income tax, Income Tax Planning, income tax planning in India, tax planning, investment planning, ITR, section 80C, 80D, 80CCD, 80E, 80G, Sec 24,

Tax planning and investment planning are not the same thing. People often make a mistake by putting money in low-return but tax-saving instruments without evaluating its impact on their short and long-term financial goals. If you invest just to save taxes and ignore the quality of investment, it may get difficult for you to achieve your financial goals. As such, it’s very important to align your tax-saving investments with your financial plan to achieve your goals on time.

So, it’s good to invest your money as per your financial goal and get the tax benefit along with it (if it’s available). However, you shouldn’t invest with an intention only to save taxes, especially when such an investment doesn’t comply with your financial goals.

Read on as we answer certain critical questions that can help you identify the difference between tax and investment planning.

What is tax planning?

Tax planning refers to the process of estimating your tax liability and working out a plan to become tax-efficient by using legal ways such as deductions, exemptions, allowances, rebates, etc. So, under tax planning, you can use the benefits allowed u/s 80C, 80D, 80CCD, 80E, 80G, Sec 24 and so on and so forth.

What is investment planning?

Investment planning, on the other hand, is the process of efficiently using financial resources towards achieving short and long-term financial goals. Investment planning focusses on choosing the right instruments that can get you closer to your financial goals while staying aligned with your risk profile, returns expectation and time-frame.

For example, you may need to make different investments for your short-term goal (such as going on an international vacation after 11 months) and for your long-term goal (like creating an adequate retirement corpus). The same investment products may not give you the desired result while achieving different goals.

Also, investment planning takes care of tax-efficiency if you choose the right investment instrument. For example, let’s assume there are two investment options — A and B. If option A’s post-tax return of investment is greater than B (while other factors remain constant), the investment suitability of option A would be higher than option B.

How do people commit a mistake by mixing tax and investment planning?

Countless taxpayers, who realise they have not exhausted the tax benefits u/s 80C in the financial year, are known to make a number of investment decisions days before the deadline. And tax-saving insurance products are often their first choice.

However, they do not consider the fact that such an investment may be illiquid, the returns may be lower and they would be required to make further investments every year going ahead. Such a move might fulfil their tax planning needs by reducing the tax liability, but it may not help them achieve their financial goals. The real rate of return on such tax saving investments are often negative too.

However, that doesn’t mean that you should not buy insurance products. In fact, you must stay adequately insured to safeguard your financial interests (and that of your family) in the face of an unfortunate incident. But you also need to invest intelligently to grow your wealth and achieve your financial goals on time and choosing only tax-saving but low-returns fetching options may not be the best strategy to that end. It’s critical to understand the difference between the basic objectives of investment and insurance.

So, what is the right way?

The right way is to first clearly identify your short and long-term financial goals. After that, estimate the maximum amount you would be able to save to invest towards achieving such goals. Now, depending on your risk appetite, time in hand (to achieve the goal), return requirement and liquidity needs, choose the appropriate assets to invest your money. While selecting your investment assets, keep the tax-saving consideration as the secondary criteria to maximize your investment benefits.

Tax planning is very important, but it should also be in sync with your financial goals. If you find it difficult to choose investment options that can help you achieve your financial goals while remaining tax-efficient at the same time, you may want to consult your financial advisor to carve out the best strategy.

[“source=financialexpress”]