Investing is never restricted to just one asset class or one instrument. There are multiple options to choose from. However, not every instrument would suit your investment objective. Choice of your investment product should largely depend on your investment objective/goal, investment horizon, and risk appetite. For example, your goal might be to take your family on a trip or to buy a car at the same time its necessary to do tax planning. Did you know you can combine the two and achieve your goals while saving tax?
Tax Planning is about trying to minimize your taxable income
Tax Planning doesn’t mean that you are paying and filing for your taxes well in time. Tax planning is about trying to minimize your taxable income by taking advantage of all the available deductions, exemptions, exclusions, etc. Indian law offers a variety of tax savings options. It allows for a large range of options for exemptions and deductions through which you could limit your overall tax output.
Tax Planning is important because it helps you manage your income in a more effective way
Do you wish to pay more tax? I’m sure the answer is a big NO. Who would want to pay more? Tax Planning is important because it helps you reduce your taxable income by allowing you to make investments that can be claimed for deductions and exemptions. While saving your taxes it also helps you in making investments. In your financial planning, tax planning plays an important role as it is one of the major expense. Therefore, it is critically important to plan and reduce your taxes.
Goal setting is the first step towards planning
Goal setting is the first step towards planning for your future. Goal setting is a process where you identify what you would want to achieve and how do you plan to achieve it. Every goal is achievable when planned and executed properly. It’s very important to be determined and patient with your goals. Nothing can be earned or achieved overnight. Time and discipline are the keys.
Goal setting will help you prioritize
Goal setting is important because it’ll help you prioritize various goals based on the availability of funds and duration. This process will help you understand your current financial situation and gives you a better perspective to achieve your goals. Goal setting doesn’t end at planning; only with successful execution, you’ll come out victorious. As part of your goal setting, it is equally important to review your investments on a regular basis to see if they are in line with your objective. Overall, goal setting will help you in planning where to invest, how much to invest and for how long to invest.
Align your goals so that your tax planning is covered
Well, it’s difficult to say which child of yours you would choose first. Similarly, both tax planning and goal setting are equally important for your financial future. Investing because you want to save tax is probably not the right approach. Let’s aim to align the tax planning such that your financial goals are also achieved. While there are a lot of investment options to save tax, picking the right one is the key.
Did you know that you can buy a car with your tax savings?
Tax saving investments come with a lock in periods ranging between 3-15 years. Does this mean that for your long term goals you invest in options that have higher lock-in period? Definitely not. The current Public Provident Fund (PPF) Rate is 8%, w.e.f 1 st April 2019 and lock-in of 15 Years. While Equity Linked Savings Schemes (ELSS) have a 3-year lock-in period and historic returns have been around 12%-13%. Though ELSS funds attract LTCG tax, the effective return is still higher than a PPF. In the case of PPF even though your investment is locked for 15 years, the return is far lesser than an ELSS fund.
If your goal is to buy a Maruti Suzuki Vitara Brezza or an equivalent that is currently costing Rs 9L in 5 years. Projected value i.e. inflation-adjusted cost of the car would be around Rs 10.5L. Here’s how you can achieve your goal with your tax saving investments. Investing Rs 12, 500 per month in Axis Long Term Equity Fund for a period of 5 years might earn Rs 11.4L at the end of the investment period based on its historical returns. Isn’t it exciting to know that your tax savings investments are not just helping you in saving tax for the current assessment year, but are also helping you buy your dream car?
You can invest in ELSS funds, as they earn higher returns compared to any other tax saving plans. This extra return will help you achieve your long term goals easily. While doing your tax planning don’t just think about how to save taxes, but try to link your investment to a goal and witness the effect it would have on your goals. End of the day all of us want to achieve our goals and retire peacefully. Therefore, be it any investment always link it to a goal and realize your goals with disciplined investing.
Happy Investing towards your goals!