Not thinking about creating wealth while planning your taxes? Big mistake!
Planning your taxes right can lay a strong foundation towards wealth creation for life
For a vast majority of us, tax planning is something that’s done at the last minute and done hurriedly, just before our annual meeting with the CA. In the hurry to file our returns most of us miss out on the advantages of using tax planning as a means to creating some serious wealth. This is particularly more relevant and effective for those who are at the beginning of their careers. The right understanding and a disciplined approach can make a huge difference to your financial wellbeing in times to come.
Tax planning is the legal way of gaining returns on your taxes by following all the obligations under the Income Tax Act. With proper tax planning, you can not just make savings at the end of every financial year, you can set yourself up for long term financial gains.
It is an essential tool that can accelerate you toward your financial goals. You must assess your current financial situation and chalk out the best deals.
There are three broad ways to plan your taxes:
Permissive Tax Planning: Using legal methods and plans to reduce your tax liability.
Short/Long Term Tax Planning: When you plan at the beginning of the financial year, it’s called long-term planning. Planning near the end is short-term planning.
Purposive Tax Planning: Formulate a tax plan with a certain financial goal achieved by altering income assets.
Now is a good time to get started
September is here and it's time to fasten your seatbelt and seriously assess your tax planning and ways to create wealth in the process. Many, and you’ll be surprised how many, make the mistake of waiting until it's to understand and analyse the options at hand, and end up making hasty decisions.
Section 80C of the Income Tax Act 1961 offers several investment options that allow you to save taxes amounting to ₹1.5 lakhs. There are two ways you can consider aligning these to long term wealth creation for yourself:
A SIP is a great choice if you’re disciplined enough and plan it well. An investment of just ₹1.5 lakh every year on a regular basis could fetch you approximate Rs 75 lakh in 15 years. An ELSS scheme is an absolute must for any youngster who wants to score high on the financial wellness index. And, this is most effective when you’ve just begun into the earning phase of their life. You’d be surprised to know what a mere investment of Rs 1.5 lakh per annum could grow to if you continued investing for 25 years… A princely sum of around Rs 3 crore!
PPF, or Public Provident Fund, is another great investment choice with a proven record of making a return of around Rs 40 lakh over a lock-in period of 15 years, with an investment of ₹1.5 lakhs at the beginning of every year.
Section 80D of the Income Tax Act primarily is to enable you to take medical insurance for yourself and your family. Apart from tax deductions, it is also great for you to ensure your peace of mind and your family's safety. A lot of us make the mistake of not availing this either at all, or randomly. Especially in the new plans on offer, a saving in Section 80D can not just help you save Rs 25,000 but allow you a decent cover for yourself and your family. Please do know that you can avail extra exemption up to Rs 1 lakh when you buy a policy for your parents. This is not just a great way to save money, but also comes in really handy, in any case of emergency.
Quantum of Deduction (INR)
|Self-family and children||Parents||Total Deductions|
|Individuals and parents below 60 years||25000||25000||50000|
|Individuals and family members below 60 years but parents above 60 years||25000||50000||75000|
|Both individual, family and parents above 60 years||50000||50000||100000|
|Members of HUF (all members for whom premium paid below 60 years of age)||25000||25000||25000|
The National Pension Plan falls under Section 80CCD and offers you a tax deduction of ₹50,000. There are just two ways to go with it – Auto and Active.
Auto stands for an investment where a fund manager makes the calculated decision to put your money in the right place to gain you the most returns. This is recommended for people who have no, or basic, knowledge of the markets.
Active indicates that you, as an investor, can choose from a wide range of options. Choose this if you’re sure that you understand the ups and downs of the markets and can drive growth accordingly.
These three sections in the Income Tax Act give you the leverage to not just save on taxes by investing right, they also give you the option to create long-term wealth by investing smart! So, are you still going to make the big mistake of not using tax planning as a wealth creation too.