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Tax Planning Tips for All Age Groups

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Tax Planning Tips for All Age Groups
April 17, 2024

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Tax planning plays a crucial role in personal finance; however, many people get confused between tax planning and investment planning. They feel that it is only about saving taxes on some specific investment option which is not the only case. The concept of tax planning extends further than that. It involves tax calculation, expenditure planning, retirement savings and age-based tax planning.

In this blog, we have discussed tax planning tips for all age groups, read along to get further insights about the same.

In Your 20s

You can start your tax planning in your 20s. This is considered the best time for an individual to start their investment journey. In this phase of life, where responsibilities are fewer, an individual's risk tolerance remains at its peak. Hence, you can consider these tax planning tips according to your age group to maximize returns and tax savings:

  • Tax Saving Investments:

    You can consider investing in an ELSS (Equity Linked Savings Scheme) mutual fund. It is an equity mutual fund scheme which is eligible for a tax deduction under Section 80C of the Income Tax Act. You can also consider investing in the Public Provident Fund (PPF), which comes with a lock-in period of 15 years. Besides the Section 80C benefits, it offers tax exemption on the interest amount and maturity proceeds.

  • Health Insurance:

    The income in an individual's early phase of life is usually low. Therefore, only a few tax-saving investments can be utilised. To avail more tax savings, one can avail health insurance at a younger age as the insurance premiums are comparatively low. Moreover, availing a health insurance plan for individuals below 60 years of age will allow a deduction of up to Rs. 25,000 under Section 80D of the Income Tax Act.

  • Retirement Planning:

    The next most important move in your 20s is to start your retirement planning. Many people choose to ignore the same but the earlier you start, the larger the retirement corpus you will be able to build. For a disciplined retirement plan, NPS (National Pension Scheme) or a retirement mutual fund are perfect options.

  • Understanding and Implementing Tax Deductions:

    The most important thing is to understand your tax brackets and income tax liability. Then, you have to figure out the tax deductions you can avail from your investments and insurance, which becomes your tax savings. Always ensure that you file your ITR within the due date to avoid penalties and avail these benefits.

In Your 30s

Usually, this is the time when you get married and your responsibilities start to increase along with an increase in your income. During this phase, your applicable tax bracket tends to increase. There are numerous tax planning tips for all age groups; here are the ones that you can follow if you are in your 30s:

  • Getting Health Insurance:

    Health insurance again becomes an important part of your tax planning at this stage. In your 30s, it is your responsibility to take care of your spouse, children and old parents. The amount of premiums paid on health insurance is eligible for a deduction of Rs. 25,000 under Section 80D.

  • Getting Life Insurance:

    As in this phase, you have responsibilities of a spouse, children and old parents, it is wiser to avail a life insurance plan and add them as your beneficiaries. Moreover, you can also get a tax deduction towards the amount of premiums paid on the life of your family (spouse & children)under Section 80C of the Income Tax Act to the extent of Rs 1,50,000

  • Availing a Home Loan:

    Many people in their 30s consider availing a home loan. If you have plans to buy a new home, you can surely go ahead with that. Besides becoming a homeowner, you can claim a deduction towards the repayment of the principal amount under Section 80C.

  • Balancing Equity and Debt:

    With time, as your risk appetite goes down, it is safer to maintain a portfolio which is a mix of both equity and debt securities. It can be either a combination of stock investments and other fixed-income securities i.e. bonds, debentures, etc. You can also consider investing in equity mutual funds and debt funds. Or, you can choose a hybrid fund to invest in multiple asset classes with a single investment.

In Your 40s

In your 40s your responsibilities will considerably increase as there can be several expenses. This can be medical expenses for your old parents, children's higher education costs, children’s marriage, etc. There might be additional medical expenses for you and your spouse as well. Among the different tax planning tips for different age groups, here are the essential tips for individuals in their 40s:

  • Education Loan for Your Child: 

    Your child's higher education in the country or abroad can be a bit heavy for him/her. In such a case, you can consider availing an education loan, which will let you save taxes under Section 80E of the IT Act. This deduction will be on the amount of interest you pay for your child's education loan for a maximum period of 8 years or till the time you complete the loan payment, whichever is earlier.

  • Retirement Planning:

    Planning for your retirement is very crucial in your 40s as you have only a few years left until retirement. You can consider increasing your NPS contribution or contribution to any other retirement fund to enhance your retirement corpus.

  • Increase Debt Investment in Your Portfolio:

    As you will be entering your 50s soon, it is safer to reduce your equity holdings and go for low-risk investment avenues i.e. debt instruments. You can start or increase the SIP amount in a debt mutual fund or fixed deposits which can be a great low-risk investment option for the long term.

In Your 50s

It is just the phase where retirement is knocking at your door. Hence, you must make sure that you pay off all your outstanding debts such as home loans, child's education loans, etc. There are numerous tax planning tips for all age groups, here are the ones that you should follow if you are in your 50s:

  • Pay Off Your Loans:

    Ensure that you pay off your debt such as your home loan, child’s education loan or any other loans that you have taken.

  • Retirement Planning:

    With the contribution days over, you should focus on withdrawal plans and how to use your retirement corpus effectively for stable returns. For example, if you have mutual fund investments, you can convert the same into an SWP (systematic withdrawal plan). But keep in mind that the tax implications  on SWP withdrawals are subject to capital gain taxes.

  • Review Your Life Insurance:

    It is time to again review your life insurance policy. Check whether the sum assured amount of your term insurance plan is sufficient and will provide adequate coverage to your loved ones in your absence.

In Your 60s

In your 60s, your primary objective will be to preserve the capital i.e. the accumulated retirement corpus. Ensure that all the current investments are in debt securities. You can also consider investing or switching some of your existing investments to SCSS (Senior Citizen Saving Scheme). It is a government-backed scheme and helps you generate stable returns with payouts on a monthly or quarterly basis.

Conclusion

Hopefully, by now you have got some ideas on tax planning tips for all age groups. It is time to start planning your investments and expenses to maximise your tax savings. Starting early will not only help you stay financially stable but also help you build a healthy financial habit and maximise tax savings. Moreover, an effective financial plan can help you to achieve major objectives in life with ease.

FAQs on Tax Savings Tips for All Age Groups

1. What are the strategies of tax planning?

There are several strategies for tax planning which include understanding your tax bracket, figuring out tax deduction options (investments, insurance, loans) and planning your finances accordingly. Furthermore, keep an aim to maximise your tax deductions and file your ITR on time.

2. What are the types of tax planning?

Primarily, tax planning can be categorised into four types which are: long-term tax planning, short-term tax planning, purposive tax planning and permissive tax planning.

3. What is the first step of tax planning?

The first step in tax planning is to assess and identify your financial condition such as your income, expenditure and applicable tax bracket. After that, you need to figure out various tax-saving options (investments, insurance and loans) and create a mix based on your priority and income.

4. Which tax-saving option is the best?

There are many tax-saving options out there. Some of the best tax-saving options include investment schemes and insurance policies. At an early stage of your career, a good option is an ELSS (equity-linked savings scheme) mutual fund and a health insurance plan.

5. How to calculate income tax?

You can calculate your income tax by entering the following details in an online income tax calculator: Your age, gender and annual income. Then, enter your eligible deduction from investments, insurance, loans, etc. Then, you will have to enter LTA and HRA exemptions and skip the entries for deductions which are not applicable to you. Proceed to check your tax payable amount under the new and old regimes.

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal Vishal Subharwal

Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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