Make tax saving a habit

If one starts saving tax early on in the financial year, one can avoid missing such opportunities.

If one starts saving tax early on in the financial year, one can avoid missing such opportunities.(Shutterstock)

It’s a common phrase to hear that we are creatures of habit and this is true if you analyse your life — you wake up, brush your teeth, catch a cup of coffee, get ready to work and life goes on.

Habits help us through our lives and many things that we take for granted can be best credited if one analyses how the situation would be if one is not used to a routine.

Even when it comes to our finances, there are certain inherent habits that we have acquired — some good and some could be worked upon for better results. For instance, a regular income helps us to put several acts in order — rent, savings, tax saving and expenses among other day-to-day activities.

Yet, chances are we have developed the habit to earn and spend far easily than focus on tax saving.

One of the reasons why one is inclined to spend is that it is far easy and tangible with instant gratification compared with savings, which one can appreciate only in the future. This is why most taxpayers tend to start exploring the tax saving options available to them towards the end of the financial year. By getting into tax saving late in the day, one tends to miss out on exploring all the available options. If one starts saving tax early on in the financial year, one can avoid missing such opportunities.

For salaried taxpayers, a significant component of tax saving is contributions through provident fund deductions that are automated by the employer each month or any other form of pension as mandated. This may make a dent in their take home pay. But if they start early and make regular contributions, they will find that the tax saving option does not strain their finances.

Section 80C of the income tax act, under which Rs 1.5 lakh can be deployed in listed financial products to get tax benefits, offers a wide choice, including PF contributions. In fact, the wide variety of financial instruments that qualifies for tax saving often lead to a bias in choosing certain type of instruments.

Go for ELSS

One of the most interesting instruments within this choice is equity-linked saving scheme, or ELSS. As the name suggests, it is an equity-linked mutual fund and the advantage of deploying tax saving into an ELSS is two-pronged: you save on taxes and the equity exposure provides the opportunity for wealth creation. After all, equity is an asset class that over the long term has generated better returns than most other asset classes.

At the same time, money in ELSS has the shortest lock-in period of three years compared with other tax-saving instruments available to the taxpayers. Taxpayers, who have never been exposed to equity investments, could consider this avenue as their first equity investment. The short lock-in and tax saving are a good reason to invest in the ELSS segment.

Make it work for you

Having figured out that ELSS has advantages over other tax saving instruments, it is important that you do not wait for the last date to put in money.

Just the way you get a regular salary, and your pension contribution is made every month; opt for a SIP (Systematic Investment Plan) when investing in ELSS. The advantage in spreading your tax saving through the year is obvious — you are not left with a last-minute decision on selecting a fund to invest. You also do away with the market noise, which would react to volatility and other factors influencing your decision-making.

Moreover, by being regular with your investments in ELSS, you will develop a habit of regular investing as well as tax saving, sparing you last minute decisions in choosing a product that could work against you. By planning your tax saving investments at the beginning of the financial year, you have the advantage of planning your other financial needs without worrying about the availability of funds to meet them. Likewise, an automated process towards tax saving each month will ensure that you develop the habit of regular investing.

The equity edge

There are other benefits of regular investing in equities. Equity markets tend to be volatile and if investors invest at the wrong level, when the risk-reward is not favourable, it may result in sub-optimal returns.

Instead of trying to time your ELSS investment, initiate an SIP and the rest will fall in place. As the money is invested throughout the year, the cost gets averaged and ensures that you get optimal returns over a period of time.

Now that we are at the last stretch of the tax saving season, make sure you deploy the sum you can under Section 80C into an ELSS and plan your taxes for the next financial year in a better way.

Start with a regular sum that you need towards tax saving and as you get closer to the financial year, increase the sum if you foresee any shortfall in your Rs 1.5-lakh-limit under Section 80C. Investing in mutual funds such as ELSS allows you to increase your investments as and when you need, providing you with the much needed flexibility with your money.

Here is a new habit to save taxes and an opportunity to build wealth with regular investments in equities. It will help you realise that over time tax saving would be a by-product to wealth creation that you achieve through investments in ELSS.