Tax planning tips for every age group

Here are some tax planning tips for every age group

When it comes to personal finance, people are generally lazy, leaving tax planning – probably one of the most important aspects of financial planning – until the last minute. Moreover, young Indians are the laziest of the bunch. On average, Indians are probably paying more tax than they need to. There are two reasons:

• They don’t utilise all the tax allowances permissible under various sections of the Income Tax Act
• Even those who actively invest in tax-saving instruments do so to avoid tax, rather than to achieve long-term financial goals, which involves investment planning and has objectives that are very different to tax planning.

Tax Savings Under Section 80C of the Income Tax Act

People often fail to look at tax planning objectively, and insurance products are usually the first port of call when it comes to tax planning. We tend to forget that life insurance is a financial safety tool and not an investment in the truest sense. Holding a number of insurance products is a highly inefficient method of tax and investment planning.

As with any investment decision, it is important to analyse your risk appetite, risks involved and returns associated with the investment instrument, lock-in period, and define the financial goal you ultimately want to achieve. This should form the basis of the tax savings instruments you invest in.

Tax Planning

A fundamental caveat to remember is that your financial goals will change over time, to reflect your changing life circumstances (marriage, children, increments, promotions, home ownership etc.). If your current plan is to maximise savings under Section 80C, you are doing yourself a disservice by not looking to your own long-term future, and you will almost certainly find it harder to meet your financial goals.

In Your 20s

This time serves as the launch pad for the future. As careers begin to take off, we are still willing to take risks, as the sense of responsibility hasn’t taken proper hold.

While Millennials/Gen Y are not known for being regular savers, this is the perfect opportunity to begin investing for the future. Given the extended horizon, it is beneficial to invest in equity-focussed instruments now, then when you are older and have other responsibilities to worry about. And the earlier you begin, the more you will benefit from the power of compounding.

At this stage, it is advisable to avoid investing in endowment plans and unit-linked insurance plans (ULIPs).

In Your 30s

During this decade, incomes and responsibilities increase, as you are likely to get married and start a family. While many will still live on rent, some will look at buying their own homes. The risk tolerance of the average 30-something is still high, and most can still take advantage of tax savings, rather than ramping up investments in other products. During this phase, putting money away in the following areas is advisable, all of which also have major tax saving benefits under various parts of Section 80 of the Income Tax Act:

• Employee Provident Fund (increase your contributions with increases in your salary)
• Life insurance (secure the financial future of your family in the event of your untimely demise. Your premium contributions should be at a level where it is possible to pay off all loans, take care of your children’s education, and provide living expenses to your family)
• Tuition fees (for your children's schooling)
• Home loans (interest repayment can be claimed under Section 24B and principal repayment under Section 80C)
• Health insurance (always essential, but include coverage for your spouse and family)
• Public Provident Fund (offers the highest risk-free, tax-free returns in the long term)

After claiming deductions, and if you’re still in a position to make investments that fall under Section 80C, plan investments according to your risk tolerance level and your optimum asset allocation strategy. If your risk tolerance is high, ensure your investments are weighted in favour of equities (ELSS), preferably via the SIP route.

In Your 40s

It has been said across generations that life begins at 40. There’s truth to that; as you’re well settled in your career, your income has increased exponentially, your children are in their teens, approaching their higher education years. The other big change that should happen during these years is that your focus should veer from tax saving schemes to non-investment related tax savings.

Given that the tax saving instruments you began utilising in your 30s are still going strong, the focus should shift to planning for your retirement, if you haven’t done so already, and reducing the level of absolute debt. So continue your EPF contributions, claiming relief for your children’s tuition fees, health insurance for you and your family, life insurance, and as far as your home loan is concerned, this is the ideal time to begin reducing the principal amount of the loan as quickly as possible.

At this stage, the scene is set to concentrate on building a corpus for your retirement years. This can be done using:

• Pension plans
• ULIPs
• Identify expenses that qualify for tax savings

The 40s is also a great time for those who might have made some erroneous tax saving decisions to re-align their portfolio without overdoing investment in tax saving instruments.

In Your 50s

The 50s is when your earning is at its peak. Thoughts turn to retirement and planning things to do once time becomes your biggest asset.

The long-term debts you’d begun paying off over the previous few years should now be accelerated. Your lifestyle choices may also see some downshifting in preparation for retirement, but most importantly, investment and savings towards your retirement must be enhanced and made your primary investment objective.

As it’s quite likely that your children could be pursuing further education, and possibly even be studying abroad, deductions towards tuition fees and interest on education loans should continue. There is no upper limit on the deduction of interest you pay every year towards an education loan. However, it is extremely important not to prioritise funding their education over your retirement planning. Ideally, once your children begin working, they should take over the repayment of any loans taken towards financing their education.

Similarly, whatever is outstanding on your home loan should be claimed, and paid off as soon as possible. In addition, your EPF account should continue to receive contributions, adding ever-larger amounts to the corpus built over the previous many years. Remember the power of compounding?

Finally, when it comes to health insurance, it is highly advisable to get one now, as getting cover for you and your spouse after the age of 60 will be difficult. These premiums are eligible for deduction under Section 80D of the Income Tax Act.

In Your 60s

There are only two goals after you retire, or even if you are lucky enough to continue working in your 60s - capital protection and health insurance. You will not have the luxury of a monthly salary. Your income comes from your investments, hence most, of your investments should be in debt or fixed income instruments. But given longer lifespans, vast improvements in medical technology, and inflation, a useful component of your asset allocation strategy should continue to be in equity-linked instruments. Some of the tax saving options include:

• Senior Citizens Saving Schemes (maximum permissible deposit is Rs. 15 lakhs)
• Bank Fixed Deposits (FDs)
• Health insurance?

Conclusion

It’s obvious that tax planning should be an important financial planning objective through your working and post-work life. With prudent tax planning following advice from a tax consultant or chartered accountant, you will not only save taxes but also make appropriate investment decisions that will help you meet your long-term investment objectives.