Everyone wants to create wealth in their lifetime. But for wealth creation, you need knowledge and discipline. Knowledge is vital to making the right investment decisions. Also, you need to know the different ways you can save money with tax breaks. Another aspect is having the discipline to invest regularly in your plans.
Your wealth creation plan will only be complete with proper tax savings. Thus, it would help if you learned how to grow your wealth while saving taxes. It is the perfect combo for you to become wealthy over the years.
Factors to Consider in Choosing Tax-Saving Wealth Creation Strategies
The options for saving taxes and growing your wealth are plenty. You need to align your financial goals with the correct investment tool. Some of the factors you need to look at are:
1. The lock-in period of the investment:
It would be best to look at the liquidity factor, as most tax-saving investments have a lock-in period. How long you stay invested must align with your financial goals. For example, when saving for your child’s education, align the investment duration with the lock-in time.
2. Taxability of the Income or Interest Earned:
Since one aspect of wealth creation is tax savings, check the applicable taxes on the interest earned. It would help if you did this because tax exemptions can increase your gains from the investment. A tax benefit is crucial for you to create more wealth. The more you can save, the more money you will have over many years.
3. Expected Returns and Interest Rates:
The returns that your investment generates are your profit. When you make more profit, your wealth grows. So factor in the interest rate you will get from every tax-saving investment scheme. The more interest you can get, the better will be the growth of your money. Another important point in your wealth creation strategies is to look for compound interest rates. Regular compounding of the interest amount will give exceptional returns.
4. Security of the Investment:
You must balance your investments. It means putting some money into a high-risk, high-rewarding investment plan. At the same time, some of your money should get invested in low-risk investment products for long durations. Your wealth creation plan should include both. This way, you will ensure better security for your investments.
Some Wealth Creation Investments with Tax Savings
The following are some investments you can make to increase your wealth and save taxes:
1. Invest in a Public Provident Fund (PPF):
The government provides this PPF investment scheme, which you can open at the bank or post office. This investment will lock in your investment money for 15 years. But the security provided by PPF is the safest way to invest your money. Also, the returns generated by this wealth creation plan, which are currently 7.1%, are excellent.
If you are someone who likes to take no risk, this is the best way to invest. You get the surety of the government to get guaranteed returns from this investment plan. Besides, your returns from PPF are tax-free because of the longer duration of the investment.
2. Take a unit-linked insurance plan (ULIP):
A ULIP provides a balanced way of investing. A part of your money is for life insurance premiums, and the remainder goes into market-linked equity investments. The risk levels of ULIPs are moderate because the investment amount gets distributed. Opt for this scheme when you have wealth creation strategies that include long-term investment.
This plan’s minimum lock-in period is five years, but it can stretch to 15 or 20 years. The fund value is tax-free if you decide to exit the ULIP after five years. Also, after the scheme matures, the maturity amount is tax-free. But if you take the ULIP after April 1, 2020, there is a cap on the tax-free investment amount. To qualify for tax breaks, your annual investment in the plan should be less than INR 2.5 lakhs.
3. Save taxes with the National Pension System (NPS):
NPS is a retirement savings plan and a long-term wealth creation investment. You get the returns once you are 60 years old, and the income is partly tax-free. On maturity, you will get a lump sum amount for which you can claim tax exemption under sections 80C and 80CCD (1B). Another part goes into an annuity plan that will provide monthly income for you. The annuity amount, however, is taxable by the income tax department.
The best part of NPS is that your wealth grows much faster. It is because the compounding of the interest amount happens every year. Also, NPS is a market-linked savings plan that gives your money more opportunities to create wealth. This scheme can help you develop a good habit of regular saving.
4. Grow Your Wealth with Equity Linked Savings Schemes (ELSS):
The growth of your wealth when you invest in ELSS depends on the stock market’s performance. It is because ELSS is a mutual fund product used to purchase equity. The potential to make great returns is higher than that of other investment instruments. But the risk factor is also higher with ELSS investments.
You can save tax on the returns you make in this wealth creation plan under Section 80C of the Income Tax Act. The limit is up to INR 1.5 lakhs of tax exemption allowed with ELSS investments. It even has a lower lock-in period of three years when you compare it to other tax-saving plans. You can continue to invest in ELSS beyond the three-year lock-in period.
As you can see, wealth creation is a lengthy process that takes time. It would help if you made the right informed choices to make it happen. Most importantly, you should start saving early, as time is necessary for growing your money. Keep a balanced investment portfolio in terms of risk-taking. Also, use the strength of compounding your returns to ensure incredible investment growth.
Piramal Finance can provide excellent assistance to grow your money and save taxes as you become wealthy.