Seven Common Mistakes You Should Avoid When Making Tax Saving Investments


Mistakes to Avoid When Making Tax Saving Investments.

New Delhi: Tax planning is a process that should be done at the start of the year so that you have the whole year to make investments according to your plan. If you have not yet started making your tax investments for the current fiscal year, you should not delay it further. When investors make hasty or last-minute tax investments, they usually make mistakes. It should be mentioned here that tax saving investments should not only be made for tax saving purposes; they should also help you reach your financial goal. the investor achieves his financial objectives. Here Are Some Common Mistakes You Should Avoid When Making Tax Saving Investments

Do not tie investments to goals

Typically, when people invest quickly in tax saving instruments, they forget to tie those investments to their goals, which will cost them dearly in the future. If you are investing in tax saving investments such as PPF, EPF, Ulips, life insurance, ELSS, which are long term in nature, it is important to link these investments to a particular long term future goal and to do not exit the investment halfway before reaching the desired goal. Even when you invest in ELSS, which has the shortest lock-in period, you have to tie it to a particular goal and can extend it until you get the amount you want for your goal. You may also want to consider supplementing your ELSS investments with an additional amount when the markets see significant corrections.

Not knowing the tax implications

While making tax-saving investments, investors should be aware of how the returns on these instruments will be taxed. For example, interest earned on the National Savings Certificate (NSC) and five-year tax savings bank term deposits are added to the taxpayer’s taxable income and taxed according to his income tax slab. So if you are in the 30% or higher tax bracket, the after-tax returns of these instruments will not be that attractive to you. But if you choose instruments like the PPF, where you can invest up to Rs 1.5 lakh per year, your returns will be tax free.

Make last minute investments

Most taxpayers make tax-saving investments only in the last quarter of the fiscal year. In a last minute rush, they often choose products that may not suit their needs. For example, if you are a risk averse investor, choosing ELSS may not be right for you. Likewise, if you are in the 30% or higher tax bracket, investing in fixed deposits that save tax at the last moment may not pay you good returns.

It is therefore advisable to calculate your tax payable at the start of the year and then plan your tax investments accordingly. In addition, investing regularly will help reduce the financial burden of investing in the last quarter.

If you invest in ELSS at the last minute, you will miss out on the benefits of average rupee costs and be able to buy them at a higher NAV.

Choose ELSS funds based on recent performance

Many taxpayers choose ELSS funds with a Section 80C tax advantage, based on performance over 1 year and 2 years only. It should be noted that a particular MF scheme cannot remain the best performing scheme indefinitely. Each year a different MF system tops the yield ranking. We must therefore avoid the mistake of choosing the best performers of the current year rather that they should consider other factors such as the returns over a 10-year period, the risk-adjusted return, the maximum withdrawal of the wallet, etc.

Ignore liquidity needs

You should consider your cash flow needs when selecting a tax-advantaged investment. Most tax saving investments have long lock-in periods and cannot be sold until lock-in to generate cash when needed. For example, if you invest in the VPF to benefit from a deduction of less than 80C, you should note that the VPF investment cannot be withdrawn until retirement.

Your tax-saving investments should be such that you get cash flow at regular intervals to meet your financial needs. It should be mentioned here that ELSS comes with the shortest 3 year lockout. So you need to put money in ELSS every year so that in an emergency you can partially withdraw it or if the markets experience a big recovery then you can reserve partial profits and roll them out again when the markets fall.

Skip section 80D and other benefits

In addition to the Section 80C and Section 24B tax saving options, there are other ways to save tax. Your health insurance premium, elderly parents’ medical bills, and interest payments on a student loan can also help save you taxes. Second, the repayment of the principal of a mortgage loan also gives the right to a tax deduction under section 80C. You should make use of these tax provisions when planning your tax investments.

Clubbing and investment insurance

Separate your insurance and your tax investments. Traditional life insurance products, which combine term insurance and debt investing, generate poor returns and are much lower than PPF and other small savings programs. They also have long tenures, low liquidity, closing penalties and low yields, tax experts say.

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