Income Tax Saving Strategies for Young Professionals
Are you looking to save money this financial year? Check out these simple and effective tax planning tips to help you minimise your tax liability!
1. Select the Right Tax Regime According to Your Income1
Every taxpayer can choose between the old and the new tax regime according to their income and investments. The new tax regime, introduced in FY 2020-2021, offers lower tax rates without certain deductions and exemptions. Under the new tax regime, there is a tax rebate for taxable income of upto ₹ 7 lakhs under Section 87A5. Before selecting a tax regime, a taxpayer should check his tax liability under both regimes using a tax calculator. Compare the slab rates and select a regime that offers you more tax benefits.
Pro Tip6: Please note that a salaried taxpayer who wishes to opt for the new regime needs to declare their intention to opt for the new regime u/s 115BAC to his employer. In case of no declaration, the employer will deduct tax as per the old regime.
2. Claim Education Loan Deduction2
An education loan not only funds your education but also helps you save on taxes. If you are still repaying your education loan, the interest paid on that loan is eligible for a deduction from your taxable income under Section 80E4 in the old tax regime. Remember that deduction is available only for the interest and not the principal amount. You can claim an education loan deduction for a maximum of 8 years.8
Pro Tip2: This deduction can be claimed for the education of self, spouse, children or a student (if you are a legal guardian).
3. Avail House Rent Allowance (HRA) Exemption3
HRA is a benefit given to employees to cover their housing expenses. It is a component of the salary available to employees living in rented accommodation. If you are a young professional staying on rent, you can claim an HRA exemption by submitting rent receipts or a rent agreement. It is mandatory to provide the landlord’s PAN if the annual rent exceeds ₹ 1 lakh.
Pro Tip3: Pay rent via bank transfer, as cash payments can be difficult to prove.
4. Avail Exemption on Insurance Premium4
When you buy insurance, the premium you pay is eligible for a tax deduction in the old tax regime under Section 80C (Life insurance) upto ₹ 1.5 lakhs.
Pro Tip: Buy insurance to cover your and your family’s financial needs and not just to save taxes.
5. Use Investment Options Under Section 80C4
Section 80C of the Income Tax Act, 1961 includes many expenses and investments for which you can claim a deduction of upto ₹ 1.5 lakhs (under the old tax regime) to reduce your tax liability. You can invest in any of these options according to your financial goals. If you have no idea how to save tax for young professionals, Table4 below shows Section 80C investment options you can consider;
Investment Option
| Return
| Lock-in Period
|
|---|
5 year Bank FD (Fixed Deposit)
| 6-7 %
| 5 years
|
Public Provident Fund (PPF)
| 7-8 %
| 15 years
|
National Pension Scheme
| 12-14 %
| Till Retirement
|
National Savings Certificate
| 7-8 %
| 5 years
|
Equity Linked Savings Scheme (ELSS)
| 15 - 18 %
| 3 years
|
Unit Linked Insurance Plan (ULIP)
| Depends on the Plan
| 5 years
|
Sukanya Samriddhi Yojna (SSY)
| 8.20 %
| NA
|
Senior Citizen Saving Scheme (SCSS)
| 8.20 %
| 5 years
|
6. Use Reimbursements and Allowances1
Many employers offer benefits like Leave Travel Allowance (LTA), food coupons, medical expenses reimbursement, etc, up to a specified limit. These benefits reduce your tax liability and make your salary structure more tax-efficient.
Pro Tip: Always keep and submit the original bills and receipts to claim for these reimbursements and allowances.
7. Start Planning at The Beginning of the Financial Year4
Do not wait till the last moment to start tax-saving investments. It is best to do your tax planning at the beginning of the financial year. To claim tax benefits, you need to provide documentary proof of tax-saving investments and expenditures during the financial year to your employer. Your employer calculates your taxable income by deducting tax-saving investments made during that financial year from your gross total salary. Thus reducing your tax liability.
Pro Tip7: Even if your tax liability is zero, you should file an ITR to claim a TDS refund if TDS is deducted and can claim a refund of the excess tax.
Conclusion
Always keep in mind that tax planning is a benefit you gain from your investments, but it should not be your sole focus when making investment decisions. Start by identifying your financial goals and risk tolerance, and create a budget to guide your investments. Based on your goals and budget, select investment options that align with your needs and make informed decisions accordingly.
FAQs
1. How much maximum tax can I save?4
You can save a maximum of ₹ 1.5 lakh under Section 80C of the Income Tax Act (in the case of the old tax regime).
Additionally, other tax saving options beyond Section 80C include premiums paid towards insurance (Health), interest paid for education loans and home loans, and charity/donations under Section 80G, which can be claimed only under the old tax regime.
2. How to save tax if your annual salary is ₹ 15 lakhs?4
In addition to investments under section 80C, you can claim tax benefits on the premiums paid (in the case of the old tax regime). If you have dependent family members, you can purchase a term plan or any other life insurance according to your goals and claim a deduction on the premium paid in case of the old tax regime. Also, interest paid for an education or home loan is eligible for a tax deduction (in the case of the old tax regime).
3. Can I save 100 % income tax?
By effectively planning your taxes and selecting the appropriate tax regime, you can lower your taxable income below the taxable limit and save 100% on income tax.
References:
An ISO 9001:2015 
