The Best Types Of Investments For Tax And Liability Planning

No matter how hard we try to fortify our financial footing with the best investment choices, we are always overwhelmed by the maze of relevant tax regulations and potential liabilities. There is, of course, not a sure-shot-designed methodology for achieving long-term financial success forever. Still, with the holistic approach of investment planning that entails prudent tax planning, we can significantly enhance our wealth-building potential.

Let us explore the intricacies of tax and liability planning to narrow down the investments that align with these financial goals. There are certain tax-efficient investment options we will consider that will help us to shield our hard-earned assets from eroding gradually due to stringent tax policies. Our investment choices have much to do with minimising our tax burden and maximising our bottom line.

Why is tax-efficient investing essential for financial growth and ultimate goal planning strategies?

Reasons are:

1. All the money that you could have accumulated for compounding and receiving greater returns is wasted by paying taxes.
2. You can minimise your liability. In that case, you can retain much of your further usable income for greater compounding potential and maximised returns.
3. Stepping stone toward tax-efficient investing is choosing the right investment account, as there are two types.

• Taxable accounts- taxable investment accounts are the investment instruments in which the returns are subjected to taxation. Such investment schemes in India include savings accounts, FDs, recurring deposits (RDs), debt mutual funds, etc. Tax treatment also varies depending on these investments’ type and time horizon.

1. An applicable income tax rate deduction is made for short-term capital gains where investment is held for less than three years. While for long-term investments where the duration is more than three years, the deduction rate is lower due to the indexation benefit.
2. Dividend distribution tax (DDT) applies to equity-oriented mutual funds.
3. Tax deducted at source (TDS) is applicable at a specific rate for FDs whose interest return exceeds a certain threshold.
4. Tax-exempt investments: equities mutual funds under the ELSS category can be considered for reducing liabilities.

• Tax-advantaged accounts- it is the investment type that enables investors to enjoy a bevvy of perks and tax benefits according to different regulations prescribed by the Income Tax Act of India.

1. Employee provident fund: EPF is a mandatory saving scheme for salaried employees where the employee and the employer contribute both. The returns are tax-exempt, depending on certain terms and conditions.
2. Public provident fund (PPF): returns earned on this type of long investment scheme are completely tax-free, and the fund contributed is locked in for fifteen years. It is recommended for folks looking for long-term insurance planning techniques.
3. National pension system: is a government-based voluntary retirement scheme that offers a considerable amount of tax benefits and an additional deduction for employer’s contributions.

Although tax-advantaged investment accounts are an obvious choice for tax-efficient investing choices, there may be instances where you may need to prioritise other factors over taxes to optimise your returns. Therefore, it is recommended to consult a certified investment advisor or an expert financial planner who could provide you with the best advice that appropriately aligns with your goals and risk tolerance.