Introduction

Disclaimer : This is solely my personal opinion and a culmination of Acquired Knowledge from various sites and forums. Please take it with a grain of salt. Do not consider this as any form of Investment Advice. Please do your own research before committing to any Financial Decisions. I am not responsible for your Decisions or Actions(Investments or not).

From, past few weeks, you may be bombarded by several notifications and mails from your Salary Account Bank, Mutual Fund companies, Insurance Distributors and many other financial websites/companies regarding tax saving products and investments. As Financial Year is coming to an end, at least I am seeing a lot more of these in between Cricket Matches, News Columns and Inbox.

You might have gone through some of this pushed/shared content, read it further on several sites, contacted your Office Account Section or CA friends and put in some sort of effort to reduce you tax liability, Or you may have said, Meh.. Not for me. This post is put together with the perspective of a relatively young(?) Salaried earner (Bar the age, I am earning from 3 years only) and a primer, making some common assumptions and taking the mindset into consideration. I want to keep things as simple as possible and make it easier to make informed decision with around a month remaining in the Financial Year. Go through this post, perhaps it changes your perspective? Or at worse, waste a few minutes of your time.

If you already paid Income Tax or filed ITR previously or have Parents doing same (Get some advice from them), most of this may seem extremely trivial for you. This is for an absolute beginner with almost Zero Experience/Knowledge w.r.t finance or Income Tax.

Where are you at Present

  • Do you want to save tax? : If you want to save tax, you need to opt for Old Income Tax Regime else can go with New Regime. If you choose New Regime and TDS(Tax Deducted at Source) is already deducted, you can file updated ITR with Old Regime and still get the tax refund. Even, if you are in 30% tax slab you may be able to get refund of several thousand rupees incase you take some measures. Find more about IT slabs here and ITR types, here.
  • Do you know your Salary Composition? : Salary is combination of multiple components. Some of them are tax liable and some are not. Most companies have HR software to check your salary break up and tax applicable. Components like Variable/Performance pay may not be added at first into this but added after each quarter or annual payment. Look out for such changes. In Form 16, at end of financial year, all of these will be added and summarized.
  • Are you tax liable? : Are you paying Income Tax (IT) or Is your Company deducting TDS from your monthly salary ? If there is no TDS from your company, there is a high chance you are not tax liable. Your tax liability and break up of taxable income will be available in your HR software. If not, you can use this Excel Calculator to find out, entering relevant details.
  • Do you have a Side Hustle or Passive Income? : Business, Freelance income, Chit Dividends or may be that money you dabbled with, in the Stock Market in lockdown. They can be income from either Business or income from other sources. This will not be present in your Form 16, but tax liable if you come under some scrutiny. Learn about Short and Long Term Capital Gains (STCG/LTCG), Indexation (regarding some Mutual Funds and Property Sale). Intraday trading profits is considered business income as per slab. Chit fund dividends and pay out are difficult to consider for tax. You can read on it here.
  • Are you investing or paid some sort of Insurance ? : Did you invest in some tax saving product or paid Health or Life Insurance (LIC or some other insurers)? You need to take these into account while filing Income Tax Returns (ITR).
  • Do you have some disposable income at present? : Disposable income is income left or available after your EMIs, regular expenses(necessities and urgent wants) and Investment/Insurance payments. This is money you can have by postponing possible purchases which can be done later (Perhaps that new Phone/Camera for no reason?). If you do not have disposable income, do not try to invest money to save Tax. Raking up Debt to save tax is stupid.
  • Do you have an Investment Plan or Basics in Place? : Well, this is not a Tax Saving advice, but, It is the best way to properly align your Tax Saving measures into Financial Independence or Specific Goals. If not, you can look further into this at freefincal and start here.
  • Unknown Factors? : HUF(Hindu United Family), Property Sales, Large business, Start-Up Equity/Involvement, Freelancing, Crypto Currencies(Bitcoin, etc..) may attract different kinds of tax. I can only recommend, cleartax or freefincal for those currently.

What path should I take?

Your tax liable income below 5 lakhs will not be taxed(at least from Employer due to input credit), or if taxed will be refunded on filing ITR. File ITR with-in deadline and honestly. On assuming, your taxable income is above 5 Lakhs either from HR software or Excel, and Based on answers to above questions, I can format only two paths at present :

  1. Non-Investing : This can be done by leveraging certain components of your Salary and liabilities (Education/Home Loan) by submitting proper documentation.
  2. With Disposable Income : When you have disposable income, you can either Invest this or get proper Insurance (try not mixing them up). You can do all the mentioned points of Path 1 as well.

