Income Tax Planning Tips for Different Age Groups SBI life
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Income Tax Planning Tips for Different Age Groups SBI life

Insurance Basics & Financial Advice One of the important factors of financial planning is also income tax planning. You are, after all, liable to pay tax on the income you earn if it exceeds the taxable limit. As per the Income Tax Act, any individual with an income of more than Rs 2.5 lakhs falls under the purview of taxation.

Income Tax Planning Tips for Different Age Groups | SBI life

8 Minute |

Income Tax Planning Tips

Tax Planning Tips According to Your Age Group

One of the important factors of financial planning is also income tax planning. You are, after all, liable to pay tax on the income you earn if it exceeds the taxable limit. As per the Income Tax Act, any individual with an income of more than Rs 2.5 lakhs falls under the purview of taxation.

Tax planning for any individual is important. Though paying taxes aids the government to collect money and use it to finance various government projects, it may also reduce the amount of money the taxpayer receives. So what can be done to reduce this?

There are multiple tax planning tips that can be used. However, this is not a one-time affair. Income tax planning needs to be done consistently and constantly in life. Remember that your tax liabilities will also likely increase as you grow in life and career.

Here are a few tax planning tips for every stage of your life:

In your 20s

Generally, it is in your mid-or-late 20s when you start working. Though you may not be earning a taxable income, this phase in life is the optimal time to start investing and tax planning. So where do you start?

You should, ideally, start small. The idea is to invest in tools that aid investment while reducing tax liability. Here are some investment instruments you can choose from:

  1. Product: Public Provident Fund or PPF

    Description: PPF is one of the most popular investment and tax savings forms. The interest rate can be between 7.1%- 8%, and the Government of India reviews the rates every quarter of the fiscal year.
    One of the benefits of investing in a PPF account is that the interest received on the investment is non-taxable. However, if you choose to invest in a PPF account, you must remember that there is a 15-year lock-in period.
    Tax Savings: Investing in a PPF account lets you avail of tax deductions of up to Rs 1.5 lakhs per annum under Section 80C of the Income Tax Act, 1961.
    Though you can get a tax benefit of up to Rs 1.5 lakhs, you can start small in your 20s. The minimum amount for investment is Rs 500.

  2. Product: Life Insurance Plans

    Description: Your 20s is also a good time to invest in a life insurance plan. Being young, the premium you pay against the insurance would be comparatively less. It is not just a vital investment tool but also a tax-saving one. There is a minimum holding period of 2 years on life insurance policies.
    Tax Savings: As a taxpayer, you can claim a tax deduction on the premium you pay on the life insurance policy. Under Section 80C, you can claim a tax deduction of Rs 1.5 lakhs on the premium paid. Also, under Section 10(10D), the maturity amount is tax-free, provided the premium paid is not more than 10% of the maturity amount and other conditions prescribed are fulfilled thereunder.

  3. Product: Health Insurance

    Description: If you are in your 20s, buying a health insurance policy is crucial. A medical crisis can occur unexpectedly, and given the escalating healthcare expenses, it's crucial to invest in health insurance plans. Also, the premium on health insurance increases as you grow older. Hence, the 20s is ideally the right time to invest in health insurance.
    Tax Savings: The premium you pay on your health insurance is exempted from taxation of up to Rs 25,000/- under Section 80D. Furthermore, if you're covering the premium for your parents, you're eligible for an extra deduction. If your parents are senior citizens, this deduction rises to Rs 50,000/-.

  4. Item: House Rent Allowance
    1. The actual HRA you receive
    2. As a resident of a metro city, you can claim 50% of the salary (basic pay + dearness allowance, if applicable)
    3. If you live in a non-metro city, you can claim 40% of the salary (basic pay + dearness allowance, if applicable)
    4. If you have paid rent that exceeds 10% of your annual income.
     

    Description: House Rent Allowance forms a component of an employee’s salary structure. It can be fully or partially exempted from your taxable income.

    Tax Savings: Tax exemption of HRA falls under Section 10 (13A) of the Income Tax Act, 1961. If you receive HRA in your salary, you can claim a tax exemption of


  5. Product: Equity Linked Savings Scheme

    Description: Investing in ELSS is an ideal way to avail deduction on your taxable income. Compared to other investment options like PPF, the lock-in period is for 3 years only.
    Tax Savings: A tax exemption of up to Rs 1.5 lakhs can be claimed under Section 80C.

