Who does not want to save Rs 60,000 in taxes? That’s why everyone in the know makes a beeline for the various tax-saving investments that avail you a tax deduction of Rs 2 lakh. But they often make the mistake of buying tax saving schemes without much thought to other factors. After all, there is more meaning to them than just tax-saving. Income tax saving options are investments meant to earn returns and help you fulfil different dreams in life. The numbers can prove this to you. Have a look:
Tax saving with a purpose
Let’s say you invest Rs 1.5 lakh, your mandatory 80C tax-saving investments, on a monthly basis throughout the year. You then end up investing Rs 12,500 every month the whole year. Now, thanks to the power of compounding, this amount earns you returns every month. And with time, even the returns compound to expand your wealth. Pretty soon, the wealth your investment generates would dwarf the Rs 45,000 you saved in tax.
Now this happens in two key phases.
1) Accumulation Phase: This is the pre-retirement phase wherein you invest Rs 12,500 per month for the entire earning period till the age of 60. This is how your investments grow over a span of 35 years (assuming you being at the age of 25)
2) Retirement Phase: Then comes the post-retirement period when you let the investments grow without redeeming the entire amount. You may not need any further contribution in this phase. All you need to do is redeem your investments partly--as and when needed for your regular monthly expenses. This way, your investments grow continuously for years together.
In such a case, after another 20 years, your portfolio can grow further as below:
Similarly, other goals can be fulfilled too. To fulfil major goals and associated expenses, you can simply withdraw from the investment corpus as and when needed. And if you choose the right tax-saving investment option, such redemptions have zero tax implications too.
This applies to all kinds of goals, whether they are time-bound or not. For example:
Child Higher Education: If your child needs say Rs 20 lakh by the time you turn 45 years of age (20 years after you first started investing), then all you need to do is redeem that amount while also continuing the investments. The entire focus of this plan is to continue the investments without a break! Alternately, you could choose an investment that gives you an annual payout like a Money-back insurance plan. You time the investment such that the payouts synchronise with your child’s fee payments, etc.
Secondary source of income: Almost all the tax-saving investment options you have offer some kind of regular payment. This could be in the form of interest payments or dividend distributions. Over a period of time, when your corpus grows large, even a minuscule interest or dividend payout can amount to large sums. These can be tax-efficient modes of getting a secondary income. You can use these to fulfil other dreams like travelling, etc.
The bottom line
Consider additional tax saving options other than 80c. Your tax saving investments options, if planned properly, can turn out to be a sweet spot in your investment portfolio. But remember, these investments need to be planned and chosen with great care. Only then can they help meet your long-term financial goals.
At IndiaNivesh, the wealth management team can help you make such wise tax-saving decisions that also fulfil various life goals. Click here to know more.
We’ve spoken so much about tax planning and tax saving, what they are and how they benefit you. But let’s move to the key information—how to plan your taxes.
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