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.
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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.