The Young Earners Tax-planning Cheat Sheet

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!

tax planning for the young earner

Photo credit: Quoteseverlasting (Flickr)

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About the Author M Pattabiraman author of freefincal.comM. Pattabiraman is the co-author of two books: You can be rich too with goal based investing and Gamechanger. “Pattu” as he is popularly known, publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis, including a robo advisory template for use by beginners. Contact information: freefincal {at} Gmail {dot} com He conducts free money management sessions for corporates (see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints.

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Updated: August 5, 2016 — 1:48 pm

26 Comments

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  1. many students take education loans. so may be 80E could also be included in this article.

  2. many students take education loans. so may be 80E could also be included in this article.

  3. many students take education loans. so may be 80E could also be included in this article.

    1. Good point. You have now included it! Thanfully 80E is a straightforward section with only the interest component of the loan accounted for tax deduction.

  4. many students take education loans. so may be 80E could also be included in this article.

    1. Good point. You have now included it! Thanfully 80E is a straightforward section with only the interest component of the loan accounted for tax deduction.

  5. Good point. You have now included it! Thanfully 80E is a straightforward section with only the interest component of the loan accounted for tax deduction.

  6. Good point. You have now included it! Thanfully 80E is a straightforward section with only the interest component of the loan accounted for tax deduction.

  7. Sir,

    Why don’t you suggest starting an SIP in ELSS? It’s anyway for long term and a common man could not identify market dips. I mean, to invest when market is down needs a lot of courage which a common person lacks. Rather he (the common man) chases the market in the bull run and sells during the market dip (natural way of thinking).
    So, I personally feel (also experienced) that SIP’s work best when you don’t understand the markets or don’t have the much needed courage to go against the flow (like investing in dip and redeeming on peaks).

    Your thoughts please.

    1. Hi Abhiit, Sip in ELSS is a pain in the ass. Each installment is locked in for 3Y. If your fund underperforms you will be forced to stick with it at least partially. I think a person must have the enough discipline to accumulate and invest in ELSS funds 2/3 times a year. This does not need any market knowledge.

      1. Agreed. Thanks Sir for the info. It’s a very important point that you raised that if MF underperforms, we are forced to stick to it.

  8. Sir,

    Why don’t you suggest starting an SIP in ELSS? It’s anyway for long term and a common man could not identify market dips. I mean, to invest when market is down needs a lot of courage which a common person lacks. Rather he (the common man) chases the market in the bull run and sells during the market dip (natural way of thinking).
    So, I personally feel (also experienced) that SIP’s work best when you don’t understand the markets or don’t have the much needed courage to go against the flow (like investing in dip and redeeming on peaks).

    Your thoughts please.

    1. Hi Abhiit, Sip in ELSS is a pain in the ass. Each installment is locked in for 3Y. If your fund underperforms you will be forced to stick with it at least partially. I think a person must have the enough discipline to accumulate and invest in ELSS funds 2/3 times a year. This does not need any market knowledge.

      1. Agreed. Thanks Sir for the info. It’s a very important point that you raised that if MF underperforms, we are forced to stick to it.

  9. Good Points Dear Pattu, However I use SIP’s in ELSS with minimum term as possible, Say 3 -Months as this my help out Rupee cost averaging.

    1. If you are setting up 3 month SIPs each year in ELSS, then it is indeed a smart idea.

  10. Good Points Dear Pattu, However I use SIP’s in ELSS with minimum term as possible, Say 3 -Months as this my help out Rupee cost averaging.

    1. If you are setting up 3 month SIPs each year in ELSS, then it is indeed a smart idea.

  11. //* “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.” *//

    Dear Sir, I’m 28 years old / married, and planning to take Term Insurance (eyeing for SBI e-Shield) ., Is there any reason we name parents as our nominees first and later to spouse (or) kids? Kindly advice as i have taken a home loan for 32 lakhs. My mothly EMI is 33K.

    Thanks in advance.

    1. If you have a wife, she should be the nominee. I was only referring to those who are unmarried. If your home loan is not covered by a separate life insurance you should include the outstanding balance amt as part of the sum insured for the term policy.

  12. //* “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.” *//

    Dear Sir, I’m 28 years old / married, and planning to take Term Insurance (eyeing for SBI e-Shield) ., Is there any reason we name parents as our nominees first and later to spouse (or) kids? Kindly advice as i have taken a home loan for 32 lakhs. My mothly EMI is 33K.

    Thanks in advance.

    1. If you have a wife, she should be the nominee. I was only referring to those who are unmarried. If your home loan is not covered by a separate life insurance you should include the outstanding balance amt as part of the sum insured for the term policy.

  13. Thank you, Sir..

  14. Thank you, Sir..

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