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Jan 23, 2020 | Source: AxisDirect-O-Nomics
Investing in your early 20s may be deemed as an unnecessary exercise by many people. However, taking the plunge and investing your money as early as possible can help you stay ahead of the game. When done right, investing can also allow you to enjoy a great deal of tax savings. And given that this is the phase in life when you’ll be climbing up the career ladder, it’s extremely important to save tax in your 20s.
If you’re interested in getting to know more about tax-saving investments, here are the best options to consider to save tax in your 20s.
Public Provident Fund (PPF)
PPF is an extremely lucrative investment option since it falls under the EEE (or exempt-exempt-exempt) tax bucket. It’s a great way to start saving up for your retirement. Opening a PPF account is a straightforward process. And what’s even better is that you only need a minimum deposit of Rs. 500 per year to keep your account active. Of course, the more you invest, the greater your returns. PPF also offers other attractive advantages like tax exemption on the interest as well as on the principal, the option to avail a loan against your investment, and the ability to partially withdraw your funds if need be.
Life Insurance
Life insurance is another essential investment that can help you save tax in your 20s. The younger you are when you purchase a life insurance policy, the lower your premiums will be. Additionally, you also have years ahead of you to pay your premium, so you can take your time and spread the cost across 20 years or more. The premiums you pay during each financial year can be claimed as deductions from your total taxable income, thanks to the provisions of section 80C. Under this section, the maximum deduction allowed is Rs. 1,50,000. Moreover, the maturity or death benefits received are also exempt from tax.
At Axis Direct, you can avail the term plans from one of the best life insurance providers in the country - Max Life Insurance to bring you a variety of insurance schemes to choose from, in line with your long-term financial goals.
Equity-Linked Savings Scheme (ELSS)
Equity-Linked Savings Scheme is essentially an equity-oriented mutual fund that is one of the best investment options for people in their 20s. Younger folks who are eager to take risks and earn if that means earning higher rewards will find that ELSS offers exactly what they’re looking for. By parking your funds in ELSS, you can earn the dual benefit of tax savings coupled with wealth creation. Your investments qualify for deduction up to Rs. 1,50,000, as per the provisions of section 80C. Additionally, if you opt for the systematic investment plan approach, you can periodically add small amounts to your investments and make your money grow over the years.
Axis Direct offers you the option to invest in ELSS, with a lock-in period of 3 years. This relatively shorter lock-in period makes ELSS one of the most liquid tax-saving investments.
Tax-saver fixed deposits
If you want to go old-school, a tax-saver fixed deposit is an excellent investment option. Not only does it offer guaranteed returns at predetermined rates, but it also helps increase your tax savings up to a maximum of Rs. 1,50,000 under section 80C. You can invest as little as Rs. 100 in your tax-saver fixed deposit. The lock-in period comes up to 5 years. So, if you withdraw your money before the tenure is up, your investment becomes taxable. However, if you remain invested for 5 years, you can continue to enjoy the tax benefits. These deposits are perfect for people looking for a low-risk option to balance out their investment portfolio.
With the tax-saved FDs available you can choose the scheme of compounding you prefer. You can also opt for periodic payout instead of reinvestment, if you choose to.
A bonus tip
In addition to parking your funds in these tax-saving investment options, you can also maximize your tax savings by claiming eligible allowances and perks as a deduction from your salary income. Certain components of your salary can help you reduce your taxes. Here’s a list of some such allowances that are either partially or completely tax-free.
Food coupons
House rent allowance (HRA)
Leave travel allowance (LTA)
Hostel expenditure allowance
Car maintenance allowance
Make sure to ask for a breakup of the salary you receive, so you can identify the tax-free expenses and take advantage of those components to reduce your tax liability.
Happy Tax Saving!
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