5 Tax Saving Tips for Young Earners

Today’s youth has infatuation towards spending. The birth of social medial influencers has made advertising, marketing and PR easier for brands. Every day there are new brands promoting their products and services to netizens, who are no other than today’s earning youth.The social media has a huge influence on how today’s youth spend, diverting them away from the fact that savings is more essential at a young stage. It is easy to spend and buy temporary luxurious lifestyle, but difficult to keep some money in the safety vault for emergencies. Since their focus is spending, the young generation tends to be ignorant when it comes to investing in tax saving instruments. They don’t understand the importance of tax saving.

If you too are a young and ambitious working professional looking for some advice on tax saving, here are a few tips for you –

Choose a tax saver fund according to your risk appetite

There are multiple tax saving investments out there, both conservative and modern. But investors should first determine their risk appetite before investing. Understanding their risk appetite allows investors to determine how much risk they can take with their finances or are able to bear losses over the short term, with the hope of earning some capital appreciation in the long run. The traditional tax saving instruments might offer low interest rates, come with lengthier lock in periods, but they offerfixed interest. On the other hand, modern tax saver funds might offer far better capital gains, but they are known to be highly volatile in nature. So, investors should keep this in mind while picking up a tax saver fund.

Investors with Risk Appetite Can invest in ELSS

Young earners generally have the option of giving their investments an aggressive approach. When you are young, you can take risk as you do not have any liabilities. ELSS or Equity Linked Savings Scheme is a tax saving mutual fund scheme. Under Section 80C of the Indian Income Tax Act, 1961 an investor can invest up to Rs. 1.5 lakhs per fiscal year in ELSS and claim tax deductions for the same. Here’s an example to help you understand how ELSS works –

If you earn Rs. 12 lakhs per annum, you fall under the highest tax bracket which is 30 percent. If you invest Rs. 1.5 lakhs in a tax saver scheme like ELSS fund, you can bring down your gross taxable income from Rs. 12 lakhs to Rs. 10.5 lakhs.

Start A Systematic Investment Plan in ELSS

SIP or Systematic Investment Plan is a way to invest in ELSS funds. Investors need to be KYC compliant in order to invest in ELSS via SIP. One does not need to have a large investment amount to invest in ELSS via SIP. Some fund houses even offer the minimum investment amount of Rs.500 per month for aspiring investors.

Do not withdraw your capital gains after the lock in

ELSS comes with a predetermined lock in period of three years. This means that investors cannot withdraw their ELSS fund units for a minimum period of 36 months. However, if the ELSS scheme that you invested in is outperforming its benchmark, it is better to remain invested and benefit from power of compounding rather than redeeming your fund units after the lock in period.

Invest for long term capital appreciation

Now you do understand that you will have to continue paying taxes till you retire from your professional career. So, it is better to remained invested in a tax saving scheme like ELSS for a longer time period. This way, you will be able to not only regularly save taxes, but also succeed in accumulating wealth over the long term.

Paul Petersen