Last Updated on December 18, 2021
Here is a set of simple steps that might help young earners minimise their taxes and take control of their financial life.
This post is based on a request from one of my students who started out on an IT job some months ago.
Tax planning – a set of actions designed to save tax – is how most young earners get interested personal finance.
Unfortunately, most of them screw up their financial life right at the start, by buying utterly unsuitable products all in the name of ‘tax saving investments’!
To plan, one must recognise that taxes saving instruments share some common traits:
Instruments that offer ‘pure’ insurance for a fee
- Term life insurance on a contract that runs for a few years with yearly renewals
- Health insurance typically on yearly contract and renewals
Instruments that offer a ‘return’
- They have a lock-in period of a few years – 3 for ELSS mutual funds, 15 in the case of PPF and few years to decades in the case of insurance plans (ULIP, money-back, endowments, pension plan, child plan etc.).
- Most of them require you to pay for a certain number of years- 15 in the case of PPF and few years to decades in the case of insurance plans.
Guidelines
(A) Choose pure insurance products first!
(B) Among instruments that offer a ‘return’, choose one with minimum lock-period with no obligation to make future payments.
Tax planning Cheat sheet
The following is independent of tax section (80C/80D) sub-limits!
Section 80 C:
1. Account for EPF contributions – the obvious and automatic choice.
2. Buy pure term life insurance – Guideline (A)
Surprised! Don’t be. Get term insurance for as high an amount as possible for about 25-30 years. Online policies are quite cheap irrespective of the insurer for young earners.
So get as high a cover as they would offer and name your parents as nominees (even if they are financially independent!). Later you can change it to your spouse or kids.
Here are some things to do after you get a term plan!
3. Lump sum investment in a ELSS mutual fund – Guideline (B)
At 3 years, they offer the lowest lock- period. There is no obligation for you to invest the next financial year, provided you don’t setup a SIP (don’t!)
Get yourself an online account from an AMC and invest –a few times a year on market dips.
You can use this step-by-step guide to select a ‘good’ ELSS fund
Section 80 D
4. Individual health insurance cover for self and parents – Guideline (A)
Does not matter if your employer offers one. Just buy one for yourself and your parents for as high a cover as you can afford. Increase the sum insured each year by as much as possible.
Section 80G
5. Identify a good charity and sponsor them. Yes, you can save tax too but that is not important.
That is it! Simple steps to ensure you don’t get your financial life in a tangle.
With that behind you, you can begin to
- list your financial goals,
- tag your ELSS investments to one of your long-term goals
- minimise your expenses
- invest as much as you can in equity instruments
Carpe Diem!
Use our Robo-advisory Excel Tool for a start-to-finish financial plan! ⇐ More than 1000 investors and advisors use this!
- Follow us on Google News.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Join our YouTube Community and explore more than 1000 videos!
- Have a question? Subscribe to our newsletter with this form.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Explore the site! Search among our 2000+ articles for information and insight!
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation for promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu gets a superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low volatility stock screeners.
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our Youtube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)