Just got your first salary or started earning a handsome amount in your business? If yes, you might have felt tempted to splurge it on those expensive items that were earlier out of your budget.
When in your 20s and 30s, you want to enjoy your life to the maximum
without worrying much about income tax saving. One reason for this could be
that you lack knowledge about income tax saving sections and related slab
rates.
However, you might have heard your friends or parents saying – “Save
a part of what you earn to plan taxes.”
But why? Isn’t tax planning something to consider later in your
age?
The reality is that tax planning plays a vital role in managing finances irrespective of your age. It refers to the process of reducing your income tax liability every financial year by using exemptions and deductions.
It is a good practice to analyze your finances from time to time and
accordingly invest a part of your regular earnings to save taxes. Channelizing
your taxable income into different investment instruments will also give you
good returns in the future.
While as a responsible citizen, you need to pay income tax on time
to avoid any legal action, you should also be wise enough to know about the income
tax saving sections for your benefit. However, many of you, when young, leave
tax planning for a later age. This results in you paying a huge sum as income
tax each year, which has a direct impact on your financial health. This is one
of the significant tax planning mistakes that many of you make.
There are several other mistakes, too, which indirectly increase
your income tax liabilities without your probably realizing the same. So, as
the wise men say, it’s always good to learn from others’ mistakes, here are the
four most common income tax planning mistakes you
should avoid in your 20s and 30s:
1- Overspending Your Money
Many people start each month by setting up a budget and spend
money accordingly. However, they often end up making unnecessary purchases with
the “A-Little-Won’t-Hurt” attitude that eventually leads to an empty bank
account before the end of the month.
Overspending habit is often linked to the emotional behaviour of
some individuals. You might have heard your friends saying – “I’m in a good
mood. Let’s go shopping!” or “I am not feeling good today, and shopping is my
only retreat.”
However, you need to realize that when you indulge in impulsive or
unnecessary buying, the little money you shell out each time eventually adds
up. This slowly drains out your hard-earned money. So, make sure you check your spending behaviour
every month to control it effectively and make better use of your money.
2- Maxing Out the Credit Card
A credit card comes with numerous perks and rewards that you may
not get when paying for things in cash.
If you have recently got a credit card, you may know that there is a specific credit limit associated with it. It’s the upper limit of the amount you can spend using the card. As per your credit history and income, you may have received a high credit limit. However, this does not mean you must use all this limit. For instance, if your credit limit is INR 1,00,000 and your credit card balance INR 95,000 or above, your credit card is maxed out. This can hurt your credit score too. So, avoid maxing out your credit card to build your creditworthiness for future sake.
3- Not Buying Insurance Plans
Insurance plans, be it term insurance, life insurance or child plans, or in fact the basic insurance that a business need, are a must to stay prepared for unexpected situations in life. Not just that, they can help you reduce your income tax liability.
Take the case of health insurance plans offered by Max Life
Insurance. As per income tax saving section 80D, you can enjoy a maximum exemption
limit of up to INR 1,50,000 in every financial year on the health insurance
premiums.
Amidst the rising cost of medical treatments in India, buying a
suitable insurance premium for yourself and your family members is a must.
4- Not Saving for Emergencies
An emergency can come knocking at your door anytime. Nowadays,
young people are facing grave medical challenges that can hurt their financial
stability. So, you must not overlook the need to have a financial safety net
for different kinds of emergencies.
With age on your side, you should also plan and save for
emergencies or challenges post-retirement. There is a high risk of facing
medical and financial crises in advanced years when there is not regular source
of income to support you. So, make sure that you don’t feel guilty about not
having enough money to tackle emergencies in life. Many investment funds like the
Unit Linked Insurance Plan (ULIP) and insurance plans are covered under the income
tax savings section, which can also help you save a part of your income each
year.
As shared above, tax planning is a crucial aspect of leading a
happy life free from financial worries. It can help you grow your income tax
saving limit. You can maximize income tax savings by keeping in mind the
aforementioned tax planning mistakes and learn from them too.
