6 Awesome Tips on How Tax Saving Can Help You Achieve Financial Freedom
The desire for financial freedom is something that many people have in their minds. Still, very few actually make a strenuous effort towards making this goal a reality. Many young investors erroneously think that financial freedom involves living miserly and sacrificing the small joys of life. This thought is not correct. The truth is that you can achieve financial freedom by living a disciplined financial life. Making intelligent use of the available tax breaks is one thing that goes a long way in increasing your chances of achieving this goal in time. This article explains the various tax-saving opportunities that you can employ to accelerate your efforts towards achieving financial freedom.
#1: Do thoughtful tax planning at the start of the year: The income tax law offers several opportunities to you to legally plan and reduce your tax liability. There are several deductions and exemptions that you can claim while filing your tax return. Every rupee you save in tax outgo can go towards investment and help you build your financial corpus. The recent amendments in the tax law help you choose between old and new income tax regimes. That significant change can help you plan your tax liability as per your unique financial situation. However, gaining complete advantage of tax benefits requires you to have a good knowledge of tax laws, or you can seek the advice of your financial adviser.
#2: Structure your salary for maximum tax benefit: Usually, employees get too stuck on the amount of “Cost to Company” (CTC) offered by their employer. However, they don’t realise that they can increase their post-tax salary income by intelligently structuring the various components of the salary. Most companies today offer some form of flexibility to employees to structure their salary components. For example, you can choose a lower Basic Pay to reduce your contribution towards the employee provident fund and increase your take-home pay. But this approach also causes you to pay more tax. So, you need to establish the right balance between take-home pay and tax liability as per your financial situation and requirements.
#3: Invest in the right tax-saving products: There are several good tax-saving products available that can help you plan your taxes and, at the same time, create long-term wealth. PPF and EPF are good old tax-saving products that give much-needed stability to your investment portfolio. Equity Linked Savings Schemes (ELSS) is a low cost and efficient way for young investors to take exposure to equity markets and create long term wealth for themselves. Then we have a true-blue retirement product known as the National Pension Scheme (NPS). NPS gives you an additional deduction over and above the regular INR 1.5 lacs deduction over Section 80C of the Income Tax Act.
#4: Buy your own home: Buying your own home is not only a wise idea from a stability point of view, but it can also help you gain financial freedom. When you buy a house, you get tax benefits on both the principal and interest component of the Equated Monthly Instalment (EMI) that you pay to the home loan provider. This can help you reduce your tax liability to a great extent. You can deploy this tax-saving to invest in tax-efficient investment avenues like ELSS, PPF and NPS. These investments can help you create a decent corpus which can prove to be a key to your financial freedom. Buying a home also protects you against real estate inflation and saves you from the hassle of moving places every few years.
#5: Buy life and health insurance: A key component of your efforts towards financial freedom is protection. Buying suitable insurance covers protect you from the financial shocks that come with death, disability, hospitalisation, natural calamities. These events can wipe a good chunk of your financial freedom fund if you are not prepared for these eventualities. The good news is that buying useful life and health insurance coverage can help you save on tax. Every rupee of tax saved through such insurance purchases can help you reach closer to your goal of financial freedom. Premium paid on life, and health insurance policies for yourself or family members qualify for a tax deduction u/s 80C and 80D, respectively. In health insurance, you also get additional tax benefits if you insure your parents in the policy.
#6: Plan for deferred taxation of your investments: Tax deferral is a powerful strategy known to very few investors. This strategy basically helps you to legally defer the tax incidence on your investment income. This deferral approach can help you grow your wealth without any interruption and reap the benefits of compounding. The best example of this is mutual funds. Tax liability in a mutual fund scheme arises when you sell the units of the scheme. Also, after a specific holding period, capital gains taxation qualifies to be long term. You are allowed to use the inflation-adjusted cost of acquisition to calculate long-term capital gains tax, which brings down the tax liability. So, the strategy is to choose a suitable mutual fund scheme and stay invested for long periods in the market. This will help you create a more significant investment corpus for your financial freedom goal and protect you from short-term volatility.
Tax planning is a significant consideration in the personal financial planning of any investor. It assumes an even greater significance if you are aiming for financial freedom. Good knowledge of taxation laws and their impact on your finances can motivate you to make minor adjustments. Over time those adjustments can make a big difference in your overall corpus and increase your probability of achieving your goal.
Plan your financial future using Finbingo’s Wealth Builder