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.
Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
What is tax planning?
As an honest citizen of the country, it is your duty to pay your taxes. However, every investor is looking to save as much tax as possible. This can be made possible through tax saving investments. The need of tax planning is absolutely necessary to save a substantial amount of your finances. This is because taxes can eat a big chunk of your total investment returns every year. Therefore, through proper tax planning, you can create a strategy that allows you to minimise your tax liability every year.What is tax planning?Tax planning is a process of analysing and evaluating an individual’s financial profile. The aim of this activity is to minimise the amount of taxes you pay on your personal income. In short, employing ways that the government has provided to save tax is a perfectly legal method to cut down your annual tax liability. There are a number of tax saving investments in India that are useful in saving money.What constitutes tax planningThere are three key characteristics of tax planning—investing to reduce taxes; planning your finances in such a way that you attract the least amount of tax, and the process of tax filing. As a result, tax planning affects all aspects of your money matters. Let’s understand this better:Tax saving opportunities available for everyoneThere is a whole range of income tax sections that allow you to legally benefit from tax-saving. A popular and easy avenue for taxpayers to avail tax deduction is to employ Section 80C of the Income Tax Act. Section 80C can allow you to claim a deduction of Rs 1.5 lakh on your taxable income.However, there are a lot of other sections that can offer you huge tax benefits. Some of the provisions in the Income Tax Act are: Sections 80D, 80DD, 80EE, 80G and 24(b). Not many people are not aware of all the tax-saving options available to them. For instance, did you know that under Section 80G, donations made to certain charitable organisations are eligible for tax deductions?Taking tax-efficient decisionsThere’s more to tax than investments. It affects every single aspect of your life—from salaries and income sources to expenditure to financial decisions. And this is a key aspect of tax planning—it helps you make decisions that lower your tax burden. For example, let’s say you have to choose between two investment options. A tax planner helps you choose the best option while keeping in mind both returns as well as tax efficiency. Another example is ensuring your income is structured in the most tax-efficient way. Tax audit and filingThe last key aspect of tax planning is the actual tax filing. This is when you take into account all aspects of your finance—income, expenses, debt, and investments—and then calculate your tax liability. Then, there’s all paperwork and documentation involved in paying your tax and filling your tax returns. How IndiaNivesh can helpOur Wealth Management team is well equipped to help you plan your investments while keeping in mind the taxation aspects. This can help you grow your wealth and save tax at the same time. Click here to know more about our Wealth Management division.In conclusionAs taxpayers, knowing and being aware of all kinds of taxes can help on planning the financial year well. This will not only help you save more money, you can also create a better financial plan for your family. That’s why it is very important to make sure you have a tax plan in mind whenever you plan to invest your money.DisclaimerInvestment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing
Know the Difference between Tax Deduction and Exemption
Every industry comes with its technicalities, and the income tax institution also has its own set of jargon. Some expressions may have more than one implication considering its usage, while some phrases may have analogous significances but diverse applications. For instance, the difference between exemption and deduction is not clear to all, even though both are useful in minimising the amount of taxable income. However, the difference between exemption and deduction in income tax are applied to different fields of your taxes.If you are earning an income, then sooner or later, you are bound to hear the words ‘Income tax’. However, there is a difference between exemption and deduction. The quantum of tax you may have to pay every fiscal year is usually based on how much you earn, your tax-filing status and so on. Luckily, the Income Tax Act has offered various provisions that allow you to reduce the amount you pay as tax. But before you take advantage of your tax benefits, you need to understand the jargons thoroughly.For example, take the two terms: Tax deduction and tax exemption. A lot of people can be confused between exemption vs deduction and may use the two words interchangeably. However, the differences between exemption and deduction are plenty. So, let’s find out the main differences between tax deduction vs tax exemption.Tax deductionTax deduction refers to the amount of money that is reduced from your total taxable income. The final tax payable is calculated depending on the balance ‘taxable income’. Tax deductions aim to promote the culture of savings and investments among the general public.However, it is good to know that tax deduction is only allowed on specific investments or expenses incurred by the taxpayer. This includes medical fees, transportation charges, donations made to charities, investments made in specific avenues such as Equity Linked Saving Scheme funds (ELSS), Public Provident Fund (PPF) and National Pension Scheme (NPS).The Income Tax Act sections between 80C and 80U deal with all the deductions available to taxpayers.Tax ExemptionIn the world of taxation, the word ‘exemption’ means exclusion. So, if a particular income is exempt from tax, it will not be included in the total revenue for tax purposes. This reduces the total taxable income of a taxpayer. All exemptions are dealt with under Section 10 of the Income Tax Act.While certain incomes such as agricultural income are completely exempt from taxation, there are other incomes that are partially exempted from tax. This means only the portion of income that exceeds the exemption is subject to tax. This includes: a) House Rent Allowance (HRA)b) Leave Travel Allowance (LTA)c) Entertainment Allowanced) Special allowances to meet personal expensese) Long-term capital gains on equity fundsTax deduction vs tax exemptionTax exemption applies to all taxpayers in the country. For instance, the amount paid to a salaried employee as HRA is not taxable. However, tax deduction applies only to those who qualify for the specific criteria. For instance, Section 80D of the Income Tax Act can be used to claim deductions on premiums paid for medical insurance policies. Even though Income Tax is a mandatory responsibility to be paid by every citizen, based on his or her paying capacity, age, and gender, taxpayers can obtain relief through the various provisions to reduce their overall tax financial obligation. Understanding the difference between exemption and deduction in income tax can help in making smarter decisions before the annual tax planning process commences. DisclaimerInvestment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
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