If you are amongst those people who panic buys the financial products just to save tax, then you may be hurting not just your finances but also your financial health.
You are not the only one to push the tax saving action down the to-do list and make it a last-minute item. However, if that is the case, then don’t be surprised if you add unworthy financial products to your portfolio that make no value addition to your wealth or the investment. It may even be unsustainable in the long run. In the end, you may have paid more for the financial product than saved in taxes!
Since that the priority is to ‘get over’ with taxes rather than planning the taxes, these decisions often lead to wrong investments. However, did you know that these errors are entirely avoidable that can be otherwise harmful to your financial wellbeing?
The idea of tax planning and tax saving instruments is to build a financial portfolio of long term investments that help maximize returns and add value to your investments. To help, here are some FAQs to help you understand the tax saving options.
1. What is Tax Saving?
Paying taxes is an obligation that everyone in the country must fulfil. Tax evasion is a criminal activity that can result in legal action. The taxes that you pay are utilized by the government to pay money towards the development and progress of the country. While paying taxes is compulsory, some types of taxes allow you to reduce your tax liability.
Therefore, tax saving is a process of investing in financial instruments to help you save tax and also helps save towards various goals that you may have at different stages of life. However, it is essential to plan your finances properly by following a disciplined approach with regards to tax saving instruments. The investment plans should never be made on the ad-hoc basis to meet a temporary or short term goal. Simply put, never begin tax saving efforts at the end of the financial year or choose your investments solely for tax saving benefits.
2. Why is Tax Saving Important?
Tax saving is essential because it not only helps you reduce your tax liability but also provides significant returns on your investment if you plan your taxes wisely.
Additionally, by planning this, you can save yourself the headache and the risk of making wrong investment decisions when you are closer to deadlines.
But most importantly, tax saving instruments save your salary from substantial deductions that your Human Resource department will adjust towards the tax liability for the year. Tax saving is crucial because it helps you earn your full salary. At the same time, it also helps your money grow by investing in tax saving instruments that will give you the benefits of insurance and investment.
Don’t make the mistake of picking the first tax saving option that comes across at the last minute. Take your time to assess your financial needs and then build a portfolio of tax saving instruments that increase your wealth and deliver the best returns.
3. When Should You Invest in Tax Saving Instruments?
Don’t treat your tax planning as a do-it-later project. It is a significant investment decision that you must carry as soon as possible. Ideally, you should start planning at the beginning of the financial year so that you can choose your tax saving products with foresightedness that allows you to meet your investment goals.
For tax saving instruments such as Equity Linked Saving Scheme mutual funds, you don’t need to wait till the last minute. You can start early and systematically so that you don’t have to deal with more significant payments towards the end. Even for fixed deposits and recurring deposits, you can plan at the beginning of the year. Thus, you will have time to prepare the investment documents that you can submit to the HR for tax calculation.
4. How to Choose the Best Tax Saving Instruments?
The objective of choosing the right tax saving options is about achieving your long term and short term goals with ease. Financial planners recommend you to take care of taxes in your investment portfolio to make sure that it beats inflation and also generates returns in the future. When choosing the tax saving instruments, you need to define your goals as short-term and long-term.
Products like Public Provident Fund and Equity Linked Savings Scheme can fall in the long-term portfolio. Similarly, an equity-based tax saving instrument is also suitable for long term goals as equities need time to perform.
When choosing the tax saving options, it is better to choose the tax-free ones. And, if you are considering a taxable investment, then you must first calculate the tax rate applicable and look at post-tax returns to make an informed decision. If the post-tax return after inflation is low, then it will not help you meet your financial objectives in the long run.
From the basket of 80C investments, there are two options to choose from – fixed and assured returns and market-lined products.
The former consists of instruments like bank deposits with a minimum five-year investment, endowment plans, PPF, and Senior Citizens Savings Scheme (SCSC). The latter is a market-linked product that invests in equity and debt asset classes. Here you can choose between ELSS and ULIP, as per your risk appetite.
Don’t forget to take the investment tenure into account. Remember that all the long-term tax saving instruments have a lock-in period of 3-15 years.
From all the tax saving tools, only PPF, ELSS, NSC, and EPF are the few that enjoy tax-exempt status through its stages of investment, growth, and maturity.
So when you are choosing a tax saving option, it is essential to review them online for benefits and investment before making the final decision. Online life insurance and other investment plans offered by insurers like Max Life Insurance can be compared before you invest. These plans are available online and allow you to make a quick purchase decision without any hassle.