Tax-saving for young earners simplified

The tax saving season begins in January with your employer sending you an email regarding submission of your tax-saving related proofs, i.e., investment declaration. While the more older employees promptly swing into action and take the right steps to avoid paying excess tax deducted at source (TDS), many young people are left confused as to what this whole exercise means and what exactly they are supposed to do.

So, if you are a young earner who wants to save on tax without locking away your money in a long-term investment and don't want to put a dent in your wallet, here are a few tax-saving investments and tax breaks you can use:

1. House Rent Allowance (HRA)
To avail the HRA tax exemption, you need to submit rent receipts or the rent agreement. Quoting the landlord's PAN is mandatory if the rent paid is more than Rs 1,00,000 annually, that is, Rs 8,333 a month, to avail the full benefit of HRA exemption. In the absence of a rent agreement, a duly signed declaration from the landlord may help.

2. Education loan
If you had taken an education loan for your higher studies, and are working now, don't forget to claim this deduction. Section 80E of the Income-tax Act, 1961 allows for deduction on the interest paid on the loan. You can deduct the entire interest amount paid from your taxable income and the deduction is allowed for a maximum of 8 years. The principal amount does not qualify for any tax deduction. But keep in mind that only an individual paying interest on the loan for himself/herself or spouse can claim this deduction.

To claim this deduction, you need to get the certificate of interest paid from the lending institution and submit it as documentary proof to your employer.

3. Health insurance
The premium paid towards health insurance qualifies for tax deduction under Section 80D of the Act. The benefit is available to individuals on health insurance premiums paid for self, spouse, children, and parents. Therefore, the premiums paid on your health insurance can help lower your tax outgo.

Now, if you are already covered by a corporate group insurance policy, you may feel that you do not need additional health insurance. In that case you should consider buying it for your dependent parents if they do not have health cover of their own.

You can claim a maximum deduction of Rs 25,000 on the premiums paid if the insured individual's age is below 60 years. If the premiums paid by you is towards the health policy of your parent, who is a senior citizen of aged 60 years or more, the maximum amount is capped at Rs 50,000. Hence, you can maximise your tax benefit under section 80D to a total of Rs 75,000.

If you are unable to pay high amount of health insurance premium for your senior citizen parents, then their medical can help you save tax as well.

Also Read: Your senior citizen parents' medical bills can help you save tax

When you buy a health insurance policy, normally the insurer will issue you a certificate for the premiums paid which you should keep as proof to claim the tax break. If you do not get the certificate, then ask the insurer for it. Else, the insurance policy or any receipt issued showing that you have paid the premium by cheque is sufficient. You will need to submit a photocopy of this document to your office to ensure that they take it into account while calculating the tax that is to be deducted from your salary.

4. Fully use the tax breaks offered in section 80C
Investment up to Rs 1.5 lakh in avenues specified under Section 80C of the Income-tax Act is deductible from your gross total income and thereby reduces your tax payable. In case you contribute to the Employees' Provident Fund (EPF) from your salary, the contribution would automatically become eligible for deduction from your gross total income (mainly your salary) before tax payable on it is calculated. Further, there are various expenditures which qualify for deduction from gross total income under section 80C. So, total your investments and expenditures which already qualify for tax benefit under this section.

If the total falls short of the limit of Rs 1.5 lakh allowed per fiscal, then you should look at investing the balance (shortfall from Rs 1.5 lakh) amount in any of the other investment avenues specified under section 80C. Of these, young earners should consider investing in equity-linked savings schemes (ELSS). ELSSs come with a mandatory lock-in period of three years, which is one of the shortest among popular tax-saving instruments.

Equity investments have proven good for long-term investors, and since youngsters have a higher risk appetite and a longer time horizon, ELSS funds are a suitable investment option. When you are a young earner the temptation to take higher take home pay is more, but this is the time when you can make the most of equities and the magic of compounding. Your age is your biggest advantage, so make full use of it while investing.

The Public Provident Fund (PPF) is another popular tax-saving instrument but it has a lock-in period of 15 years. Studies show that over such a long time period equity has often yielded better returns compared with pure debt-oriented investments such as PPF.

What if the investment declared in the beginning of the financial year (FY) and actual investments differ?
If your actual tax-saving investments are lesser than what was declared in the beginning of the FY, your employer will compute your tax liability again as till now he would have been deducting tax on the basis of a lower estimated taxable income. And because of this, your tax payout will be higher in the last few months of the fiscal as your employer is likely to increase the TDS from your salary during this time to adjust for the lower tax deducted earlier. So you end up with a lesser take home pay in these few months.

If actual investments made in the FY are more than what you had declared in the beginning of the year, you have been paying a higher tax. Sample this: If you had declared tax-saving investments worth Rs 1 lakh and actually invested Rs 1.5 lakh during the FY, you are eligible for lower TDS from salary. Your employer will deduct a proportionately lower tax in the last few months of the fiscal to compensate. You will be required to claim income tax refund, if TDS deducted is higher than the actual tax liability for FY.

What is TDS and why you need to submit tax-saving proofs
TDS stands for Tax deducted at source. As the name implies, it aims at collection of revenue at the very source of income. It is essentially a method of "collecting tax which combines the concepts of pay as you earn" and "collect as it is being earned."

Salaries are subject to TDS under section 192 of the Income-tax Act. This means that the payer (i.e., the employer) of the salary is bound by law to deduct tax on the salary at the time of payment and deposit the tax against your PAN directly to the government. Consequently, since the beginning of a financial year, the accounts department of your company starts calculating taxes on your salary based on your estimated taxable income. Your estimated taxable income would equal your gross total income minus tax-saving deductions proposed to be made during the financial year. TDS on full salary is deducted if no proposed tax-saving investment is declared.

So if, during the financial year, you have made any tax-saving investments or have any expenditures which qualify for deduction from gross total income, then you need to furnish the documentary evidence of such investments/expenditures to your employer. Once the actual proof is submitted, the accounts department will compute the taxes based on the proofs of the actual investments made by you, which helps lower tax from being deducted from your salary.

Less than a month is left till the end of the financial year but that does not mean that there is no way out for you from paying higher taxes. Even if you have not made any investments yet, it is not too late. And if you do not have enough money left to make those tax-saving investments, use the above mentioned tax-breaks available on expenses to reduce your tax outgo. And remember to submit all the right documents on time to your employer.

However, do keep in mind that from FY 2020-21 salaried individuals have the option to continue with the old tax regime and avail tax deductions and exemptions. He/she has the option to opt for the new, concessional tax regime by foregoing 70 tax deductions and exemptions. Thus, as a young earner if you do not have money to make tax-saving investments, then you can opt for the new tax regime. If you have opted for the old tax regime with your employer, then at the time of filing ITR you can opt for new tax regime.

(With inputs from Preeti Motiani)