A Millennial's Guide To Tax-Saving Investments

For any youngster reaching a phase where their annual income starts falling in the tax slabs is a good reason to pop the champagne. However, it also means that the individual now must take one more step towards financial literacy. The millennials have long been considered an earn-and-burn generation but that’s an exaggeration. They are also willing to try more options of investing money. They know that investments are not only meant for tax-saving purposes but also a means of growing wealth by judiciously using the savings to get maximum returns.

Different Types of Tax Saving Investments

If you are a millennial who thinks all this is not cool, then wait till the end of the financial year when you get to see a decent chunk of your income being deducted as tax, which will be a real party pooper! So, let’s take a quick glance at some of the options that you can consider for tax saving :

1. PPF

Public Provident Fund (PPF) is one of the conventional methods for long-term investments. It is usually preferred by people who want to play safe with their hard-earned money. One can deposit up to INR 1.5 lakh in a year and get steady interest at the rate of 7-8% per annum, which is completely tax-free. The compounded interest is calculated annually at the end of the Financial Year. The lock-in period for this type of investment scheme is generally higher.

2. ELSS or Mutual Funds

Equity Linked Investment Schemes is quite popular among the youngsters. It is a diversified equity mutual fund that gives tax deduction of up to INR 1.5 lakh under Section 80C of the Income Tax Act. It comes with the lock-in period of 3 years or more. Its interest rate is usually very high based on the market. It offers higher returns compared to other investment schemes. One who has a bigger appetite for the money and a good understanding of the market should opt for this investment. It is risky but helps in growing money for the future.

3. FD

Fixed Deposits are the term deposits offered by financial institutions for the period ranging from a week to 10 years or more with a minimum deposit of INR 1000. It offers a different rate of interest depending on the duration of deposit. It is most beneficial in the ‘rainy days’ when there are sudden financial crises. One can withdraw or break the FD before the maturity period after paying the minimal penalty charges. These savings come in tax deductions under section 80C but the interest earned is taxable.

4. RD

Recurring Deposit is like FD except that one must deposit a fixed amount every month into the RD account. RD period varies from 6 months to a maximum of 10 years. These days, the banks offer standing instructions facility where the fixed amount gets deducted from the saving account every month and is credited into your Recurring Deposit Account. The interest is calculated compounded on a quarterly basis. The loan facility of up to 80-90% can be availed on this scheme.

5. Life Insurance Schemes

Life insurance plays the dual role of a tax saving component and a low-cost cover. Life Insurance Premium depends on an individual’s age - younger the person is, lower will be the premium and higher will be the coverage. The premium amount up to INR 1.5 lakh qualifies for the tax deduction under Section 80C.

6. NPS

National Pension Scheme is the new scheme introduced by the government offering various investment options for salaried professionals. It gives the newcomers an opportunity to decide how their pension wealth would look like. It is the long-term market-based investment with interest rate varying from 8-12%. One can choose the share of investment in equity on their own. It is completely tax-free under Section 80C to the maximum limit of INR 1.5 lakh. Also, an additional tax-free deduction up to INR 50,000 under section 80 CCD (1B) can be availed. It is an ideal retirement plan for the millennials.

7. HRA 

Hate to meet your landlord at the end of every month? See, the brighter side! Home rent is eligible for tax deduction. Most employers pay House Rent Allowance (HRA) as a salary component and a part of it is exempted under Section 10 (13A) of the Income-Tax Act, 1961. If the annual rent is above INR 1,00,000, then you need to attach the landlord’s PAN number along with rent receipts. If you don’t get HRA, you can still claim a deduction on your rent payments under Section 80 (GG) given that your house rent declaration is filed under Form 10BA and you don’t own a residential property.

8. Education Loan

Many of the recently employed people have taken the education loan to complete their higher studies. While it’s quite a task paying back the loan, you would be glad to know that at least the interest on the education loan is deducted from taxable income. Under section 80E, you can make use of this feature for a period of 8 years. However, note that the principal amount does not qualify for tax deductions. Education loan can only be claimed by an individual paying interest on the loan for himself/herself or his/her spouse.

9. NSC

National Saving Certificate is one of the oldest schemes available in India. It is offered by Post Office and starts with a minimum amount of INR 100 for a maturity period of 5 or 10 years. The interest is calculated yearly at a superior interest rate. Tax deductions with the deposit amount can be availed up to INR 1.5 lakh under Section 80C. As many certificates can be purchased with no maximum limit, one can keep on renewing it after the maturity period.

Yes, we know that you have bills to pay, parties to attend, clothes to buy, and travel and you probably think there’s still time left before you need to actually start thinking about financial stability. That’s exactly why we are not asking you to live a frugal life but merely pick an option keeping your future goals in mind and in accordance with your risk appetite. The best part is that you can start with whatever amount you are comfortable with and then keep building on it. Remember a little saving goes a long way.