5 Tips For Making Tax-Efficient Investments
One should know the tax bracket because it helps to understand how can one invest to get maximum rewards
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It was the famous inventor Benjamin Franklin, who said that there is nothing about life that is certain; except death and taxes. However, this does not mean that one should sit back and let all their hard earned money be eaten up by the tax monster. In fact, with just a hint of savvy and some careful planning, you can make tax-efficient investments that will help you achieve your long-term financial goals.
How is this possible, you ask? Well, these five expert tips we have outlined below should help:
1. Start investing early: Many people think that investments should be made only
when you have a certain income. This is absolutely untrue! The key to saving more is starting early You can start investing in Mutual Funds even with a small amount of money, and if you opt for Liquid Funds you can create an emergency fund for rainy days as well as earn money on it.
Starting early also means investing early in the financial year. This gives you more time to look at how your funds are performing and rework your portfolio if need be.
2. Know your tax bracket: It helps to know your tax bracket and how you can invest to get maximum rewards. Many people do not know that income from Fixed Deposits is also taxed at the same rate as your gross income. So, those who are in the 5% tax bracket can opt for Fixed Deposits as it would mean less taxes for them as compared to someone who is in the 20% tax bracket. In fact, if your total income is below the minimum tax slab, you can also recover the TDS (tax deducted at source) deducted on the FD interest by claiming a refund at the time of return filing.
3. Look for tax-advantaged investments: Returns from Equity Mutual Funds, held for more than 1 year, are exempt from tax under Section 10(D) of the Income Tax Act. However, this is not true of all Mutual fund Schemes. For instance, if you sell your Liquid or Debt Funds before three years (36 months), you will have to pay tax on short-term capital gains. If you hold on for more than three years, you will benefit from indexation on your original investment but will also have to pay a 20% long-term capital gains tax on the return. Hence, it is always better to choose funds and investments that will help you save taxes in the long haul.
4. Map tax-saving investments to your goal: All your investments should have a two-pronged benefit - to decrease your taxable income so that you pay less taxes, and to increase wealth in the long run. Financial goal planning should always precede investments, and it is necessary to understand what kind of tax benefit you will get from investing in a certain instrument. For instance, if you are saving up to buy a house, you can buy bonds issued by the Housing and Urban Development Corporation (HUDCO) and Indian Railways Finance Corp. (IRFC) which offer tax-exempt returns.
5. Keep your exit load low: Many investors lose money in funds because they sell their assets too early or at the slightest hint of trouble. An exit load is charged on the Mutual Funds redeemed or sold before the stipulated period. The same goes for Liquid Funds, where you will have to pay taxes on short-term capital gains if you try to redeem them before 3 years. Patience is an integral part of wealth-creation so try to wait for the stipulated time period before you redeem your investments.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.