How to maximise your tax benefits with smart tax planning

Planned financial goals can help balance your wants, needs, and luxuries for every year. While it is great to have varied investments ready, sound planning with the right tax benefits is equally essential. 

The more successful you are in tax planning, the more successful you will be in maximising your tax benefits.

With this article, we have created a roadmap of investment plans with tax planning and the tax implications that come with it.

Making an investment plan
 

1. Start by setting your financial goals (assuming you know how much you can invest). This helps make informed decisions

2. Assess your risk tolerance. It is crucial to know what risks you can and are willing to take

3. Consider tax-advantaged accounts when weighing the various investment types – stocks, mutual funds, real estate, etc. It will help with better tax planning

4. Get professional help from a financial advisor who can advise you on investing, portfolio diversification, and understanding the tax implications of your steps

Also read: Understanding income tax slabs for various income groups​​

Financial goals

Setting financial goals involves identifying short, medium, and long-term goals that vary with individuals and selecting appropriate investment vehicles for each.

However, while high returns and tax benefits are certainly areas to look at, individual and family healthcare are crucial investments to make early in life. Buying health insurance for the family or choosing a family floater plan spares you from healthcare expenses that can affect your savings.

Section 80D of the Income Tax Act allows tax benefits on health insurance premiums paid for dependent parents and in-laws, up to Rs 25,000 if younger than 60 years or Rs 50,000 if older. It is separate from the Rs 25,000 you can claim as deductions for yourself, your spouse, and your dependent children, increasing your possible claim to between Rs 50,000 and Rs 75,000.

Risk appetite
 

Risk appetite is an investor’s capacity to absorb market fluctuations and resultant investment losses.

For instance, if your main concern is that your investments remain safe even if the returns are average, then you have a low-risk tolerance. But if you place high returns above the safety of your investments, then you like taking risks.

Financial planners will assess your risk tolerance to design a portfolio that suits you, so you must be honest about it for sound investment planning.

The following factors usually influence risk tolerance levels:

Age:
 

The tendency to take risks will likely be higher for young investors in their 20s or early 30s.

Financial state: 
 

If you have considerable assets and few liabilities, you could be more willing to face market fluctuations. If your finances are shaky, your risk appetite will be too.

Disposable income:
 

This is critical; having only assets sometimes translates into disposable income. With lower disposable income, you will likely be more averse to risk-taking.

Time horizon:
 

 It is also vital to risk tolerance and investment objectives. You will be more inclined to take risks if you have the time to achieve a financial goal. 

Also read: Investment plan for beginners: A step-by-step guide​​

Tax planning and investment types

Tax planning refers to the strategies followed to get the best returns on investments by claiming various tax benefits under the Income Tax Act.

For instance, IT Act Section 80C allows you to maximise your tax benefit – to reduce tax commitments by Rs 1.5 lakhs in one financial year – if you invest in tax-saving instruments such as PPF, ULIP, ELSS, NSC, etc.

Tax-advantaged mutual funds offer tax benefits for both long and short-term goals. With IDFC FIRST Bank, you can invest for up to 30 years with professionals managing your investments.

At the same time, if you let your requirements drive your investments, tax benefits will flow naturally. For example, one instrument people tend to overlook, given its long lock-in period, is the National Pension Scheme (NPS). Here, you can only access your investments once you are 60.

But if you invest Rs 5,000 a month in NPS as saving for your golden years, you will have a retirement corpus of Rs 1.76 crore in 30 years, thanks to the power of compounding, and assuming an interest rate of 12% a year, and your age at 30 years. You will also reduce your tax liability by Rs 50,000 in one financial year. 

This way, you maximise your tax benefit by availing of every available benefit and building a corpus.

Short-term goals like setting a budget, reducing debt, starting an emergency fund, or even taking that cherished vacation can be met with the following investments and interest rates. 

· Recurring deposits: 6-7%

· Money market account: 5-9%

· Debt instrument: 7-11%

· Bank fixed deposits: 5-8%

· Post-office time deposits: 5.5%

· Large-cap mutual funds: 8-13%

· Corporate deposits: 7-8%

If you are self-employed or an entrepreneur and decide to buy a car, you can claim depreciation, provided you have used it for legitimate business purposes. If there is a car loan, you can show the interest paid as a business expense to offset your income.

The Income Tax Act also allows you to claim tax benefits on home loans, rent, and donations.

Also read: Want to move to the new tax regime and stop ELSS funds? Think again!​​

Diversify your portfolio

According to investment advisors, diversification is critical to achieving long-term financial goals. It may not guarantee against loss, but it minimises risk.

So how does portfolio diversification work? 
 

Let us assume you have several airline stocks. A pilot strike will most likely lead to the share prices dropping. You can hedge the risk with a few railway stocks (IRCTC, CCI, IRFC, RITES, etc.) that affect only a part of your portfolio.

However, airlines and railways pertain to travel industries, and anything affecting the travel sector will hurt both sets of stocks – like the pandemic. Diversification across sectors is recommended to offset such risks.

For instance, if you also held IT or entertainment stocks, you would gain as people stayed home and sought diversions online as they did during the lockdown.

Diversifications are also advised across companies, asset classes, and timeframes (long-term, short-term, medium-term).

Professional advice

Juggling a portfolio can be complicated for a new investor. That is where a financial advisor plays a crucial role. They can help you with advice on when and where to invest and when to offload. They can also guide your investment plan to meet your long-term goals and get the maximum tax benefit.

Conclusion

Investing is a must if you want to live beyond a paycheck-to-paycheck existence. But if seeking a financial advisor isn't want you want, check different investment options and detailed layouts with IDFC FIRST Bank. With us, you have a bouquet of investment avenues, such as FDs, mutual funds, bonds, etc., to bring you the best returns on your investments and help you achieve optimal tax benefits each year.

You can also open your IDFC FIRST Bank Savings Account and start planning your investments hassle-free. 

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.