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Do you make last-minute tax investments regularly every year?
If yes, have you tried observing the “why” of this pattern?
It’s most likely that you view tax planning as an indispensable compliance activity that helps you avoid interest, penalties, and stuff…
If you agree with the above, we ask you to change that mindset and look at tax planning As a tool for wealth creation and building a secure financial future.
Below, we are sharing some tips to help you get the most out of your taxes and grow your wealth at the same time.
Tip #1: Increase your knowledge of personal finance and taxation:
Sadly, our schooling system does not teach us money management.
Result? You work hard for the money. But then lose it in unsuitable investments because you don’t know how to manage it.
So start today and spend some time every weekend developing your knowledge of personal finance and taxation and try to stay updated on various financial and tax changes.
This will help in the following ways:
- Develops critical thinking ability to evaluate various financial products
- You can proactively change your investment strategy keeping in view the changing financial and tax landscape.
- Saves you from costly tax mistakes that lead to penalties etc.
Tip #2: Integrate tax planning into your overall financial plan:
In general, we treat tax planning as a separate compliance activity and do not consider it part of our financial planning.
As a result, tax investments made over the years become completely decoupled from your financial needs and requirements.
Consequences: Hasty decisions, risky investments, premature withdrawals, tax implications, penalties…
To avoid this, you must do the following:
- First, set your financial goals and risk profile
- When selecting investment products, don’t make tax efficiency the sole criterion. Also check the risk, lock-in, liquidity etc.
- For the chosen financial products, start investing systematically and in advance every month – don’t leave it until the end of the year.
Tip #3: Choose the right tax investment avenues to help create long term wealth:
People are often stuck on the path of “safe” and low returns tax savings like LIC policies, NSC, PPF etc.
Often this is because of the conditioning/advice given by elders in the family who live in a very different financial scenario from us
Over time, investing too much in these methods hurts wealth creation goals….but what is the solution?
The solution is to look at tax-saving ways of investing in equities… Why Equity?
Because equities have given higher returns in the long run as compared to other asset classes like debt and gold. Equity also helps beat inflation.
The best way to invest in equities and avail tax benefits is by investing in equity linked savings schemes (also known as ELSS).
Another way is to invest in the National Pension Scheme (NPS). By the way, NPS investments over and above the limit of section 80C are also eligible for additional tax deduction.
Tip #4: Tag each investment to a financial goal:
So, when you make a tax investment, don’t forget to tag it with a clear financial goal.
For example, you can invest in ABC Mutual Fund’s ELSS plan for child’s education and XYZ Mutual Fund’s ELSS plan for retirement.
Now that you’ve got a clear idea of which investments help with which goals, the next time you want to take out money for a vacation or to buy an iPhone, you know that the above investments are off-limits…
Why? Because withdrawing money from those mutual funds will affect your chances of achieving important goals.
And by not disrupting the compounding, you allow yourself to generate substantial wealth and secure your long-term goals.
Tip #5: Periodically Review Your Tax Investments:
Generally, people have an “invest and forget” mentality towards tax-saving investments…
They think the purpose is served when you get the required tax deduction…
Unfortunately, this approach is not correct for the following reasons:
- Investment performance may deteriorate
- Your Financial Goals Can Change
- Tax changes reduce investment efficiency from tax perspective (best example is the recent budget change in taxation for ULIPs and EPF)
If you continue to make wise investments, they may not contribute well to your money goals.
Therefore, review the financial plan at least once every year and make necessary changes so that your financial plan stays up to date and your tax investments help you grow wealth.
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