Key Tax-Saving Investments for Young Adults

Tax-saving is a crucial part of financial planning. By making smart choices during your early income years, you can work towards reducing taxable income and build a robust financial foundation.

Here are a few tax-saving investments for young adults:

Public Provident Fund (PPF)

Backed by the Indian government, the Public Provident Fund is a popular long-term investment option that allows salaried individuals to save money by offering them tax benefits and good interest rates.

With a lock-in period of 15 years, contributions towards a PPF account earn a guaranteed rate of interest. People can claim tax deductions under Section 80C of the Income Tax Act, 1961, for contributions to the PPF. The interest earned on it is tax-free.

You can claim deductions up to Rs.1.5 lakhs in a financial year on deposits.

Equity-Linked Savings Scheme (ELSS)

Equity-Linked Savings Schemes, popularly known as ELSS, are an excellent option that provide dual advantage of growth and tax savings.

ELSS mutual funds primarily invest your money into equities with the potential for higher returns.  If you have a higher risk appetite and want to get exposure to equity instruments, then ELSS schemes could be suitable for you. ELSS funds come with a lock-in period of 3 years. You can invest in ELSS funds through both Systematic Investment Plans (SIPs) and lump sum. Many ELSS funds allow SIPs starting at as low as Rs.500 per month.

Investments made towards ELSS are eligible for tax deductions under Section 80C.

National Pension System (NPS)

The voluntary retirement savings scheme requires subscribers to make contributions and secure their future in the form of pension. It is regulated by the Pension Funds Regulatory and Development Authority (PFRDA).

A citizen of India, whether resident or non-resident, between the age of 18 and 70 years on the date of submission of application is eligible to open an account.

It’s a voluntary contribution scheme and considered to be one of the best government-backed pension schemes in the country for salaried employees. However, self-employed individuals aged between 18-40 years with an annual income not exceeding Rs.1.5 crore can also enrol under the scheme.

Being a retirement benefit scheme, NPS withdrawal is allowed on retirement (at 60 years of age). The NPS subscribers can withdraw 60% of the accumulated corpus as lumpsum and the remaining 40% will be utilised for buying the annuity option. On the other hand, partial or premature withdrawals are allowed under certain conditions.

You can withdraw from your National Pension System (NPS) account upon superannuation (60 years)

Contributions made to this scheme get covered under Section 80CCD. The aggregate limit of deduction under the section along with Sections 80C, 80CCC cannot exceed Rs.1.5 lakhs limit.

Health insurance

Although it is not an investment in the traditional sense, health insurance covers expenses incurred from an accident or hospitalisation.

These also cover pre and post-hospitalisation expenses, depending on the sum assured. Investing in a comprehensive health insurance plan allows individuals to take care of unexpected medical expenses and enjoy tax deductions on the premiums paid.

Health insurance offers tax benefits under the Section 80D of I-T Act.

Fixed Deposit

Fixed deposits (FD) are a low-risk investment option that help in availing tax benefits under Section 80C. By investing in these, you get to claim a maximum deduction of up to Rs.1.5 lakh. It must be noted that there is a lock-in period for such FDs and the interest earned remains taxable. The interest rate typically ranges anywhere between 5.5% and 7.75%.

How to strategise your investments?

1. Be an early bird
   Young individuals should start thinking about their comprehensive financial plan in the beginning of their professional career even when their income is below the taxable limit.

2. Setting goals
   There should be a defined objective behind every investment that you make. The investments should be well aligned with your financial targets. Doing this helps you in getting tax benefits, better potential returns and achieve targets.

3. Diversify and recalibrate your portfolio
   Once you start tax planning early, you need to be focused on maximising tax savings with the rise in your income and any modifications in the taxation norms by the government. Diversifying your portfolio with different assets and tax-saving instruments like NPS. The diversification as per the changing market conditions and policy environment, could help you maximise gains, while reducing risks and the tax liability.

Conclusion

Tax-saving investments require meticulous planning and financial discipline. It’s advisable for young adults and professionals to plan it well in advance to maximise gains. A financial roadmap at the early stages after employment may help to manage your money better and make the most out of income tax deductions and exemptions. You can also consult a financial advisor to invest in different tax-saving instruments to diversify your portfolio and minimise risks. A long-term planning and disciplined investment could help you accumulate wealth while enjoying the tax benefits.

This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.