (Read: Best Investment options)
4.) If you are in a habit of giving donations or charities than do take the receipt of that amount. This will also help in saving taxes u/s 80G.
5.) If you want to save for your near-term goal which is not possible through EPF/PPF/Equity funds or any other Tax free investment option for that matter, then it’s better to gift the amount to your parents or sister or any other family member who comes in the lesser tax bracket and invest through them.
If you are worried about the management front, then don’t worry there are lot many other ways to keep control on that.
6.) Don’t let your taxable income increase by keeping the amount in your saving bank account and bank fixed deposits. Just keep the amount required for an emergency in your saving account, for all other parking of funds use Debt mutual funds and select as per your short and medium-term needs.
Many people would be of opinion that if you have the good income you should go for home loan kind of products to help you save tax and create assets, but I do not think that would be wise. I would advise youngsters to avoid any kind of loan till they become disciplined with their savings and expenses.
As I always say that Tax planning and Financial Planning should go hand in hand, so whatever you do for tax saving should support your long or short-term goals.
In the coming articles, I will be sharing the Tax planning strategies for other life stages like for newlyweds, Small Family with Kids, Post Kids’ marriage and own Retirement. So keep watching the space. (Also Read: tax planning tips for couple with Kids)
Do share if you have any other tax planning strategies to save tax at this Young life stage. It will be beneficial for readers.