Tax planning strategies for investors: 5 key points to reduce income tax outgo

Effective tax planning strategies help investors achieve their financial goals while saving on taxes and most importantly protecting from last-minute rush to put money in assets for deductions. Investors should include tax planning in the broader financial strategy that can enhance the overall financial health.

Here are some tax planning strategies for investors that can be helpful in picking proper investment vehicles for creating financial wealth.

Understand tax laws

Understanding of taxation laws is equally important as to picking a proper investment plan for higher returns. The government offers two types of tax schemes for individual taxpayers - the old tax regime and the new tax regime.

While the old tax structure offers various deductions for tax saving, the new tax scheme offers a simple tax rate and higher tax exemption limit.

Investors should be well aware of the tax scheme they will opt for to maximise tax savings. Also, there are several levies such as capital gains tax, securities transaction tax (STT), income tax and others, which should be taken into account while selecting investment options.

Invest in tax-efficient instruments

Investors should choose tax-efficient accounts that offer benefits at various stages of an investment cycle. It is wise to know about the current and future income tax impacts of an investment. While some investment options offer immediate tax-saving relief while making contributions, other assets offer tax benefits on returns as well as at the exit stage. Retirement-related products are often tax-exempted while equity-linked saving schemes also offer tax benefits under Section 80C of the Income Tax Act.

Diversify investment portfolio

Investors should look for a proper mix of asset accounts to create a balance between returns and tax liability. Allocating investments to equity, debt, fixed deposits and other safe instruments such as the Public Provident Fund (PPF) is the key to creating a balance between returns and short-term tax liability. Proper asset diversification and matching investment with the account type can help achieve long-term financial goals.

Long-term investments in securities for tax benefits

While equity markets offer enticing short-term return opportunities with high risk, investors should focus on holding assets for a longer term to benefit from asset gain tax laws. Sale of equity shares and equity-linked mutual funds after a year or more attracts long term capital gains (LTCG) tax. Investors can benefit from a lower 10% LTCG tax rate on investments sold after a year, for instance.

Use investment losses to offset tax on gains

The strategy is called tax-loss harvesting. As every investment does not give returns and can generate losses also, such negative returns can be used by investors to offset tax liability on positive returns from other assets. Similarly, in case of mutual funds, investors can select growth options rather than getting dividends for deferring LTCG liabilities at the time of exiting the mutual fund scheme.

To sum up

Tax planning strategies are the key to saving taxes as well as compliance with Indian tax laws. Selecting tax-efficient investments such as index funds, MFs and ETFs, and picking diversified asset accounts offer investors an option to minimise their tax outgo while ensuring high returns.