Financial Literacy and Its Influence on Investment Behaviour and Tax Planning among Individual Investors in Bengaluru: A Structural Equation Modeling Approach

Abstract

The increasing complexity of financial markets, rapid digitalization of investment platforms, and continuous reforms in taxation policies have transformed the financial decision-making environment for individual investors. Financial literacy has consequently become a fundamental competency that enables individuals to understand financial products, evaluate investment alternatives, manage financial risks, and make informed tax planning decisions. Despite various initiatives by the Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), and financial institutions to enhance financial awareness, significant differences continue to exist in the financial knowledge and investment practices of individual investors. Bengaluru, one of India's leading financial and technology hubs, presents a unique environment where individuals actively participate in diverse investment avenues while simultaneously navigating increasingly complex taxation regulations. Against this backdrop, the present study, "Financial Literacy and Its Influence on Investment Behaviour and Tax Planning among Individual Investors in Bengaluru: A Structural Equation Modeling Approach," aims to examine how financial literacy influences investment behaviour and tax planning practices. Specifically, the study investigates the direct influence of financial literacy on financial attitude, financial self-efficacy, investment behaviour, and tax planning behaviour, while also examining the mediating role of investment behaviour in strengthening the relationship between financial literacy and effective tax planning. The proposed framework is grounded in the Theory of Planned Behavior, Behavioral Finance Theory, and Human Capital Theory, providing a comprehensive explanation of individual financial decision-making.

The study adopts a quantitative, cross-sectional research design and utilizes primary data collected through a structured questionnaire administered to 800 individual investors in Bengaluru using a stratified random sampling technique. The statistical techniques employed include descriptive statistics, normality assessment, Exploratory Factor Analysis (EFA), reliability analysis using Cronbach's Alpha and Composite Reliability, convergent and discriminant validity assessment through Average Variance Extracted (AVE), Fornell–Larcker criterion, and Heterotrait–Monotrait (HTMT) ratio. Common method bias and multicollinearity diagnostics were also performed before validating the measurement model through Confirmatory Factor Analysis (CFA). Structural Equation Modeling (SEM) with bootstrapping procedures was subsequently applied to examine the hypothesized direct and indirect relationships. The study is expected to demonstrate that financial literacy significantly enhances investment behaviour and tax planning directly as well as indirectly through improved financial attitudes and financial self-efficacy. The findings are anticipated to contribute to the existing body of knowledge by developing an integrated behavioural model explaining investment and taxation decisions among individual investors in an emerging economy. Furthermore, the study offers practical implications for policymakers, financial institutions, wealth management firms, financial educators, and tax authorities in designing evidence-based financial education programmes and policies that promote informed investment decisions, effective tax planning, and long-term financial well-being.