When you are given a choice where, on the one hand, you have a tax scheme with lower returns and, on the other hand, a non-tax saving scheme with high returns, generally, you choose a tax-saving one without thinking of the profitability and suitability. However, it might not be an issue if you do not fall into the tax slab, but the mindset is still the same.
Don’t you think it is high time when we focus on our future financial requirements rather than just choosing random schemes because they are saving tax, as the government is also promoting a new tax regime in which no tax deductions are available with a lower tax rate? It certainly means that the government also wants you to focus on wealth creation and quality investments.
A fundamental comparison between tax-saving and non-tax-saving schemes is necessary by keeping the following factors in your mind:
Always compare the tax benefits you are getting in proportion to the sacrifice in returns. Basically, calculating opportunity cost plays an important role here. If tax benefits are more than the potential returns, you can definitely go for tax-saving schemes.
Schemes like ELSS, PPF, NSC, and FDs provide tax benefits under Section 80C of the Income Tax Act 1961, which can help in reducing taxable income. Non-tax saving schemes, on the other hand, do not offer such benefits.
Tax saving schemes typically have a lock-in period of 3-5 years, while non-tax saving schemes may have no lock-in period or a shorter lock-in period. Investors need to consider their liquidity needs before choosing a scheme.
Returns on investments are an important consideration. While tax saving schemes may offer slightly lower returns, the tax benefits can offset the difference. Non-tax saving schemes, on the other hand, may offer higher returns but without any tax benefits.
Tax saving schemes and non-tax saving schemes have varying levels of risk. For example, equity-linked savings schemes (ELSS) may have a higher risk profile than fixed deposits. Investors should choose a scheme based on their risk appetite.
Investors should consider diversifying their portfolios across different asset classes and investment options. Tax saving schemes and non-tax saving schemes may offer different levels of diversification, and investors should choose a mix that suits their investment goals.
Investment horizon refers to the period for which an investor intends to hold the investment. Tax saving schemes are typically long-term investments, while non-tax saving schemes can be short-term or long-term. Investors should choose a scheme based on their investment horizon.
Investors should consider the costs associated with the investment, such as entry and exit loads, expense ratios, and brokerage charges. These costs can significantly impact the overall returns of the investment.
Tax planning is not necessarily done at the time of choosing which regime to opt for. It starts right from choosing which scheme you are going to invest in. While choosing the same, you must focus on enhancing wealth and fulfilling the financial objectives you are determining to achieve from the same investment.
You can save tax by investing in your financial objectives, but tax saving should not be the financial objective.
Anushka Trivedi is a freelance financial content writer. She can be reached at anushkatrivedi.com