You just got done with filing your taxes of last year. We get it, it’s intricate and taxing. So, why think of the next season now? Well, there are several reasons. Starting early can give you a head start and help you plan and manage your investments at your own pace rather than rushing through at the last moment.
People usually have a mindset for a deadline – we tend to take the last date as the date of actually doing the task. For instance, if you have to pay a fine by 5Th August 2022, it makes sense to delay it to the deadline so you can earn interest up to that date. However, this is not true for all deadlines. For tax saving investments, it’s quite the opposite. The earlier, the better. Let’s understand why you must start with tax-saving investments early.
One must understand that tax-saving investments are not expenses, rather they are termed under investments. When one terms them as expenses, they tend to procrastinate it. However, expenses and investments are two diverse terms. An expense is a current consumption in exchange of funds. On the other hand, investment is conceding your consumption to earn a higher amount of money over a period of time, called as returns.
SIP
If you begin early, you have the option to invest via SIP or Systematically Investment Plan. This will lower the burden on you to invest a significant amount by the end of the financial year. For instance, you wish to invest Rs 80,000 in tax saving mutual funds – ELSS (Equity-Linked Savings Scheme). Rather than accumulating a substantial amount at the last minute, you can start an SIP of Rs 8,000. This will be easier on your pocket. What’s more, when you begin to invest early, you put your money to work sooner.
Power of compounding
The power of compounding works better the sooner you invest. Under this concept, your returns are further invested in hope of earning further returns. In short, your money works to make more money for you. So, the sooner you start, the more you’d be able to benefit from the power of compounding. No doubt several experts refer to compounding as the eighth wonder of the world.
Rupee cost averaging
When you invest via SIP, you invest in mutual funds on a regular basis despite the prevailing market cycle. This means that an investor automatically invests in both bullish and bearish market cycles. This helps them benefit from the market dip and also averages the cost of the mutual fund units bought over time. This concept is known as rupee cost averaging.
Discipline
Investing early ensures a certain level of discipline needed to invest in mutual funds.
Cash flows
If you choose to invest in tax-saving investments at the last moment in March, it might burden your cash flows.
There are certain tax-saving investments that you can consider for your investment portfolio. One of the most popular one being ELSS mutual funds. This is because ELSS funds offer the dual benefit of tax saving and wealth creation. An investor can save up to Rs 1.5 lac under section 80c of the Income Tax Act, 1961 per annum by investing in tax-saving investments. However, one should not invest in these types of investments for the sole purpose of saving tax. Your tax-saving investments must align with your investment portfolio. Happy investing!