Lately, I’ve been coming across many who are averted to savings and investments. Most such people are the ones who just started off earning.
Of course, all of us, to an extent have the tendency to spend on all sorts of things we’ve been craving for ages the moment we make our own money, for there would be no dad or mom asking us to account for our expenses.
While that sounds sweet, most (read : almost no one ) really cares a rat a$s for future financial planning. The moment such young pockets hear terms like – retirement planning, tax saving, investment strategy, etc., here is what we get to hear –
You kidding me? There is a whole life for that. Who knows if I’m even going to exist till I retire.
Or something close to that.
Well, I’m so not against enjoying ones’ today to the fullest. And yes. None of us really know if we are going to live for as long as we plan our finances. But in the end, the big question always exists.
What if we do?
Will we be able to sustain the inflation?
Can we have a reasonable and consistent lifestyle if not an ever improving one?
Will we be able to spend like we do today after about 5-10 years from now?
I know such questions still look vague to many young earners. But it is always better to understand this now and plan early than to realize this by force of responsibilities (like kids and mortgages).
If you still have doubts like how it would help investing early in life, you gotta go through six reasons to start investing early.
Top 6 Tax Saving Investment Options for Indian Youth
I’m being specific here about saving tax, because when we talk about investing for the future one would certainly expect high returns which unfortunately incurs higher tax. So we’d obviously want to beat that. Don’t we?
Tough tax saving can sound a little financially geeky, I’ll try making it as lucid as possible.
Public Provident Fund (PPF)
PPF was initially considered only as an alternative to EPF (Employee provident Fund) for the self-employed; but eventually this turned out to be the best of the lot. Both the employed and self-employed get their share of profits from this unavoidable scheme.
The key features of PPF –
- Long term investment of 15 yrs which can be extended further.
- High interest rate of 8.7% (the rate is linked to the government bonds)
- Max investment of Rs.1,00,000 per annum which can be deposited as a lump sum or as monthly installments.
- The income earned is non taxable no matter what the amount is.
- Many banks offer opening of PPF accounts which allows you to auto credit fixed amount into your PPF account from your bank account.
- 25 % loan can be issued against the balance in the account at a low-interest rate of 2%
- A withdrawal of 50% of the balance is allowed after the 5th year, once a year.
All these features make PPF reasonably liquid, can be seen as a long-term safe investment arena and also as a monthly savings option.
I’ve calculate the ROI for a Rs.2000 pm investment at the present rate of 8.7%. You can calculate yours here.
PPF makes a great investment option for young Indians as they have the time of 15 years in hand, plus the scheme fits the new earners’ budget as the minimum investment is just Rs.500 p.a.
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Equity Linked Savings Scheme (ELSS)
This investment option the name of which implies its alliance with the share market (Equity market) though is specifically designed for saving tax is understandable risky (as it is linked to the stock market).
I included this in this list of tax saving investment options for the young Indians as youth usually does not step back when it takes risk. As expected, more the risk better the chances of hitting the jackpot. As per a study by the Economic Times, ELSS gave an average ROI of 17.5% in 2014. The lock in period is 3 yrs though it’s always advised to invest in equity for longer than 5 yrs.
When we talk about high risk, it also implies that this might end up as a loss too. Choosing the ELSS schemes wisely will help. The key to dodging risk with the ELSS is
- Redeem the dividends when the fund declares any instead of reinvesting them.
- Invest in SIPs (systematic investment Plan) and not in lump sum.
- Don’t redeem in a hurry. Invest for a minimum of 5 yrs though redemption is allowed after the third.
Returns upto Rs.1,00,000 is tax-free.
Life insurance is not a traditional investment avenue, but the premium paid for it is exempted from tax under section 80C with an upper limit of Rs.1,00,000. The lump sum paid in case of an eventuality is non taxable.
Though LI is not an investment as such, for every young Indian it ought to be considered an investment for a better after life for their beloved.
The later one invests in an LI, more the premium he’ll have to pay. Hence LI must be one of the first investments of an individual to reap the max benefits. No point realizing the safety of your better half and kids after you have them, because that is going to cost you more.
The VPF (Voluntary Provident fund) is just an extension to the EPF (Employee provident fund). Most employees are aware of what the EPF is about. It is a mandate for all the employees of an organization, wherein, the employee and the employer both contribute 12% of the basic salary of the employee into the account.
Unlike, in the PPF, EPF/VPF is only for the employed.
While investment of the 12% of the basis salary into the provident fund is an obligation, the employee is allowed to invest 100% of his salary into the account. This voluntary credit then turns the EPF into VPF. The withdrawal on VPF is tax-free. However, the share of the employer can’t be more than the 12%. You earn an interest of 8.75% with the VPF.
As per the provision under section 80C, banks offer tax saving fixed deposits. These are akin to any other FD, except that the lock-in period is 5 years and the investor gets tax benefits as per his/her income slab.
But the interest earned is taxable, even if it reinvested into the FD.
The tax saving FDs come with the benefit of negligible risk as your money is save with a bank.
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Thinking of real estate might sound a huge deal in the early stages of your earnings. But then, owning a house is one of the biggest financial goals of an individual. The earlier you start working on it the easier it gets.
The interest payment of loan for the residential property enjoys tax exemption for upto 1.5 lakhs under section 24 and the repayment enjoys deduction under section 80C.
However, this feature is applicable only to loan against a house and not just a piece of land.
Hope you’ve figured out which of these tax saving investment options can be your best bet for a good financial planning foundation.