India is the world’s second most popular country with a population of 1.3 billion residents. The annual tax collection of India is about 72.5 billion dollars. A mere 2.5% of people pay taxes. However, even in those, there are gaping gaps of inequality. On one side where businessmen of India deal with black money up to their necks, the load of taxes has to be carried by professionals and people holding corporate jobs.
The worst-hit are young earners. Multiple reasons contribute to the taxes paid by young earners which border on exploitation. One major reason is the stigma around taxes. The willingness and cunning to escape taxes have been running down generations. Indians tend to all ways, legal and illegal to refrain from paying taxes like it’s a bad thing to do. As a result, a lot of youngsters either try to avoid tax or end up paying more than they are supposed to because of the unavailability of proper knowledge and guidance. Another reason is the lack of financial Planning amongst young earners. Without a care in the world, youngsters tend to live the ‘YOLO’ life, unaware of the urgent need for financial planning to secure their future and those of their family.
However, with proper knowledge, awareness, and guidance, youngsters can save a lot from the tax perspective. Continue reading this article to know more about the different tips to save taxes, specifically when you are a youngster who’s just started earning or has just been earning for only the short term. Also, please note that all the tips and tricks mentioned below are completely under the letter of the law and are pari-materia to the laws of the Union of India about the regulation of the collection of income taxes.
Know Your Laws
A major reason that leads to tax payments that are more than an individual is supposed to be the lack of knowledge and awareness. This awareness begins with the basic knowledge of the fact that the minimum taxable annual income for anyone under the age of 60 is Rs. 2,50,001. If your annual income from all sources of income is below this figure, then you are not supposed to pay any taxes on your income. Secondary awareness is about the fact that not all income is taxable. Income from certain insurance plans, parts of income that are used to pay home loans or used for donations to charity, etc. are not taxable and can be deducted from your net taxable income. This requires awareness of a lot of sections of the income tax laws such as 80C, 80D, 80TTA, 80CCC, and so on.
2. Section 80-C Is Your Friend.
Section 80C is a part of the Income Tax Act of the government of India. It is one of the most popular options used by salaried professionals and other taxpayers. They use it to claim tax benefits and deductions from the gross incomes.
Section 80 looks to reduce the burden of income tax on residents by allowing deductions to the tune of Rs. 1.5 lakhs from your gross income if you invest this sum in investment options. What has to be noted is that there is a list of investment options authorized under this act. Investment in only these will allow you a deduction.
The allowed investment avenues are life insurance, public provident fund, equity-linked saving schemes. It also allows deductions for certain capital expenses like home loan repayments and stamps duty registrations.
For example, let’ say your gross annual income is Rs. 6.4 lakhs. Now, as per income tax slabs, you are supposed to pay 10% taxes. However, you have invested Rs. 1.5 lakhs in an equity-linked savings scheme. You can now use this investment as a deduction to reduce your net taxable income to Rs. 4.9 lakhs which directly falls in the 5% slab.
3. Section 80C Isn’t Your Only Friend
Investments and capital repayments aren’t the only things exempted from the calculation as a part of your annual income. Other sections of the law also come into play to provide you with tax benefits.
A. House Rent Allowance
Suppose your house rent is over one lakh rupees per annum. In that case, you can avail of a complete deduction for the house rent allowance that you receive. This means that HRA that you receive will not be considered as your net income.
B. Education Loan
Section 80TTA of the Income Tax allows tax benefits to the extent of the amount from your annual income that is used to pay the interest on education loans. The validity for this exemption is for the first eight years of paying off interest or the completion of the loan period, whichever is earlier. This clause benefits those that take education loans to support higher studies and then start earning.
Another benefit that can be availed from this clause is higher studies after you start earning. So if you are one of those who start earning first and then consider higher studies, then you should contemplate taking an education loan instead of resorting to your savings. This is because when you take an education loan, you get an exemption to the tunes of the interest paid. The same can’t be availed when you exhaust your savings to pay.
Any donation made to a reputed and registered charitable donation is exempt from inclusion in your net income, as per section 80G of the Income Tax Act. This means that any amount of donations that you make to an organization that is authorized to issue 80G certificates, will not be included in your net taxable income. However, this clause can only be availed of, if the organization can present to you an 80G certificate and if you can present that certificate while filing your tax returns.
D. Health Insurance
If you use your salaried income to pay for your health insurance plans and that of your family members, you can avail of deductions to the tune of the amount that is paid to get you or your family, a health insurance cover.
4. Section 80C Can Also Be A Fake Friend
This is one issue that plagues all youngsters who have half knowledge about the taxation laws of India and the financial Planning that it entails. Section 80C helps you get an exemption for any authorized investments that you make. However, what you need to realize is that you need not invest only to save taxes. If you don’t plan well financially but yet invest in schemes and avenues that you don’t properly understand, you might end up losing more than you would while paying taxes in the first place. This same logic applies to every possible deduction that you can avail of. This deduction can only be availed of in a sensible manner if you follow proper financial Planning.
5. Financial Planning On Weekdays Is What Makes The Weekends Worth Living For
Now, this is one place where a lot of young earners falter. It is essential that you align your tax planning with your short-term and long-term financial Planning. Your long term financial goals should supersede your tax-saving goals. This is because loans, investments, and insurance plans are taken at a time when they don’t align with your financial goals will do you more harm than paying taxes without deductions and benefits ever could.
For example, don’t take a home loan just to gain deductions when you know your income and lifestyle won’t make an additional payment of a home loan feasible. You may get deductions at present. But over time when you aren’t able to pay the loan amounts and interests, your credit score will suffer miserably. This means that in the future when you might have a stable earning and you’d need a home loan, you won’t be able to avail it.
6. Keep Your Friends Closer And Know About TDS Closer.
This piece of advice applies to salaried earners. TDS stands for tax deducted at source. TDS is the amount of money that your employer cuts from your gross salary before handing you your net salary. As a result, salaried professional don’t need to pay additional taxes for the income that they receive from your job.
However, if you have any investments or liabilities or capital expenses that might apply, make sure you provide all the relevant documents to your employer so that they cut only that amount which is your actual tax liability and not more.
If you invest in a new plan midway through the year, make sure you inform your employer so that they can cut just the right amount for the remaining months.
If you aren’t able to or don’t want to inform your employer, you can also apply for refunds when you file your income tax returns at the end of the financial year.
7. What’s Written On Paper Is More Important Than What’s Written In Stone
All of your investments and your deductions will become redundant if you aren’t punctual, and if you don’t keep track of all your paper documentation.
Make sure you fill your form 16, form 26as. Also, keep your investment papers, loan papers, salary slips for filing in your income tax returns at the right time. Make sure you apply for the correct refunds at the right time. This helps you pay in taxes, only what you are actually liable for.
Paying taxes isn’t a social wrong if that’s what you’ve picked up from your elders. You aren’t paying taxes to fill the pockets of some corrupt politicians. You are doing it so that India as a whole can progress. Paying taxes if you are liable to is your social responsibility and your duty. However, claiming deductions under the letter of the law isn’t wrong. It can be a way of saving some of your hard-earned money here and there.