  6. Item: Interest on education loan

    Description: If you have availed of an education loan and are in the process of repaying the debt, you can claim tax exemption on the interest. To get the benefit, you will need a letter from the financial institution giving the break-up of the principal amount of the loan and the interest amount.
    Tax Savings: Though there is no limit to the exemption you can claim, you can claim an exemption for 8 years or until the loan is repaid in full. This tax exemption can be claimed under Section 80E.

In your 30s

When you are in your 30s, you are at a stage when you have an idea as to what you want in life. You may have also moved up in your career, thus making you a part of a mid to high-income group.

Your dreams and goals start to take shape, and this is when you start thinking of fulfilling long-term goals. Most individuals also choose to extend their families by getting married. This also means an increase in responsibilities. It may include buying a new house, looking to buy more comprehensive insurance, retirement planning, etc.

  1. Product: Home Loan

    Description: If you have purchased a home by availing of a loan through a bank, tax exemption can be claimed on the repayment of the principal amount as well as the interest paid.
    Tax Savings: Under Section 80C, you can claim up to Rs 1.5 lakhs on the principal amount. You can also get an additional tax exemption of Rs 2 Lakh under Section 24B. Under Section 80EEA, you can get an exemption of up to Rs 1.5 lakhs. These exemptions are subject to the conditions mentioned by Income Tax.

  2. Product: Life Insurance

    Description: Even if you have purchased life insurance in your 20s, you can upgrade it to a higher value, add, or change the nominees. The annual premium paid for life insurance policies is eligible for deduction from your income in a financial year.
    Tax Saving: You can claim Rs 1.5 lakhs under Section 80C.

  3. Product: Health Insurance

    Description: If you have dependents, including spouses, children, or parents who are senior citizens, you can buy health insurance for them and claim the premium as a tax exemption.
    Tax Savings: Apart from the tax exemption of Rs 25,000 on the health insurance you have purchased for yourself, you can claim additional tax benefits for the insurance purchased for your family members. You can get Rs 25,000/- as an exemption for your spouse or children.
    If the health insurance is for your senior citizen parents, you can get a tax deduction of up to Rs 50,000/-. Under Section 80D, you can claim a deduction of up to Rs 1 lakh for yourself, your spouse, children, and senior citizen parents. The point to remember is that this should not be group insurance.

  4. Product: Retirement Planning Investments

    Description: if you are in your 30s, it is the optimal time to start retirement planning. You can start this by investing in the National Pension Scheme. The lock-in period of NPS is until the individual turns 60.
    Tax Savings: Under Section 80CCD, you can get a tax exemption of Rs 50,000/- by investing in NPS. This is over and above the exemption limit of Rs. 1.5 lakhs per year under section 80C.

In your 40s

At this point, your responsibilities may have increased. However, this is also the time to invest in your future more diligently while saving taxes. For instance:

  1. Child Education Loan: If you have taken a loan for your child’s higher education, you can claim an exemption under Section 80E, where the interest is paid to give your tax relief. This lasts for 8 years or until the loan is fully repaid, whichever comes first.
  2. Long-Term Savings: Continue investing in instruments that can provide future savings and tax benefits. Tax-saving Fixed Deposits can exempt you up to Rs 1.5 lakhs under Section 80C, with a lock-in period of 5 years
  3. Home Loan: You can continue to claim tax exemption for the principal amount as well as interest under Section 80C, 80EE, Section 80EEA, and Section 24B.
  4. Retirement planning: If you haven’t invested in NPS, you can consider Atal Pension Yojana, where you can get a maximum deduction of 10% of gross total income subject to a maximum deduction of Rs 1.5 lakhs under Section 80CCD(1)

In your 50s

If you are in your 50s, it means you are close to your retirement age. At this juncture, prioritising savings over merely focusing on tax savings is essential.

  1. Review your medical insurance: If you have medical insurance, you can claim Rs 5000 for a preventive health checkup, apart from the tax deduction on the premium paid.
  2. NPS contribution: Continue your NPS contribution to get a tax deduction of Rs 50,000, over and above any deduction claimed under Section 80C.

Tax planning for an individual is possible at any age group. You will need to look at the financial plan and the tax relief you can claim from the investments to get maximum benefits.

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Disclaimer:
Our content given in this article is as per the existing provisions, laws and regulations as per the Income Tax Act, 1961 and Income Tax Rules, 1962 issued thereunder. Tax laws are subject to amendments made thereto from time to time. The benefits / guidance mentioned herewith should not be considered as opinion / view of the Company. We request to seek independent view from your personal tax advisor on applicable tax benefits / guidance under the said article.

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