How to make sure your tax-saving exercise is in line with your life goals

The views and opinions expressed are of Mr. Arun Thukral, MD & CEO, Axis Securities.

FMost people tend to consider tax-saving investments only as the end of the financial year approaches. Before March ends, it’s often a mad scramble to find ways to invest just enough to claim the deduction of Rs. 150,000 under section 80C. However, while tax saving is a smart move, it can be detrimental to your long-term financial objectives if your tax-saving exercise isn’t planned out in advance.

Before you invest, you need to make sure your tax-saving endeavors are in the same direction as your life goals. When you choose the right investment options, they can contribute to your milestones instead of taking away from them. Here’s how you can use tax-saving schemes to your advantage.

Figure out your investment budget

The first step in your tax-saving exercise is to figure out how much you can afford to invest. To understand this limit, draw up a budget that includes your income and all your fixed mandatory expenses. Account for costs like rent, EMIs, telephone and internet charges, which you incur on a monthly basis. Over and above this, make an estimate of the variable expenses you incur, such as petrol charges, food and other provisions, and electricity bills. Leave out discretionary expenses and check how much you have available to invest.

Identify your short-term and long-term goals

Once you know your investment budget, you’ll need to be clear about your life goals, so you can choose your tax-saving schemes accordingly. For instance, if you plan to own a house after 15 years, you could invest in PPF now. This way, you can lock up a block of money for the down payment on the housing loan you might need to avail in the future. Alternatively, if want to save for your children’s higher education expenses, you could consider investment options like ELSS, which comes with a 3-year lock-in period and qualifies for deduction u/s 80C.

Source: holisticinvestment.in

Invest in insurance smartly

For investors who want to ensure the future of their loved ones is financially sound, life insurance is undoubtedly a great investment option. It can provide financial assistance to the family in case of the policyholder’s death. However, if you’re going to invest in life insurance merely as a part of your tax-saving schemes, it would lock in huge amounts of money that could otherwise be invested in other instruments that can help you meet your life goals. A better way to approach this would be to obtain life insurance cover for an amount that’s around 10 to 12 times your income, and then invest any remaining money in other instruments.

Assess your risk appetite at various points

If you’re only just beginning your career, you have years ahead of you to create wealth and generate returns. Typically, at this point, you’re likely to be a risk-taker. Here’s when you could park your money in equity-based investment options. It’s advisable to include some debt instruments as well. Later in life, as the timeline for achieving your long-term goals shortens, you need to adjust your portfolio so that it balances both high-risk as well as low-risk instruments. As retirement nears, you’ll want to invest in safer options like tax-saver FDs with a monthly payout option.

Opt for EEE investment options

If your income falls in the highest income tax slab, you’ll want to save as much as you can using as many investment options available. Here’s where exempt-exempt-exempt (EEE) investment instruments can help. EEE implies that the amount invested, the gains or returns on the investment, and the withdrawal amounts are all not taxable. Axis Direct offers you a variety of EEE investment options. ULIPs, for instance, are among the best EEE tax-saving schemes. Axis also offers you other investment options that provide this three-point exemption, such as ELSS and PPF. By investing in these instruments, you can simultaneously reduce your taxes and allow your corpus to grow, thus equipping you to meet your life goals.

The takeaway 

The key to aligning your tax-saving exercise with your financial goals is to know where you’re headed, and then to identify the investments that can help you get there. It’s essential that you understand the tax-saving advantage of each investment option. However, over and above that, you also need to analyze whether the investment you’re considering contributes to your overall goals. Pick the options that offer you a two-fold advantage by helping you minimize tax and achieve your objectives simultaneously.