Here’s a new routine to save taxes and a chance to increase wealth by consistently investing in an equity linked savings plan.
When a behaviour is repeated frequently and consistently, it becomes a habit. Repeating a habit is simple to do once it has been established.
Our daily life and many other things that we take for granted are aided by our habits. We have developed certain ingrained patterns when it comes to managing our cash. For instance, a consistent income enables us to cover our usual expenses.
But, it’s likely that we’ve grown accustomed to spending money more readily than to investing or saving. One of the causes is that we have a tendency to spend since it is simple, gratifying, and immediate.
On the other hand, saving for a distant objective does not give immediate satisfaction. As a result, the majority of taxpayers start looking at tax-saving possibilities at the tail end of the fiscal year. They frequently fail to fully consider all choices by doing this.
Employer-mandated provident fund deductions or any other type of pension contribute significantly to tax savings for salaried taxpayers, who also benefit from alternative pension options. Many options are available under Section 80C, including donations to the Provident Fund (PF). A large range of financial products that can save you money on taxes may cause you to choose one over another.
One programme that has gained popularity among investors opting to save tax under Section 80C is the Equity Linked Savings Scheme (ELSS). ELSS provides a double benefit. Taxes are saved, and the equity exposure presents a chance to build wealth.
Long-term returns from the asset class of equity have outperformed those from other asset types. As of March 15, 2023, the Nifty 500 TRI had a ten-year CAGR of 13.32%. (According to Bloomberg) In contrast to other tax-saving devices, ELSS has the lowest lock-in period, at just three years. Taxpayers who are familiar with stocks may want to explore this option.
Use a Systematic Investment Plan (SIP) while investing in ELSS, just as you receive a regular salary and contribute to your pension each month. Automating the procedure reduces the amount of effort needed to save towards our objectives. Make tax saving a regular habit, just as you do with earning, spending, saving, travelling, and socialising.
Spreading out your tax savings over the year has the benefit of preventing you from investing in something at the last minute that may not be right for you merely to save money on taxes.
Planning your tax-saving investments at the start of the fiscal year gives you the advantage of being able to plan for other financial demands without worrying about having enough money to cover them. A monthly automated method for tax savings will ensure that you establish the habit of consistent investing. Start a SIP, and everything else will fall into place.
Via SIP, the cost averages out over the course of the year, ensuring that you receive greater risk-adjusted returns over time. You can overcome behavioural biases that you could run into when investing and timing the market with SIP.
You could choose to make a lump sum investment to make up the difference under 80 C now that we are in the last stretch of the tax-savings period. It is sage to prepare ahead of time to invest your funds under Section 80C into an ELSS through SIP for the upcoming fiscal year.
You can increase your investment as and when you need by making an ELSS investment, giving you the much-needed flexibility. Start by setting aside a regular amount for tax savings, and as the fiscal year approaches, raise the contribution if you anticipate falling short of the Section 80C limit of 1.5 lakh.
Create a new habit of investing regularly with a SIP in ELSS to reduce taxes and increase wealth. This will make it clear to you that the wealth creation achieved through ELSS will eventually result in tax savings.
Srinivas Rao Ravuri, CIO, PGIM India Mutual Fund, is the author.