It’s already April and most of us are done with submitting proof of investments for tax saving under section 80C and other sections for the last financial year. But, this doesn’t mean that you have much time to relax. For a healthy financial life and tax saving, it is important to ensure that you make the right choice for the next financial year. However, to ensure this, you need to know that investing is the main activity, while tax saving is just one of the outcomes of it. Additionally, by investing only in tax-saving portfolios you can’t achieve bigger financial goals and as you get not so good returns on it. So, it is always beneficial to first make a clear goal and then start investing in order to accomplish them.
Additionally, when you have different financial goals you need to strategize accordingly. To put things into perspective – both tax planning and goal-setting are critical pillars of robust long-term financial planning and you can’t achieve one without another.
Why is Goal Setting Important?
Goal-setting is a steady process of identifying and analyzing your requirements and them setting up various short, medium, and long-term goals. However, achieving these goals is not very easy and needs constant effort and practice. This can be done by managing finances and linking each goal to an appropriate investment portfolio.
While tax-saving investments are specially designed for maximizing disposable income or return on the aforementioned investments by taking advantage of the various tax deductions, exemptions, and exclusions awarded under several sections of the Income Tax Act.
Importance of Optimising Investment while Saving Taxes
Whether your goal is based on short-term requirements such as purchasing a car or purchasing some expensive gadget, or it is a long-term goal like purchasing a house or building retirement funds, it is important to choose the right investment portfolio that helps you to accomplish your desired goal. However, as per experts having a diversified portfolio is best as it not only helps you to gain maximum returns but also minimizes the risk involved.
For example- investing in tax-saving investment benefits you to reduce your overall tax burden and also gives you returns which helps to achieve some of your goals. For example, section 80 C can help you reduce your taxable income by ₹ 1.5 lakh in a financial year for investments made in ELSS, PPF, ULIPs, life insurance plans, NSC, etc. Also, only a few know that they can reduce their tax liability by another ₹ 50,000 each year by investmenting in the National Pension Scheme (NPS), this exemption is under Section 80CCD (1B).
Look Beyond tax-saving!
Most of the tax-saving investments have longer lock-in periods and even fail to provide higher returns. So, if you are focusing on tax-saving there are higher chances that you are not going to make enough money from your investment. But equity exposure, investment products such as ELSS, ULIPs, etc., mutual funds, shares are some of the investment options that tend to be the most preferred as they yield maximum profit.
This means if you want to make good returns from your investment you need to look over and above the popular investment choices and tax-saving ones.
Other investment options such as mutual funds and equity are some which can yield you many returns in less time. But these investment options are subject to market risk and hence one should always invest in these portfolios if he/she thinks that they can take the risk.
Let your needs drive your investment decisions
Well, the lust to get high returns should not be the only driving factor to decide your investment portfolio. It’s your needs that necessitate an investment decision and goals.
For someone who is not making much money, the priority will be to secure the health and make investments that help their loved ones survive when he/she is not around. For this health insurance and life insurance fits fell as they are investment options that provide financial security for the family members.
So, at the beginning of the investment journey, it is important to have one medi claim policy or a family floater plan and life insurance.
Whereas for someone who is planning to buy a house in the near future investing in shares, mutual funds can take them closer to their goal. However, investment in these portfolios should be done after the accomplishment of tax-saving. Another important thing here is before you invest you should analyse your risk tolerance. Whereas those who want to build retirement funds should focus on NPS, PPF and PLI which is a long-term investment with fixed returns and zero risks.
Both tax-saving and financial goal accomplishment are complementary strategies. Tax saving without goal-setting could result in inefficient money allocations. While goal-setting without tax planning will not allow you to gain maximum returns. However, the key to a financially secure future is- to start early, plan your investments and then invest throughout the year, be aware of tax-saving investments and keep your goals in mind while investing.