Tax planning is a means of organising your revenue, assets, and expenditures alongside other financial transactions to maximise tax savings while reducing tax liabilities. Tax planning is different from investing; however, many tend to mistake one for the other. Investing to save tax is a considerable part of tax planning, but there is much more to tax planning than investing in tax-saving instruments. It involves saving for retirement, taking loans that help manage taxes, planning your expenditures, calculating tax liabilities, and a tax strategy based on age.
Let us explore tax planning strategies for different age groups that will prepare you for retirement and minimise your tax liability.
Tax planning in your 20s
Your 20s are the perfect time to begin tax planning, as you have fewer responsibilities and higher risk tolerance. Understanding tax brackets to avail deductions from investments and insurance and file your tax returns on time to prevent any penalties and maximise your savings is crucial. Here is how you can get started with your investment and tax planning journey:
• Tax saving: Invest in Equity Linked Saving Scheme (ELSS) mutual funds and Public Provident Fund (PPF) for tax saving strategies. Both these investments provide tax benefits under Section 80C in the old tax regime (Income Tax Act 1961.) You can claim up to 1,50,000 total deduction annually.
• Health insurance: A robust health insurance plan is non-negotiable, covering you and your family in case of unforeseen health emergencies. The best time to start is when you start earning, so your premiums are lower. You can claim up to 25,000 under section 80D in the old tax regime.
• Retirement planning: Your 20s are the best time to start planning your retirement. The earlier you start, the larger your retirement corpus will be. Choose from National Pension Scheme (NPS) or retirement mutual funds. You can claim up to 1,50,000 total deductions under section 80CCD under the old and new tax regimes.
Tax Planning in your 30s
At this stage, your responsibilities grow. Most people have a family with a spouse, kids, and ageing parents as dependents. Effective tax planning at this stage is essential. Here is how you can achieve that.
• Health Insurance: Health insurance still stays non-negotiable. Ensure your children and other dependents are added. The premiums will provide you a deduction of up to Rs. 25,000 under Section 80D.
• Life insurance: Your dependents must be secured in case of unforeseen mishaps. Life insurance is extremely essential at this stage, which will protect your family, give you peace of mind and offer a deduction of up to 1,50,00 under Section 80C on the premiums paid.
• Home loan: Buying a home is a crucial step, a great asset, and one of the best tax saving mechanisms. The principal repayment on a home loan allows a deduction of up to 1,50,000 under Section 80C, and the interest component allows up to 2,00,000 under Section 24B.
• Investing: At this stage, your risk appetite should be low, so hybrid funds are a wise idea. You can balance your portfolio between equity and debt investments and a mix of stocks and bonds to ensure security and growth.
Tax Planning in Your 40s
Financial responsibilities are higher in your 40s due to added expenses such as children’s education, medical expenses for ageing parents, holidays with family, and overall increasing family needs. However, at this stage, you will also be settled in your career, and protecting your income from added tax liabilities is crucial. Here is how you can do that:
• Education loan for kids: You can use your kid’s education as a tax-saving instrument by taking an education loan for higher studies. This allows for tax deductions on interest payments for up to eight years under Section 80E.
• Retirement planning: Retirement planning is one of your most crucial investments at this stage. Increasing your payments to the NPS or other retirement accounts is advisable. This will add to your retirement corpus and help you save money under section 80CCD.
• Low-risk debt mutual funds: As you approach your 50s, it’s time to reduce your risky investments and transition from equity to low-risk debt investments. This is the age to move to debt mutual funds or fixed deposits to safeguard your portfolio.
Tax Planning in Your 50s
In your 50s, with retirement approaching, your main criterion should be being debt-free and adding to your retirement funds. At this stage, your income is at its peak, your kids will mostly be employed, and your house will be paid for. This is the time you can focus on adding to your retirement corpus, so your sunset years are comfortable.
• Pay off loans: If you have any loans, it is time to clear the outstanding on these debts, such as home loans or education loans. This will give you a debt-free entry to your retirement years.
• Retirement: Now, all your investments should be directed toward your retirement corpus. In your mid-50s, your mutual funds should be converted to a Systematic Withdrawal Plan (SWP) so you have a steady income post-retirement. Your SWP can have tax implications under capital gains, so consult a professional financial planner to mitigate your taxes.
• Review your life insurance policy: The sum assured should be adequate to safeguard your family in your absence. These steps help secure a financially stable and comfortable retirement.
Financial Planning in Your 60s
In your 60s, the focus shifts to preserving your retirement corpus rather than investing
• Focus on low-risk investments such as debt funds.
• Switch your investments in the Senior Citizen Savings Scheme (SCSS), a government-backed option that offers monthly or quarterly payouts.
If you start investing and tax planning at the right time, you can attain your financial goals, as well as achieve your major objectives in life. Starting early will help you will build a corpus for a comfortable retirement life and reduce your tax liabilities to the maximum. You can attain financial security with a steady income during retirement and keep your capital intact.
