Using tax saving instruments to meet financial goals

Using tax saving instruments to meet financial goals
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The month of April is the time to submit the Investment Declaration to your employer. This lays down the foundation of the tax to be deducted from your salary every month. Section 192 of the Income Tax Act, 1961 mandates the employer to hold back taxes at the time of payment of monthly salary. The differential, if any, is covered in the last 2/3 months of the financial year. Hence, there is a surge of tax saving investments in January, every year.

The approach

A good way to tackle taxes is to sit down with your financial advisor at the beginning of the financial year and chalk out a roadmap for investments. While tax-saving is a concern, investing in instruments that are not in sync with your financial goals can be detrimental to your wealth.

Having a clear perspective of your financial goals and weaving tax saving into it can help to create financial balance. Most of us spend a lot of time researching the internet and asking for reviews when it comes to buying a smartphone. Investments rarely warrant such diligence from us.

Look beyond traditional options

We tend to be satisfied by investing in instruments like Public Provident Fund (PPF) and life insurance, exhausting the Rs. 1.5 lakh deduction limit under section 80C of the Income Tax Act, 1961. Most of us do have an affinity to fixed-maturity-instruments like five year fixed deposits, Provident Fund (PF), Public Provident Fund (PPF), National Savings Certificate (NSC), etc. Regardless of your monthly income, Section 80C of the Income Tax Act, 1961 allows deductions only up to Rs. 1.5 lakhs. Opening yourself to investing in options like unit-linked insurance plans (ULIPs) or equity-linked savings schemes (ELSS) can add a new dimension to your tax-saving exercise.

Wealth creation with tax saving

Remember, tax-saving does not necessarily mean that you cannot create wealth. A smart investor can create opportunities to generate wealth while saving taxes by choosing a suitable combination of these instruments. This is possible only when you have clarity of your financial goals. Every person has a unique financial requirement and hence needs a tailor-made solution to manage his/her monies.

While PF, PPF, NCS and such fixed-return instruments are good for your financial health, investing in ULIPs or ELSS which match your risk profile can open the doors for creation of wealth. Section 80CCD(1B) of the Income Tax Act, 1961 allows an additional tax deduction of Rs. 50,000 for investment in National Pension Scheme (NPS). This is over and above the limit of Rs. 1.5 lakh under Section 80C of the Income Tax Act, 1961. NPS can help you achieve a good retirement corpus while enjoying these tax benefits. Sections 80C, 24B and 80EE of the Income Tax Act, 1961 provide tax deductions and rebates for home-buyers while they build a financial asset.

A savvy tax saver is one who not just saves tax but makes his tax-saving investments work for him/her. It is possible to get the benefit of both the worlds; tax-saving and meeting your financial goals. All you need to do is plan in advance, understand your financial needs and seek an expert’s advice.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.


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