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Tax planning or goal-setting: Let your needs drive investment decisions

When making investment decisions, you often come across two main aspects – goal-setting and tax planning. Which aspect, do you think, is the more important of the two?

In reality, both these aspects have their respective importance and prudent investment decisions cannot be made without either.

Confused? Let’s understand.


What is goal-setting?

Goal-setting is an activity wherein you identify your financial goals, quantify them and assess their investment horizon. Goal-setting is nothing but goal identification which helps you understand how much funds would be needed, when, and for what purpose.

For example, say you want to accumulate funds for your child’s future. Goal setting would mean identifying the goal of child planning, estimating the corpus that you would need and the tenure after which the corpus would be needed.


What is tax planning?

Tax planning means considering the tax implications of your investments. Under tax planning you check the tax saving benefits of investment avenues and pick those avenues which give you maximum tax saving.


Which is better?

Both goal setting and tax planning are important considerations. However, your investments should be driven by your needs, not only for saving tax. Goal setting, thus, takes precedence as it gives a direction to your investments. It helps you invest as per your needs. If you invest only based on saving taxes, your investments might not fulfil your financial goals. That is why your needs should dictate how much to invest and where.

That being said, what if you can combine both goal setting and tax planning for a holistic financial plan?

Yes, there are different investment avenues that help you invest as per your needs and save tax too in the process. One such avenue is life insurance. Let’s understand how –


Life insurance – need-based investing with tax benefits

Life insurance plans combine both need-based investing and give you tax benefits too. There are different types of life insurance policies which help you plan for your financial needs.

For instance, you can invest in term life insurance plans for providing financial security to your family in your absence. Endowment and money back insurance plans help you create a guaranteed corpus for your financial goals along with life insurance protection. Child insurance plans are designed to create a fund for your child’s future needs, whether it is higher education or marriage. Similarly, pension plans help you plan for your retirement goals and unit linked insurance plans help you earn market-linked returns with insurance protection.

Different financial needs, one solution – life insurance.

Along with meeting your needs, life insurance plans are very tax-efficient as they have multiple tax advantages. Have a look –

  • The premium that is paid for a life insurance policy is allowed as a deduction under Section 80C. You can claim a deduction of up to Rs.1.5 lakhs on the premium amount. This deduction helps in lowering your taxable income. As your taxable income is reduced, your tax liability is also reduced. In fact, if you fall in the 30% tax bracket, an insurance premium of Rs.1.5 lakhs can help reduce your tax liability by Rs.45,000. Impressive, isn’t it?

  • If you opt for a money back insurance policy, the money back benefits are treated as tax-exempted incomes in your hand.

  • In the case of ULIPs, if you withdraw partially, no tax is payable on the withdrawn amount. Moreover, if you switch between your investment funds, the amount switched is also tax-exempted.

  • In traditional endowment or money back plans, the bonus or other additions added to your corpus are tax-exempted.

  • The maturity benefit that you receive is completely tax-exempted under Section 10(10D) if your premium was up to 10% of the sum assured. In the case of ULIPs, you can enjoy tax-exempted maturity benefits if the premium was up to Rs.2.5 lakhs.

  • The death benefit paid under life insurance plans is always tax-exempted, no conditions attached

So, if you plan your life insurance policy, you can enjoy EEE (exempt, exempt. exempt) benefit wherein no tax is paid on investment, on the returns and also on the benefits paid by the policy.


The bottom line

When investing, don’t play favourites between goal setting and tax planning. Invest according to your needs and choose avenues which give you the best of both worlds, i.e. they help you plan for your goals and also save tax. Life insurance plans are an excellent example. You can pick a plan as per your financial needs and save taxes on your investments and also on the returns that you earn.


So, keep your needs a priority when making investment decisions. Tax saving can be the icing on the cake which sweetens the deal further.


* Tax Benefits are as per current Tax Laws and are subject to change
AN Nov 25/21

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