Tax-planning approach to save money and building wealth

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Often while planning finances, we are too much focused on goals and objectives. So much that even when it comes to tax-saving we see it as a goal. The primary goal of investing should always be wealth generation. Tax-savings should be viewed as an additional advantage that we receive from the financial products we invest in, and should not be viewed as a primary goal in itself.

Tax planning approach

· Assess the tax savings you’ve already achieved through insurance premiums, medical insurance, employees’ provident fund (EPF) contributions, and home loan repayment, among other things.

· Subtract this amount from Rs. 1.5 lakh to determine the remaining investment amount.

· Now, choose tax-efficient instruments that will assist you in achieving your goals and accumulating money. For instance, equity linked savings scheme (ELSS) funds are the most popular instrument under section 80C due to their low lock-in time and higher average return than other section 80C investments. For conservative investors, PPF is the best choice.

Early planning is critical for achieving the highest possible returns on any investment or tax planning effort. Everyone works really hard to earn money, yet relatively little effort is given to maximising our earnings. We should make our money work harder for us. This can be accomplished by properly reducing our tax liability and also by allowing our money to compound over time and accumulate wealth as intended.

Give enough time for the power of compounding to work

By beginning early, you can begin investing your money sooner rather than later. Your money has a longer compounding period, which allows you to develop your wealth more rapidly and significantly than last-minute investments in March the following year.

Select the investment option carefully

Decisions made at the last minute are invariably hasty and inefficient. An investor does not have the time to thoroughly choose the appropriate investment. Thus, in addition to the opportunity cost of investing early, there is the possibility of a loss owing to poor selection while choosing ELSS or insurance policies, among others.

Reduce the financial load on your investment

Beginning early enables you to invest smaller amounts in a tax-saving fund via Systematic Investment Plans (SIPs) rather than a large lump sum in January or February. For instance, if you need to invest Rs 1,50,000 to benefit from section 80C tax savings, you can begin by investing Rs 12,000 every month from May to March of the following year. Regular investment with SIPs enables you to make smaller monthly payments from your salary rather than writing a cheque for a large sum all at once.