Millennials who form a significant part of the working population need to invest prudently to reduce their tax liability. Indian financial markets offer ample instruments, investing in which can help them lower tax burden and create wealth simultaneously. So, how tax-savvy are millennials, and what options do they have? Let’s find out.
While millennials have taken financial planning seriously, they tend to lag in tax savings. As they like to live in the present, tax savings often take a backseat. However, many tax savings options can help millennials address present and future needs and lower their tax outgo. Also, every penny saved is a penny earned.
One of the best tax-saving schemes, ELSS helps you achieve two goals with one investment. It aids you to invest in equities and lower tax liability as investments qualify for tax exemption under section 80C of the Income Tax Act, 1961. ELSS has the shortest lock-in period of 3 years among all tax-saving instruments. It means you can’t withdraw money for three years from the investment date.
Also, if you invest through systematic investment plans (SIPs), each SIP is locked in for three years. Redemption happens on a FIFO (first-in, first-out) basis. You can also invest through lump sum to get tax benefits.
ULIPs weave insurance and investment in a single plan. One component provides life cover, while the other is invested in underlying securities. ULIPs are essentially life insurance products where the premiums paid qualify for tax exemption under section 80C of the Income Tax Act, 1961.
New-age ULIPs are more transparent in their pricing structure and make a good investment if you want insurance and investment in a single product. Compare different plans and choose the one that best fits your requirements.
PPF is one of the best investment options to save tax as it enjoys an EEE (exempt, exempt, exempt) status. The amount invested, interest earned, and the corpus withdrawn at maturity are tax exempt. You can open a PPF account in a bank or post office. The deposits made in a financial year qualify for tax exemption under section 80C.
PPF has a lock-in period of 15 years. Partial withdrawals, though allowed, are subject to certain conditions. The government revises PPF interest rates every quarter.
One of the prudent investment ideas to save tax, NPS helps build a sizeable retirement corpus. You can choose to invest in various instruments based on your risk tolerance. NPS offers tax benefits up to Rs. 1.5 lakhs under section 80C and Rs. 50,000 up and above Rs. 1.5 lakh under section 80CCD (1B). It offers two accounts - tier I and tier II.
While tier I is the account to save for retirement, tier II is a savings account. You can open an NPS account online or offline. Upon turning 60, you can withdraw a portion of the corpus as a lump sum and use the remaining to buy an annuity plan for lifelong pension.
NSC is a fixed-income instrument that you can open in a post office. A low-risk fixed-income product, investments qualify for tax exemption under section 80C. There’s no limit on the purchase of NSCs, and you can invest from as little as Rs. 1000.
You can gradually increase the amount. Note that the interest earned NSC is added to the initial investment and qualifies for tax exemption. Like PPF, the Government every quarter revises the interest on NSC.
Life insurance plans help provide financial protection to dependents in case of an untoward incident. Premiums for life insurance policies qualify for tax exemption under section 80C. Be it a term plan, endowment policy, ULIPs, or annuity plans, the premiums paid are eligible for tax exemption.
Choosing the best investment to save tax requires careful consideration and alignment with life goals. All the tax-saving instruments mentioned above serve their own purpose and help millennials achieve their life goals easily.
Open a Demat account with us and start your investment journey today!