5-Point Checklist to Help You Identify the Right Tax-Saving Investments

Remember, finance is personal. What works for someone else may not be the best thing for you.

To get the most out of your tax saving investments, they should fit your financial story and work towards meeting your financial goals. So, if you are confused as to which tax saving investment is best for you, don’t worry.

In this post, we share a 5-point checklist. This checklist will help you filter through the tax-saving investment options available and help you choose the right fit for your financial needs.

In Budget 2020, the Finance Minister made a significant change by introducing a new tax regime. The new tax regime includes lower tax rates and minimum exemptions. As a young investor, you have to choose which arrangement you want to get into.

Let’s say you choose to join the old tax regime. In that case, you need to invest in the above tax-saving way to cover the entire limit (for example, INR 1.5 Lakh for 80C and so on) to get the total tax benefit. If you choose to be governed by the new tax regime, you do not limit yourself to traditional tax-saving investments like PPF, ELSS, NPS etc.

So, before proceeding, first make an informed decision about which tax regime you want to involve yourself in. This will help you to clarify the universe of investment products available to you and then you can make a better decision.

The constant barrage of ads and sales pitches you see daily sell you for a return or a tax profit. No one talks about the most important thing – your financial goals.

Remember, no investment is good or bad. It is as good or as bad as it helps you meet your financial goal.

So, first of all, prepare a list of your financial goals. This will include how much money you want and when you want it. Once you are clear on this, you can take the right decision on where to invest.

Ideally, considering the lock-in period of most tax-saving investments, you can consider them only for goals exceeding 5 years.

A good tax-saving investment should be commensurate with your risk tolerance. Simply put, risk tolerance is the percentage of total assets invested in equity markets and yet one can sleep peacefully at night.

So, first of all, you should assess your risk tolerance and decide on the mix of investments. It is also known as asset allocation. For example, let’s say your risk tolerance in equity and debt is 60:40. You must have 60% in equity products at any given time.

When choosing a new tax-saving investment, you need to examine your current asset allocation. This will help you choose an investment that aligns with your ideal asset allocation.

For example, let’s say your current allocation to equity and debt is 30:70, and the ideal allocation is 60:40. In this case you can buy ELSS mutual fund. This will not do a good job of saving tax and will lead to ideal allocation of your asset allocation.

The mistake people make while choosing a tax saving investment product is to consider only immediate tax saving at the time of investment. However, as a knowledgeable investor, you should carefully examine the tax implications over the entire life cycle of the product, which includes the following:

Comparative Life Cycle Taxation of Common Tax Saving Routes

Do not rush into investing blindly in tax-saving investments without considering the lock-in period. It doesn’t make much sense to lock in your money for some small tax savings. And when you need money, take a costly personal loan.

Therefore, it is essential that you clearly identify the goal in which you are investing this money before investing. Then check when the money is due, and ensure that the lock-in period of the proposed investment is less than the target time.

For example, if you are planning to invest in the education of your child 8 years away, then investing in PPF would not be a good idea as it has a lock-in period of 15 years. Instead, you can consider ELSS Mutual Funds.