New Delhi: The apple doesn’t fall far from the tree, it is said. And, that’s true for most millennials when it comes to investments and tax planning. “A majority of them end up following the herd mentality and buy insurance policies to save taxes or invest in post office savings schemes. They do so because their parents did it or family members or friends are doing it,” said Suresh Sadagopan, founder, Ladder7 Financial Advisories, a financial planning firm.
How millennial investing trends differ from their parents’
“However, a healthy percentage are now evolved and are asking the right questions around investments. They are not rushing blindly into tax savings. This trend is growing, but is not yet the norm,” he added.
Ritu Sharma, 31, a professor at a Delhi university college, invests most of her money in equity-linked savings schemes (ELSS) to save taxes, unlike her father who has never invested in equities. “My father prefers fixed deposits(FDs), post office schemes and real estate. But I invest primarily in ELSS for tax saving and the remaining amount goes into FDs,” said Sharma.
What works in favour of young professionals is that there is enough information out there. Gaurav Mashruwala, founder, Gauravmashruwala.com, a financial planning firm, says millennials are more open to advice and take informed decisions. He adds that tax savings should be done through the lens of financial goals and investment horizon. We give you five tried and tested products that will not only help you save taxes, but also help you achieve your life’s financial goals. Read on.
As per the India FIT report 2019 by GOQii, a fitness device manufacturer, millennials’ lifestyle is very different from that of their parents—they sleep less, eat out often, have more stress—and it makes them prone to lifestyle diseases. Millennials realize it, and are proactively buying health insurance policies.
But it’s important to be adequately insured. An individual cover of at least ₹5 lakh is recommended. If you are buying for your family, bump it up to a minimum threshold of ₹10 lakh. Use top-up covers to enhance it further. Besides, it helps in tax savings.
The premium paid for a health insurance policy qualifies for a deduction under Section 80D of the Income Tax Act, 1961. A health insurance premium for you, your spouse and children qualifies for a deduction of up to ₹25,000. You can get additional benefits under Section 80D if you pay health policy premiums for your parents—if they are below 60 years, you can claim deductions of up to ₹25,000, but if they are senior citizens, then you can claim a deduction of up to ₹50,000. If you avail of the maximum ₹75,000 benefit, it translates into a tax saving of ₹23,400 if you are in the 31.2% tax slab, including cess.
For long, insurance policies have been sold as investment products, rather than as safety nets, providing financial security against unforeseen events. However, more millennials are considering term insurance plans over traditional endowment insurance plans. Term plans are preferred for two reasons: one, they offer a substantial cover for a relatively low premium compared to other policies. Two, it’s a plain vanilla plan that only offers insurance. Others such as traditional policies usually fail to either give you decent insurance benefits or good returns.
“Term plan is the right way to get insurance. It is low cost, addresses the risk management part of the financial planning and also saves tax,” said Rohit Shah, founder and CEO, Getting You Rich, a financial planning firm. As a rule of thumb, buy a term plan with an insurance cover of at least 10 times your annual income.
Besides, premiums for such policies qualify for tax deduction under Section 80C of the Income Tax Act, provided the sum assured or insurance cover is at least 10 times the annual premium. Section 80C carries an overall deduction limit of ₹1.5 lakh.
Tax-saving mutual funds
Nothing suits better than an ELSS for millennials, who also want to save taxes. Equity is the ideal asset class for chasing returns and a long-term horizon takes care of any volatility in the market, ensuring you reap the benefit of real returns—return after adjusting for inflation. Given that most millennials have a long-term horizon, ELSS works well. Investment in ELSS qualifies for tax deduction under Section 80C. Prospects of higher returns and a low lock-in period of three years for claiming tax deduction make it a must-have in your tax-saving basket of instruments.
One cannot, however, ignore the risk appetite of an individual. This is where the comfort of Public Provident Fund (PPF) comes into play. Good for those with a low risk appetite, PPF currently offers 8% returns per annum.
Investments in PPF offer tax deduction under Section 80C and maturity proceeds or withdrawal from PPF is tax-free. This is a long-term investment product with a tenure of 15 years, extendable in blocks of five years. While it’s one of the best tax-saving instruments in the debt category, your money gets locked in for long periods, though partial withdrawal is allowed after a few years in some conditions. Pick this product only after your equity investments are made, but don’t ignore your asset allocation. You needn’t exhaust ₹1.5 lakh in PPF alone if that means a debt-heavy portfolio. Your asset allocation should be equity-heavy.
For retirement investments, millennials can consider the National Pension System (NPS)—a contributory scheme wherein you need to annuitize at least 40% of the corpus for regular pension after the age of 60. Contributions get tax benefit under Section 80C. However, if you have exhausted your 80C limit of ₹1.5 lakh and are still looking to save more tax, then Section 80CCD (1B), which was introduced in assessment year 2016-17, offers an additional deduction of up to ₹50,000 for investments in NPS. You have the choice to invest both in equity and debt, but equity investments are capped at 75%. Additional stand-alone tax benefit (under 80CCD (1B) and low cost make NPS a must-buy product. Like other products, diversification is key.