Tax savings and investments are two of the most important and confusing subjects for many people, especially those in their first jobs. After receiving their April salary, many employees receive emails from their company's human resources department to update their tax-saving investment plans. However, this can be a confusing task.
We have listed a few simple tips that can not only help you in saving taxes but can also help you make progress towards your financial goals.
Education Loan
Often, young employees have outstanding education loans. You can claim tax relief on the interest paid on an education loan. You can get tax relief under Section 80E for the interest paid on educational loans. A certificate from the lender confirming the interest paid is required. However, it is crucial to adhere to the repayment schedule to maintain a good credit report, or it will be difficult to obtain future loans. Starting from the first repayment, you can get tax relief on interest paid for the next seven financial years or till the financial year you'll pay your last EMI, whichever is shorter.
House Rent Allowance (HRA)
Many youngsters live in rented houses/flats/apartments. You can claim HRA exemption through your employer or file your tax returns to claim the same. If you are not getting HRA but are paying rent, you can claim a deduction under section 80GG to reduce your tax outgo.
PF Contribution
PF contribution is a long-term investment plan offered by the government. It has a 15-year lock-in period and offers complete capital protection to its users. An individual can avail of up to 1.5 lakh tax exemption under section 80C. It's essential to keep track of the employee's contribution to the provident fund (EPF).
National Savings Certificates And Fixed Deposits
If you belong to lower tax brackets and prefer straightforward products that pose no credit risk, you might want to consider investing in National Savings Certificates (NSCs) and tax-saving fixed deposits offered by nationalized banks.
NSCs guarantee an 8 per cent interest rate for five years, while nationalized banks' five-year tax-saving fixed deposits give slightly lower returns, ranging from 6.5 per cent to 7.5 per cent annually.
Equity-Linked Savings Scheme (ELSS)
Investors who can tolerate volatility may consider investing in Equity-Linked Savings Scheme (ELSS) as it offer the highest potential returns. With a lock-in period of three years, ELSS has the shortest lock-in period among tax-saving investments. For investors interested in long-term wealth creation, ELSS could be a good option.
Insurance
It's always advisable to have health insurance to secure your health and save on taxes. You can claim up to Rs 25,000 as a tax deduction under Section 80D for health insurance premiums paid for yourself, your spouse, and your dependent children. For senior citizens, the limit is Rs 50,000. Term life insurance premium is admissible under Section 80C within the overall limit.
Before considering any investments, it is important to prioritize building an emergency fund that can cover at least six months of your expenses. You can use fixed deposits and liquid funds for this purpose. It is advisable to seek guidance from a financial advisor before making any investment decisions.