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If You Think Tax Planning is Investment Planning, Think Again. It’s Not!

Dec 11, 2018 | 2 years ago | Read Time: 3 minutes | By Dev Ashish

Most people will do anything to minimize their taxes. In fact, the urge to save taxes at such times is so strong that people end up investing in the first tax-saving option, they come across. These hurried investments are made without much thought on the actual long-term benefits and returns. And, whether the product being purchased is suitable or not.

Ideally, tax planning should not be looked at in isolation with everything else in your financial life. There is instead a need to sync tax saving with financial planning.

Investing just to save taxes serves a limited purpose.

It’s best to align this agenda of tax saving with your overall financial plan to get the maximum benefit from the financial products and more importantly, help you move towards your financial goals.

Simply put, tax saving should be the result of proper investment planning and not vice versa.

So how can you do this?

First, start with goals – identify and finalize your personal financial goals (like retirement, children’s education, their marriage, buying a house, etc.)

Once you know the goals and their time horizon, it will be easier to finalize a proper asset allocation and choose the right financial products.

In the long run, product suitability (for financial goals) is more important than just tax saving. Remember, tax efficiency is and should be a secondary factor.

How does it matter in real life?

Your child won’t be happy to know how much taxes you saved in previous years if you are unable to fund his or her education with proper savings. Isn’t it? It should be clearly understood that if you don’t invest in suitable products, you will not have enough money for the goal even if these wrong products helped save some taxes along the way.

Remember that the primary goal of tax planning is not to grow your money. It is to reduce your taxes. But for you personally, achievement of financial goal by investing in right products is more important than whether you are maximizing your tax benefits or not.

So, what exactly should you do?

  • Estimate your total taxable income and tax liabilities for the year.
  • Estimate your expenses. You will then know how much is your saving capacity.
  • Estimate your automatic tax savings – like insurance premiums, home loan repayments, children’s school fee, contribution to EPF/NPS, etc. These reduce the need for tax-saving options to some extent (if not fully).
  • (If you still haven’t then) find out your financial goals.
  • Depending on time horizon and risk appetite, choose a suitable asset allocation and the correct investment products. Remember, tax efficiency is a secondary. At best, it should be linked to the process of identifying suitable investment products.

Once you do this exercise, you will be putting your financial goals in the centre of your financial life and not taxes.

Figuring out a good goal-based financial plan ensures that you know what needs to be done and not be confused about what tax-saving products to buy later.

No doubt tax planning is important. But real cost of buying the wrong financial product outweighs the cost of taxes. So, do yourself a favor and seek out proper financial advice. Good investment advisors can help you create a tax-efficient investment plan that ensures you invest properly for your goals.


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