Non-Investing

  • Education Loan/Home Loan : Interest on Education Loan payments can be exempted and Home Loan Interest/Principle can be exempted with a upper limit. Honestly, I do not know much about this as they are not with-in my Personal Finances. You can read more on freefincal or cleartax.
  • HRA : Living in a PG or Rented Place, you can get Rent Receipts from Landlord for HRA deductions. But, most of us, due to Pandemic may be living with parents. Do you know, we can get HRA exemption for paying rent to parents? You can put your home address, with Parent as Owner and generate receipts from cleartax or similar website. However, make sure you do not add to your parents tax burden. Rent amount on your parents account can be exempted for some extent but adding to their tax burden doesn't make sense. Also, any Rent amount greater than 1 Lakh, you need to give owner PAN details, so keeping it under may be better. Regular Digital Transactions to your parent accounts will help incase of any scrutiny (you can just withdraw cash later for self).
  • Life Insurance : Life Insurance paid till date can be exempted up to 1.5 Lakhs from 80C Limit. Got Insurance? Save tax on it, but getting Insurance just to save tax isn't practical or recommended. Do not mix Insurance with Investment (Example : Endowment Policies, ULIPs). There is a lot of literature on this, just google it. Some insurance providers/agents may lure you into this, Do not be fooled by ads and do some considerable research.
  • Health Insurance : Paid by You, not parents or your employer can be exempted under 80D up to 25000 rupees (Considering you are under 60). This include for Your family (Wife, Husband and Kids and not Parents). Insurance Premium paid for parents can be exempted under same up to 25000 extra (50000 if they are Sr. Citizens).
  • Donations Done : 50% of Some donations done for eligible reliefs or Institutions (like PM fund) etc... can be tax exempted under 80G. Read more on cleartax. If you want to donate to save tax, None will or should be against it.
  • Preventive Health Checkups: Full Body checkups taken maybe eligible. I am not much aware of this. Better check on cleartax or some other site.

There are some other sections for exemptions regarding Electrical Vehicle Loan, incase of Disability, and Other Home loan specifics, but not going into those and suggest you freefincal or cleartax for that. I am not an expert and this is just a primer.

With Disposable Income

If you are interested to invest or insure with your disposable income, you can get an idea here on how you can do it. Please keep in mind that these are just personal views and not literal facts. You are free to try changing my mind and this post through feedback.

First, Investment and Insurance (not a combination of both) are good ways to save tax. Insurance brings security (much-needed when you are sole bread winner for family) and Investment brings fulfillment of goals when aligned properly with your finances.

  • Life Insurance : Life Insurance is as the name suggests and comes under 80C. Much needed when your family is dependent on you. Assuming age of readers (and my age being 24 at writing this and 25 in few months), Life Insurance is cheap. Vanilla Term policy is the most recommended policy by many experienced people. It secures, cheap (dirt cheap, some say) and easy to get (no medical tests at our age). Be honest about your current health and smoking habits, it may increase premium a bit but helps at claim(better it never comes). Keep a distance from Endowment, Money Back and ULIPs, these give meager returns (some say only 3-6 % which is less than PPF or FDs). Read this comprehensive guide regarding Term Insurance. You are generally eligible up to 20 X of your annual income (1-2 Crores may be) and make use of it to get good coverage, not 1, 1.5 or 2 Cr number but at least 12-15X of annual income.
  • Health Insurance : Your Employer may be already providing this, If not, get it. It is exempted under 80D. Having additional one apart from employer will help incase of job changes or loss of employment. They are also relatively cheap at our age. Get at least 5 Lakhs base policy coverage and a Super TopUp (will come into consideration if base coverage runs out). Get a policy for your parents if not present and get it seperately (reduces your premium as elder member age is considered). Do not go for super low or super high coverage to save tax, it doesn't make sense and is waste of effort and money. Read about health insurance, more comprehensively, here and here.

Remember, In case of Insurance, Honesty is best for Policy.

  • Investment : Do not come directly to this section. I hope you made use of your non-investment limits and insured yourself properly before coming here. I am assuming that after using above limits you have some more tax liability which you are looking to reduce AND some disposable income. Remember, every thing in here has a lock-in period ranging between 3 Years to 35 Years (Until you reach 60). It would be best if these investments align with your goals. Read more about Money Management and Goal Based Investing, here. I am assuming you are a Noob in Investing.

