This year be smart when it comes to investing to save tax. You are aware that you can invest upto Rs 100,000 in designated schemes to save tax. What if we told you that by investing the same amount of money you could not only save tax, but also achieve a lot more!
You can do more with the money you have set aside for tax-planning. Yes, it’s true.
While financial planning is a personalised process, there are some common mistakes people make when it comes to investing to save tax. If you are thinking what has financial planning got to do with investing to save tax, then you are in for a surprise – investing to save tax is only a part of financial planning. And understanding this holds the key to achieving more with your money.
Here's an example to help you understand this
Let’s say you are a 35-Yr old salaried person, married with one child. Your child goes to college in 10-Yrs from now. In all probability when you are investing under Section 80C to save tax, you will commit a large amount of money to the Public Provident Fund (PPF), probably the entire Rs 70,000 that you can. The rest will get covered by your contributions to the Employees’ Provident Fund (EPF) and any life insurance premium commitment that you may have.
Now, think for a moment what else you could have achieved if you had the option to invest this Rs 70,000 (the rest being already committed) in another, more rewarding tax-saving avenue. Presently you are investing to save tax; but you also are saving to fund your child’s education 10-Yrs from now.
PPF is not liquid enough...
In case of PPF, the monies are invested for 15-Yrs with liquidity being limited. You will need the money 10-Yrs from now by when your account will not mature (only partial withdrawal will be permitted). So, you have a situation where the tenure does not suit you. But the one big advantage is that you get an assured return of 8% pa. This return is of course assured but not fixed; the rate of return can change from year to year.
But tax-saving funds are… and they also have the potential to earn a better return
On the other hand, let’s say you opt for tax-saving mutual funds (also known as ELSS). These schemes invest all their money in the stock market and have a lock-in of three years. Post that you are free to withdraw your money. So, you have a chance of earning a much better, but not assured, return (in our view 15% CAGR as compared to the assured 8% pa in the PPF) and also liquidity when you need it.
So if you have an appetite for risk, you should surely put some money, or maybe even most of this money, into tax-saving funds. Since you have a 10-Yr investment time frame you can opt for a long-term investment avenue to generate wealth for your child’s education. We can think of only one avenue that fits the bill – equities and related avenues like tax-saving funds (since the tax benefit is equally important for you). That is why, given your investment objectives, we propose that you opt for these tax-saving funds over PPF.
Of course, the PPF is a great scheme as it gives an assured return; but it does not suit you and therefore it merits a minimal allocation (as you are already putting money into the EPF).
Remember, this is just one example of meeting two goals with the same pool of money. If you plan well, future goals will look a lot more attainable than they do currently. All you need to do is be smart when investing your monies.
You have six months to go…
You have just over six months to invest upto Rs 100,000 in designated schemes to save tax. Ideally, we would have liked you to have started planning a lot earlier; but do not worry. Six months is still good enough a time frame to plan out your investments.
For that you must act now! To ensure that you are not under pressure towards the end of the year, which could lead you into investing in the wrong avenue just to save tax, start your tax-planning now.
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