Steps to sync your tax planning with long-term financial goals

Date : 26/02/2023
Read: 3 mins

It is vital to set clear goals, focus on the right investment products, and avoid unplanned expenses. With careful evaluation and planning, you can ensure your tax-saving investments are in line with your varied financial goals.

You must have seen investors rushing to make tax-saving investments during the last two months of the financial year. This is usually done to claim the maximum tax benefits available under various sections of the Income Tax Act, 1961. However, amid this frantic rush to save tax, people often fail to invest as per their long-term financial goals.

Most financial experts recommend that your tax planning should be in sync with your future financial goals. Here are the four steps that can help you align these two:

1. Define your financial goals clearly

It is crucial to set financial goals. You can work towards fulfilling your financial goals only when you have them. So, you need to define your short-, medium-, and long-term financial goals very clearly. For example, you can decide that you want to purchase a house in the next ten years or plan a foreign trip with your family in the next five years. No matter what your goals are, they should be clear and realistic.

Also Read: 6 Everyday Habits That Can Help You Achieve Your Financial Goals

2. Invest in suitable instruments to get maximum tax benefits

The Government of India allows tax exemptions on certain investment and savings instruments. Understanding and identifying these can reduce your tax liabilities and help you prepare for your future needs. For example, you can invest in tax-saving instruments under Section 80C and claim tax deductions of up to Rs 1.5 lakh in a financial year. Public Provident Fund (PPF), National Savings Certificate (NSC), Sukanya Samriddhi Yojana (SSY), etc., are some government-backed savings options that carry low risk. You can also consider high-risk and reward mutual fund investments like the Equity-Lined Savings Scheme (ELSS). An ELSS investment can be particularly suitable for your long-term goals.

However, make sure to choose investments per your financial goals, as explained in the previous step.

3. Paying insurance premiums can reduce your tax outgo

Insurance not only protects you from financial adversities but can also reduce your income tax outgo. Premiums paid towards life and health insurance policies qualify for tax deductions under Sections 80C and 80D. The maximum limit for tax deduction under Section 80C is Rs 1.5 lakh, and Section 80D is Rs 1 lakh (based on your age).

4. Do not forget to create an emergency fund

You can never be 100% secure against financial emergencies. That is why you must create a separate emergency fund to tackle sudden contingencies. You can save excess funds in a bank savings account. The interest earned on a savings account qualifies for a tax deduction of up to Rs 10,000 (Rs. 50,000 for senior citizens) under Section 80TTA in a financial year. This can help you access funds immediately in your hour of need while also enjoying tax benefits.

Also Read: Need Emergency Funds Quickly? Consider These Options

Impact of aligning tax planning with goals on investors

Aligning tax planning with your financial goals can serve the dual purpose of saving as well as wealth creation. It can help you increase financial liquidity in the present with tax savings and prepare for the future with your investments. Thus, ensuring financial security at all times.