Ensure Financial Growth and Save Tax with These Tips
11 July, 2023
Novice investors often face difficulties in staying true to their path of financial goals. Financial goals are not only limited to financial growth but should also aid in tax savings.
You may question, if financial growth ideally leads to higher taxes, how can it help you save on taxes? Here are ways you can save taxes.
Before delving into this, let’s understand the importance of financial growth.
Important factors relating to financial growth
1) Consider long-term financial goals
Financial growth is a gradual process. Goals will determine your investment avenues and tenure. Your long-term financial goals can include retirement planning, buying a house, creating generational wealth, a child’s higher education, marriage, etc.
2) What is your risk appetite?
It is essential to understand your risk appetite - you need to consider how much risk you can bear. If you want to earn higher returns and accumulate higher capital in a relatively short period, consider investing in high-risk-bearing assets. These include equities, commodities, high-yield bonds, real estate, etc. However, if you prioritise capital preservation and are risk-averse, safer options such as gold, debt instruments, or Mutual Funds may be more suitable.
3) Diversification is the key
Diversification is a key aspect of wealth creation. By investing in multiple asset classes, you are distributing your risk across different investments. This ensures that not all of your capital is at risk, in case one or two assets perform poorly.
4) SIP vs lump sum
SIP vs lump sum has always been a dilemma, especially for new investors. SIP and lump sum are two modes of investing in assets like Mutual Funds. Lumpsum investment involves investing a specific amount in the Mutual Fund scheme at a point in time. On the other hand, a systematic investment plan (SIP) involves investing a predetermined amount each month over a fixed period of time. SIP also offers the advantage of rupee cost averaging, which balances the cost of Mutual Fund units due to market volatility.
Tax saving instruments in India
Every individual who has built a strong asset base is particular about minimising their tax payments. Several tax-saving instruments can help you reduce your tax liability. These include the following:
Investment option | Returns | Risk | Brief explanation |
Public Provident Fund (PPF) | 7-8% | Low | PPF offers attractive returns with a low-risk profile. It has a long-term investment horizon (15 years) and you can claim a deduction of up to ₹1.5 lakhs under Section 80C for each financial year. |
National Pension System (NPS) | 9-12% | Moderate | NPS provides market-linked returns based on underlying investments. Risk and returns depend on the chosen fund allocation. |
Equity-Linked Saving Scheme (ELSS) | 12-15%, or more | High | ELSS offers the potential for high returns as it primarily invests in equities. The rate of returns depends on market performance and the chosen fund. It comes with a lock-in period of 3 years and is eligible for a deduction of up to ₹1.5 lakhs under Section 80C for each financial year. |
Unit Linked Insurance Plan (ULIP) | Varies | Moderate | ULIPs provide variable returns based on the performance of selected funds. Returns and risk depend on the underlying funds and market trends. The premium paid is eligible for deduction under Section 80C. |
Senior Citizen Saving Scheme (SCSS) | 7% - 8% | Low | SCSS provides fixed returns with a low-risk profile. It is ideal for risk-averse senior citizens looking for stable returns. The amount invested is eligible for deduction under Section 80C. |
Sukanya Samriddhi Yojana (SSY) | 7-8% | Low | SSY offers high fixed returns and tax benefits, making it an excellent choice for long-term wealth creation. The amount invested is eligible for deduction under Section 80C. |
Investing in these instruments can help you save on taxes and build wealth over time.
Correlation between financial growth and tax savings
Financial growth not only increases your total assets but also offers benefits in paying taxes. Investing in these instruments allows you to grow your wealth while claiming deductions for the amount invested under the Income Tax Act of 1961.
The deductible amount will depend on the prevailing provisions of the income tax law. The amount of tax savings will depend upon the taxation slab applicable to your total income.
Financial growth and tax savings are two of the most important financial goals necessary to lead a financially independent and stable life. It requires you to adopt a long-term approach and maintain a disciplined investment strategy. Before making any decisions, it is important to think twice about how much risk you are comfortable with, your short and long-term financial goals, and how long you plan to invest.
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This is an information communication from HDFC Bank and should not be considered as a suggestion for investment. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The information provided in this article is generic in nature and for informational purposes only.
