A lot of us interlink investments with tax planning. And more often than not, investments done to save on taxes are done at the nth hour. The last moment rush to save some tax money could see you making investments that don’t meet your long-term objectives and therefore, not necessarily good investments from your “investment” perspective. The best time to start planning your investments are at the start of the financial year and the best age to start your investments is right when you start earning. There are several advantages of starting early. Money invested in the right instruments early on in life gives you a head-start. The corpus adds-up to a meaningful amount by retirement time – even after having adjusted for inflation. Depending on your age profile and income, starting your investments earlier than 35 years is a good point to start. There are two broad age-groups from an early tax planning perspective. Let’s look at each of these.
The first category includes people who have just started their professional careers. These are people in the age group of 21 – 28 years. The second category includes people who have a few years of experience under their belts. These are typically people who are married or are about to be married with key life events round the corner – planning for a child, about to buy a first home and so on. The people in the second category fall in the age group of 29 – 35 years. Regardless of which category you fit in, there are a few key aspects you will have to bear in mind while choosing an investment option. These include the benefits these investments can bring to you and your family including life cover, wealth maximization, risk factors, retirement corpus, etc. Endowment plans and term plans are adequately equipped to address the above aspects. Savings and protection are integral to anyone who intends to start a family or has started a family. With the added benefit of tax savings under section 80C, investing in an insurance plan offers all-round benefits. Further, contribution to a pension plan is eligible for deduction under Section 80CCC* of the Income Tax Act. The total amount deducted under section 80C and 80CCC cannot exceed Rs.1.5 Lakhs.
For those who fall into the first category discussed above, considering it is the start of your career, it is important to invest in a plan that has a long-term investment horizon. Also, the premium amount for life and term plans is lower if you start at an early age. If you opt for a monthly premium payment, it will not chip away too much from your income and at the same time set-aside money for your investment option. Investments made at an early age gives your money a larger time-frame to benefit from the power of compounding. Investing in an endowment plan, or a pension plan is a good option for professionals of this age group. It is also advisable to go for health insurance cover. As mentioned earlier, premium rates are lower for younger people and one should take advantage of this.
For those who form the next category outlined here – people in the age-group of 29 – 35 Years, contribution to Provident Fund (PF) by self and employer, home loan principal component, tuition fee towards children’s education/schooling, etc., contribute to a significant chunk of the deductions available under Section 80C. So, rather than looking at investments purely from a tax savings perspective, one should also look at small but vital investments towards securing one’s family. A term plan is the best option to pick from for securing one’s loved ones. Term plans are available at an annual premium ranging from Rs.6,500 – Rs.15,000+ (The individual premium may vary based on age of the proposer and other factors). You should carefully evaluate the extent and duration of your term cover requirement basis factors such as time to retirement, security needed, outstanding liabilities, etc.
If you haven’t already invested in a health plan, it is advisable to go for one as it can come in handy during emergencies involving you or a family member. Besides, it provides tax relief under Section 80D of the Income Tax Act.
Planning early is your first step to getting your tax planning right. It saves you the high likelihood of getting your tax planning wrong when done in a hurry. Also, you begin to reap the benefits of tax-savings the sooner you plan your taxes.
The information shared in this article is not specific to individual needs and should not be construed as tax, or investment advice by PolicyBoss.com. The company is not responsible for decisions made basis the above. We encourage you consult with your tax consultant prior to investing in a specific product basis your individual requirements – tax-savings, investment-based or otherwise.