    • Under 80C (Up to 1.5 Lakh exempted including Life Insurance payments):

      • Voluntary Provident Fund (VPF) : This will contribute to your EPF(that provident fund deduction from your monthly salary), but your employer must support it and there are some new Taxation rules around this, but it is still simple, lock-in is same as EPF.
      • Public Provident Fund (PPF) : Probably the safe and simple one apart from EPF/VPF, 7.1%(Better than some popular bank FDs, Currently) interest rate and lock-in of minimum 15 years. One click setup from your Salary Account(mostly all private and national banks).
      • National Saving Certificate (NSC) : Five year lock-in period, Better interest than FDs, but need to take from nearest Post Office.
      • Tax Saving FDs : Any Popular Bank, minimum 5 Year lock-in but lower interest rates as of now. Still simple and no hassles.
      • Sukanya Samriddhi Yojana : Only if you have a girl child(with age limit to opt-in), Similar to PPF.
      • ELSS : Mutual Funds with 3 Year lock-in. Do not do this if you know nothing about equity. Better stay away. Others have principle guarantee (in most cases), but not this. I do not want to discuss much here, assuming you are beginner and you can always read more, if required. Reminder is they are not as simple or best as many financial sites(distributors/aggregators) may claim. Learn about Equity markets before going forward.
      • There are some other components like Child School Fees, Bonds, etc.. I do not have in-depth knowledge on those and this is a primer, I want to keep things simple.
    • Under 80CCD-1B (Up to 50000 additional of 80C) : This is after you exhausted your 80C, 80D, etc.. AND still have disposable income. You can invest in NPS (New Pension Scheme). It will be locked-in till you reach 60 and is a complex product. There is a lot of literature around this here.

Enter Details into Tax Calculation Sheet or Software to track taxable income properly, Keep proofs ready incase of submission.

Special Mention - LTA Cash Voucher

Assuming readers as young earners, there is a high chance, you never used your Leave Travel allowance, i.e. salary component for vacation. Taxes can be exempted on this. However, due to pandemic, Government want us to spend this component of salary to boost economy. The purchases or services which attract 12% GST or more with digital payment made from self account are eligible to be exempted, with some catches. To keep it simple, If you have Rs.10000 as Annual LTA, You bought a Mobile Phone (12% Slab) for Rs.18000, you can avail 1/3rd of this i.e. Rs.6000 exempt from tax. If you bought Rs.50,000 mobile, your exemption is capped at Rs.10000 (your LTA and not Rs.16,666). It is applicable for purchases done between Oct 12, 2020 and March 31, 2021. You can read more on this, here.

Coming to personal opinion on this, Being lured into Insurance, Investment or Unknown Products can be considered as gullibility. But, Making unplanned purchases or raking up debt for tax exemption is plain stupidity. If you already have plans or bought something already without knowing this, make use of this.

What not to do

  • Insurance/Investment just for the sake of Tax Saving.
  • Fall prey to ads, distributors and agents without knowledge.
  • Not understanding product before getting in.
  • Not reading and understanding documentation.
  • Not being honest (Especially in-case of Insurance).
  • Thinking some Insurance, Investment returns and Products are guaranteed in long term.
  • Some other mistakes.

What if I already did

  • At least, read and understand documentation now.
  • Find more about the product and ways to make it better or get out.
  • Do not do it again.
  • Do not feel bad about yourself, nothing goes waste and everything is an experience.

Is the Effort Worth it?

We cannot escape taxes forever, and paying it isn't bad or a waste. We can only reduce or delay a bit, add some stake to our future goals along the way, but they will always catchup. Also, It takes time and effort to get our finances together. All it takes is a start, with a few hours of our weekend. Getting down this rabbit hole of Personal Finance may be draining and a hassle. A sense of security may creep in and may affect your choices in-case of Big Leaps (like quitting job for start-up or new job). But having a cushion of Insurance or brace of Investments towards goals is not a hassle but something that is necessary to achieve them. Developing and enabling a framework in place, earlier and before our time is worth more than what we are trying to save out of it, is much better. We might shake it off as complex and isn't worth it, But how long can we escape it ?

Conclusion

You might always find better literature and data than this. This is something I learned from my experience and understanding of things going around. This is neither advanced nor absolute. You may be better off discussing these things with experts or CAs. But, this is a place to get started. If you question, what I am doing? I do a bit of everything, you can also try them. We are still relatively young, un-experienced and have time on our side, Don't we?

P.S : You may want to suggest changes or correct me. I am open to editing this, as long as you provide me some relevant details. And as many people say, Personal Finance must be kept Personal. Also, re-read the disclaimer on the top.