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The desire for financial freedom is something that many people have in mind. Yet, very few people actually try hard to realize this goal. Many young investors mistakenly think that financial freedom involves living skimpy and sacrificing life’s little joys. This idea is not correct. The truth is that you can achieve financial freedom by leading a disciplined financial life. Using available tax breaks wisely is something that goes a long way in increasing your chances of achieving this goal on time. This article explains the various tax-saving opportunities that you can employ to accelerate your efforts towards achieving financial independence.
#1: Do tax planning wisely at the beginning of the year:
Income tax law gives you many opportunities to plan legally and reduce your tax liability. You can claim several deductions and exemptions while filing tax returns. Any money you save in tax outgo can go towards investments and help you build your financial corpus. Recent amendments in the tax law help you to choose between the old and new income tax regimes. This important change can help you plan your tax liability according to your specific financial situation. However, to take full advantage of tax benefits, you need to have a sound knowledge of tax laws, or you can take the advice of your financial advisor.
#2: Structure Your Salary for Maximum Tax Benefits:
Typically, employees are heavily stuck on the “Cost to Company” (CTC) amount that their employer pays. What they don’t realize, however, is that they can increase their after-tax salary income by structuring the various components of salary wisely. Most companies today offer employees some form of flexibility to structure their salary components. For example, you can choose a lower basic pay to reduce your contribution to the Employees’ Provident Fund and increase your take-home pay. But this approach causes you to pay more tax. Hence, you need to strike the right balance between take-home salary and tax liability as per your financial situation and requirements.
#3: Invest in the Right Tax Saving Products:
There are many good tax saving products available that can help you plan your taxes and at the same time, build wealth for the long term. PPF and EPF are good old tax saving products which give much needed stability to your investment portfolio. Equity Linked Savings Scheme (ELSS) is a low cost and efficient way for young investors to invest in equity markets and build 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 Lakh deduction on Section 80C of the Income Tax Act.
#4: Buy Your Own Home:
Buying your own home is not only a wise idea in terms of sustainability, but it can also help you achieve financial independence. When you buy a home, you get tax benefits on both the principal and interest component of the Equated Monthly Installment (EMI) 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 one to invest in tax-efficient investment avenues like ELSS, PPF and NPS. These investments can help you build a good corpus which can prove to be the key to your financial independence. Buying a home also protects you from real estate inflation and saves you the hassle of relocating every few years.
#5: Buy Life and Health Insurance:
Security is a key component of your efforts towards financial independence. Buying a suitable insurance cover protects you against the financial setbacks that come with death, disability, hospitalization, natural calamities. These events can wipe out a good chunk of your financial freedom fund if you are not prepared for these events. The good news is that purchasing useful life and health insurance coverage can help you save tax. Every rupee of tax saved through this type of insurance purchase can help you get closer to your goal of financial freedom. Premiums paid on life, and health insurance policies for you or family members are subject to tax deduction under section 80C and 80D respectively. In health insurance, you also get additional tax benefits if you insure your parents in the policy.
#6: Planning for Deferred Taxation of Your Investments:
Tax deferral is a powerful strategy that few investors know about. This strategy basically helps you to legally defer tax events on your investment income. This deferred approach can help you grow your wealth without any hiccups and reap the benefits of compounding. The best example of this are mutual funds. In a mutual fund scheme, tax liability arises when you sell the units of the scheme. In addition, after a specific holding period, capital gains taxation qualifies for a longer period. You are allowed to use the inflation-adjusted cost of acquisition to calculate the long-term capital gains tax, which reduces the tax liability. Hence, the strategy is to choose a suitable mutual fund scheme and stay invested for the long term in the market. This will help you build a more substantial investment corpus for your financial independence goal and protect you from short-term volatility.
conclusion
Tax planning is an important consideration in any investor’s personal financial plan. This becomes even more important if you are aiming for financial freedom. Good knowledge of taxation laws and their impact on your finances may prompt you to make minor adjustments. Over time those adjustments can make a big difference in your overall corpus and increase your chances of achieving your goal.
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