Benefits of Tax-Planning with SIPs

Benefits of Tax-Planning with SIPs

Still a few months in hand before the crazy rush of tax planning. By February and March, people will all of a sudden remember about specific tax-savings declarations that they made at the beginning of the financial year. The inability to invest in those particular events may result in a huge tax cut in their salaries. In such a situation, most of them will try to resort to some super quick tax saving avenue and invest in them. There are plenty of people who do this every year to save a large chunk of their salaries from tax payment.

Such a quick fix solution is not beneficial in the long run. At the last moment, a person always tends to be in haste. Such a hasty decision may land you in unwanted investment avenues. You will not have enough time to enquire and gather knowledge about the returns. So you may end up investing in areas where you may not get better returns in the future. Sometimes, you may have to keep on investing in the same avenue even if you do not like the returns. But due to mandatory tenures of certain tax-saving investments, one may have to keep on investing in the same area again and again.

It is always better to plan earlier. You should commence your new year by making preparations for the tax-saving investments. The benefit of starting early is that you can devote time to deciding the perfect tax saving option. Advance tax planning will also help you in avoiding payment of huge lump-sum investments, that too, in the very last moment. Also, investment in a market-linked instrument, for instance, a tax-saving fund, will allow you to average the cost of investment.

There is an umpteen number of tax-saving techniques. But here, we will guide you on how to save taxes according to Section 80C. This specific tax saving avenue allows you to make investments up to 1.5 lakhs per year. There are several options available to you in terms of Public Provident Fund, Employees’ Provident Fund, National Pension System, tax saving mutual funds (equity-linked savings, ELSS), tax savings deposits, insurance policies, etc.

If you go through the Section 80C instruments, then you will realize that ELSS or tax saving funds are more significant. ELSS offers you enough exposure to equity. This leads to an increase in capital in the long run. And we all know well that 80C avenues tend to lock your capital. So, it is better to gain higher returns. Also, ELSS possesses a higher level of efficiency and transparency as compared to other equity-linked 80C products. Also, the good news is that the lock-in period for tax saving funds is merely three years. If you make a comparison, you will realize the lock-in period is 5 years in case of insurance plans, 15 long years for PPF, and up to retirement if you choose the NPS.

But matters related to investment should always be handled with care and thoughtfulness. You should not invest a lump sum in ELSS. Lump-Sum investment may lead you to catch a market peak. As a result, you may get lower returns in case the market falls. This will demoralize you, and you may not want to invest again. Therefore, it is always better to make investments through SIP. SIP’s are helpful in two ways. One, they help in improving the number of your returns. Also, they help in averaging the cost of investment.

Always try to see your tax-saving investments from a long term perspective. Tying up with a long term goal helps in the accumulation of capital and also makes you more aware, concerned, and responsible regarding tax-saving investments. All you need to do is to be more disciplined with the SIP’s and take your tax saving investment s a bit more seriously.

If you go by the popular Chinese proverb, then plant your ELSS investment tree now. Water it regularly with SIP’s, and soon it will become a giant.