Posted on , Updated On |
Do you end up regularly making last-minute tax investments every year?
If yes, have you tried to observe the “why” of this pattern?
It is most likely that you see tax planning as an unavoidable compliance activity that helps you ward off the interest, penalties, and stuff…
If you agree to the above, we ask you to shift that mentality & see tax planning as a tool for wealth creation & building a secure financial future.
Below, we share some tips to help you get the maximum bang out of your tax buck & grow your wealth at the same time.
Tip # 1: Increase your knowledge of personal finance & taxation:Sadly, our schooling system doesn’t teach us money management.Result? You do all the hard work for the money. But then lose it in unsuitable investments because you don’t know how to manage it.That’s why to start today & spend some time every weekend developing your knowledge of personal finance & taxation & also try to stay updated on the various financial & tax changes
This will help in the following ways:
- develops critical thinking ability to evaluate various financial products
- you can proactively tweak your investment strategy given the changes in financial & tax landscape
- saves you from costly tax mistakes causing penalties etc.
Tip # 2: Integrate tax planning into your overall financial planning:Generally, we consider tax planning as a separate compliance activity and don’t consider it part of our financial planning.As a result, the tax investments made over the years are entirely disconnected from your financial needs and requirements.Result: Rash decisions, risky investments, pre-mature withdrawals, tax implications penalties…
To avoid this, you need to do the following:
- First, decide on your financial goals & risk profile
- While selecting investment products, do not make tax efficiency as the only criteria. Also check on risk, lock-in, liquidity etc.
- For the chosen financial products, start investing systematically every month & well in advance – don’t leave it till the end of the year.
Tip # 3: Select the right tax investment avenues to help in long term wealth creation:People often remain stuck to “safe” and low-return generating tax saving avenues like LIC policies, NSC, PPF etc.Often times it is because the conditioning/advice given by elders in the family who lived in a very different financial landscape than usOver time, too many investments in these avenues hurt wealth creation goals….but what is the solution?The solution is to look at tax-saving avenues that invest in equity….why equity?Because equity has generated returns way more than other asset classes like debt and gold over the long term. Equity also helps beat inflation.The best way to invest in equity & get tax benefits is to invest in equity-linked savings schemes (also known as ELSS).Another way is to invest in the National Pension Scheme (NPS). By the way, NPS investment also qualifies for additional tax deduction over & above the Section 80C limit.
Tip # 4: Tag each investment to a financial goal:So, when you make a tax investment, don’t forget to tag it to a clear financial goal.For example, you can earmark investment in ELSS scheme of ABC mutual fund for child’s education and investment in ELSS scheme of XYZ mutual fund for retirement.Now that you’re clear on which investment helps in which goal, next time you wish to withdraw money for a vacation or buying an iPhone, you know that the above investments are off-limits…Why? Because withdrawing from those mutual funds will impact the probability of achieving critical goals.And by not interrupting compounding, you allow yourself to generate substantial wealth & secure your long term goals.
Tip # 5: Review your tax investments periodically:Generally, people have an “invest & forget” mentality towards tax-saving investments…They think that the purpose is served when you get the necessary tax deduction…Unfortunately, this approach is not correct because of the following reasons:
- Investment performance may deteriorate
- Your financial goals may change
- Tax changes reduce the efficiency of investment from a tax perspective (best example is the recent budget changes in taxation for ULIP & EPF)
If you continue the sane investments, they may not contribute optimally to your wealth goals.
Hence, every year at least once do a financial plan review & make the necessary changes so that your financial plan stays up to date & your tax investments help you grow wealth.