Choose Your Tax Saving Options Wisely

Common tax-saving mistakes:

♦ Not exhausting all the tax-saving avenues:

-There are various investment schemes notified under section 80C along with certain expenses, do cover all in your checklist.

-Apart from 80C, one must look at section 80CCC (included under the section 80C limit) and section 80D allows medical insurance premium installments.

♦ Section 80C is only about investing:

80C is not all about tax-saving investments, it also includes tax-deductible expenses such as payment for the life insurance premium and tuition fees for children, repayment of the principal amount of home loan. This deduction is also applicable on stamp duty, registration fees, and transfer expenses.

♦ Tax Saving investments are a must:

No. First, look at the expenses permitted under Section 80C, if you have not maxed the Rs1.50 lakh limit, then move on to check your provident fund contribution under EPF. If you still have not hit the Rs1.50 lakh limit under Section 80C, you should consider any other investment (such as PPF, NSC, ELSS, or 5-year bank deposits) to save tax.

♦ Tax saving is about a fixed-return instrument:

under the tax-saving umbrella, there are also ULIPs, ELSS, and the NPS, which provide equity exposure. One must always approach tax planning from the perspective of an overall portfolio.

♦ Buying an unnecessary insurance policy/product:

Don’t just buy to save tax. You need to understand if the investment is actually of use to you in the long run, or else you will end up spending money and not investing or purchasing something useful.

Investors can choose to invest by themselves, or they can involve investment planners to make the most of their investment plan. One must examine the pros and cons of an investment decision before implementing it

Consequences of a wrong plan:

  • Not meeting goals or targets: Good financial plans are goal-oriented. Failure to achieve your financial goals owing to wrong decisions can affect your personal and corporate finances.
  • Loss of funds: A poor investment decision leads to some or all monies allocated to the investment lost, as the primary aim of the investment is to make money.
  • Liquidation or Bankruptcy: a real and very possible outcome of investing unwisely is that your business can face liquidation, or you may face bankruptcy.
  • Lawsuits: Yes, don’t be surprised if you find yourself on the wrong end of a judge’s gavel following a poor investment decision. Breach of trust or contract can be inferred from any number of circumstances or clauses inherent in the initial agreement you had with any partners.

This can be explained with the help of an example:

Mayank has just started his career and is looking forward to investments and tax planning. The list in which he already invests includes PPF, Ulips, life insurance, ELSS, pension funds, and NPS, which adds up to around Rs 2 lakh in tax deductions. However, Mayank struggles to meet the annual savings target with his limited income, but the lure of tax saving is high. What can be the possible solution to his problem?

One’s financial situation changes with age. As a young earner, Mayank needs to save and invest, but his short-term needs would likely eat more into his income. By locking his money into long-term tax-saving products, he might be making a mistake. He may find it difficult to keep up the investment required or draw on it when needed. The inability to maintain a balance in his tax-saving temptations and available cash results in dormant PPF accounts, discontinued subscriptions, and missed premium payments. If Mayank tries to access the money during times of need, he is likely to face penalties, lower realization values, or high costs. What he does to save taxes should, therefore, fit within his overall personal financial situation and needs.

For investors like Mayank, liquidity needs may be higher due to unexpected expenses at the early stage of his life. Tax-saving products come with lock-ins during which time they cannot even be pledged to raise money. He may need term insurance much more than a Ulip; health insurance coverage more than retirement planning. It might be a wiser thing to pay the taxes and retain the flexibility.

It is always advised to choose the tax-saving instrument that suits your demand best through multiple factors, as different investment plans benefit people in different ways. One must think about whether the amount of return in investment(s) is profitable or not Also, it is better to know the rules and regulations regarding investments and taxes if you are investing to save tax.

All the best to all the potential investors!