They mostly fall in the lower bracket and can make the most of the various exemptions provided.
The frenzy that surrounds tax planning is back and deadlines for the relevant documents for the year’s tax-saving investments are drawing close. A sense of rush prevails for all, specially for first-time taxpayers.
Meet Ron Quadros, 25, a salon manager, who in his words, "woke up just yesterday" and is utilising his day off to get his tax act together. He is definitely better off when compared to Prital Patil, 26, editorial coordinator for a newspaper, who doesn't have a clue as yet about even the amount that would be taxable.
Financial planners say this is a fairly common trait among taxpayers. Mainly because many are not conversant with the various rules for claiming deductions, says Anil Rego of Right Horizons. And, should, hence, focus on first educating themselves about these.
For instance, many new payers come in the lower tax bracket of 10 per cent (Rs 1.8-5 lakh). "They can utilise the exemptions/deductions available to them effectively to minimise their tax liability. Chances are they may not have to invest any amount additionally," says Rego.
Like Patil, who has an annual package of Rs 2.4 lakh. Her basic exemption limit is Rs 1.9 lakh (for women). She would have to invest around Rs 50,000 in Section 80C instruments to claim a deduction equivalent to the sum. However, she doesn't have to invest the entire amount afresh. She pays around Rs 8,000 annually towards employee provident fund (EPF) contribution. This can be claimed as a deduction under the Rs 1 lakh limit of Section 80C. Similarly, there will be exemptions available like medical (up to Rs 15,000), conveyance (up to Rs 9,600 a year) or house rent allowance (HRA).
Researcher Parag Taluktar, 25, seems to know his taxes well. His gross package is Rs 3.6 lakh. Of this, Rs 1.8 lakh is taxable (basic exemption = Rs 1.8 lakh). He intends to claim an exemption of Rs 15,000 for medical and Rs 42,000 for HRA and a deduction of Rs 10,000 for contribution towards EPF. He is also servicing an education loan with an annual interest payout of Rs 30,000, which can be claimed under Section 80E. According to advisor Sadique Neelgund, this is an important provision and one that first-time payers can benefit most from. "This age group is typically defined by fresh graduates and many may be servicing education loans," he says. Under Section 80E, there is no cap on the interest amount you pay towards an education loan. Therefore, those servicing education loans can make the most of it.
Any taxable income left after considering the deductions/exemptions can be invested in tax-saving instruments. However, the choice must be made carefully. For example, Taluktar plans to buy an endowment plan with an annual premium of Rs 52,000. He is getting an insurance cover of Rs 10 lakh. A common mistake, mixing investments and insurance. Instead, he could easily take a term plan for a similar coverage of 20 years and annual premium of Rs 2,000. The rest can be invested in equity-linked savings schemes (ELSS) for long-term growth. Equities would give around 10 -12 per cent annually. Even the Public Provident Fund (PPF) would give higher tax-free returns (currently 8.6 per cent per annum).
However, according to Rego, "In the early stages of one's career, financial goals are not defined. Funds may be required at any time. It is, therefore, recommended to make liquid investments." And, PPF, with a 15-year lock-in, is not recommended in the initial years, when the investment amount is limited. Even ELSS comes with a lock-in but at three years is liquid among tax-saving instruments.
