If you are an earning individual, planning your finances is likely on your mind. It is especially prominent at the end of each financial year when there is a looming dread of paying taxes. Safe to say that calculating the payable taxes from your income is certainly not fun.
However, it can be less burdensome if you create a sound financial portfolio with tax saving investments. With proper tax planning, you can boost the benefits from your investments that impact your current budget and future financial goals.
Most taxpayers find it challenging to balance tax saving investments and fulfil the financial objective. You can simplify the process by learning the basics of how to use tax saving instruments to your advantage.
The investment needs of one person can differ substantially from another. As a result, financial plans are greatly personalized. Knowing the tax saving instruments and their utilization in your context can make it more convenient to do so.
Hereās how you should go about planning tax-saving investments:
1. Understanding Your Risk-Appetite
The risk tolerance of an investor is a crucial factor to choose from a variety of tax saving instruments. Mainly, there are three categories of investors:
- High-Risk Tolerance
Investors with a high-risk tolerance looking for high return investment prospects need tax saving instruments to match their needs. Equity-Linked Savings Scheme (ELSS) is a mutual fund that fits the bill.
It is a tax saving investment that allows the investor to avail tax benefits under Section 80C of the Income Tax Act, 1961. It has a lock-in period of 3 years, making it a shorter period tax saving investment that can yield significant returns.
- Moderate Risk Tolerance
If you find your risk appetite to be moderate, a combination of tax saving investments such as ELSS, Public Provident Fund (PPF) and fixed deposits can work in your favour. These can be ideal tax saving options for salaried individuals. You can divide your money between them, depending on your preference.
Such an approach to tax saving investments allows you to balance risks and returns and achieve financial objectives without compromising your stability. The tax benefits for these tax saving instruments are also provided under Section 80C of the Income Tax Act.
- Low-Risk Tolerance
For investors with low risk tolerance, PPF or fixed deposits are suitable tax saving investments. Under section 80C of the Income Tax Act, you are eligible for tax benefits for investments made towards these financial tools.
A notable point here is that the degree of risks for tax saving investments also dictates the quality of returns. So, make sure your expectations are aligned with the results of a risk-averse tax saving instrument.
2. Advantage Of Early Planning
Early planning for tax saving investments is always a preferable option. The advantages make sense when compared to investments made at a later stage in life. Some of these advantages include:
- You have sufficient time to spread the financial impact of investments. This means that long-term tax saving instruments will have adequate time to grow your money and produce desirable results.
- As you pass through different life stages, you will already have the support of a strong financial plan that includes tax-saving investments. You can make adjustments to them as per your evolving needs.
- You can maximize the investment returns from tax saving instruments, and reduce your income burden when you plan it well.
- It will give you the safety and assurance of a financial support system against unpredictable circumstances.
3. Comparing Investment Options
When it is about crucial financial decisions, staying well-informed is a priority. While you do not need to be an investment expert to utilize tax saving investments appropriately, basic knowledge can lead you in the right direction.
Amidst the variety of tax saving investment plans offered by insurers and banks, you might find yourself struggling to choose the right tools. It can help your decision to establish relevant parameters such as affordability, objective, investment tenure and compare different investment options based on it.
4. Assessing Financial Standing
Your financial capabilities at the time of investing your money play a critical role. This determines how much money you can realistically set aside to use in tax saving investments. As a consequence, it will also ascertain your risk-tolerance to an extent.
Apart from current financial status, it is also vital to project future conditions. Your lifestyle needs, inflation and the general increase in the cost of living can impact the viability of tax saving investments significantly in the future. So, make sure you are not under or overestimating your ability to invest money.
Several factors affect your financial plan, which means there is a need to review it for optimum results regularly. The tax saving instruments can help you achieve your investment goals if you carefully plan and revisit them to keep it relevant.