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Come February and March each year, most salaried folk make a dash to invest in ‘tax-saving' instruments. While this does serve the limited purpose of saving tax for the soon-to-be-over financial year, such last-minute rush is not financially savvy.
If you make your investments early in the financial year, say before June, or at least invest regularly over the course of the year, you stand to gain more than just saving tax. Here's how.
Early investment
The early bird gets more worm. An early investment starts earning returns sooner and also helps you benefit from the magic of compounding. Say, at the beginning of the financial year in April, you invest Rs 1,00,000 (the maximum amount qualifying for tax deduction) in your PPF account.
At 8.8 per cent a year tax-free interest, returns on the PPF account are much higher than what you can expect to earn (around 4 -7 per cent taxable interest) on your savings bank account.
You will earn Rs 8,800 on the PPF investment by the end of the financial year next March. Next year, you will earn 8.8 per cent interest on the cumulative amount of Rs 1,08,800. This works out to Rs 9,574.
In contrast, if you invested Rs 1,00,000 in PPF only in February, your accrued earnings in the account by the end of March would only be Rs 1,467.
It's simple. If you have surplus funds, consider deploying them in tax-saving investments instead of them being parked in the savings bank account.
Even regular periodic investments in tax-saving avenues, as and when you have surplus funds, would be more financially beneficial, than waiting to invest till the end of the year.
Earn more
Reduce you monthly tax outgo and earn more. As and when you make the tax-saving investment, your company will consider this amount in your ‘tax deduction at source' calculation.
This will help reduce your monthly tax outgo, which in turn can be invested elsewhere to earn more over the course of the year.
Continuing with the above example, if you are in the 30 per cent tax slab, an investment of Rs 1,00,000 in a tax-saving instrument will result in a tax-saving of Rs 30,900 for the whole year.
This works out to Rs 2,575 a month. If you invest in the beginning of the financial year in April, your monthly tax outgo from April onwards will be lower by this amount.
You can deploy this saving in other investment avenues which offer say 8 per cent.
This would have earned you around Rs 1,100 over the year, something you do not get if you postpone your tax-saving investment until the close of the financial year in March.
What's the point of letting the taxman enjoy your funds, when you can use it yourself to make more money.
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