One of the biggest investment errors we make during pressing times is to invest just to avail the tax deductions. Do not therefore make any investment just for the tax deduction.
Tax planning is not about saving taxes but it is an important part of overall financial planning and should ideally be planned throughout the year.
But unfortunately, we all consider it one time activity which we undertake generally in the last three months of the financial year without giving much thought on how it is going to impact our overall finances.
" One of the biggest investment errors we make during pressing times is to invest just to avail the tax deductions. Do not therefore make any investment just for the tax deduction. Judicious investments will ensure that the investments made are relevant to your needs," says Anil Rego, CEO and Founder, Right Horizons.
There are only three months left for doing tax-saving investments for the year 2015/16. Most of you would have received emails from your human resource department to submit tax proofs. So, if you have not done your tax saving investments for the year yet, try not to commit the following mistakes in haste.
1) Investing too much into fixed income: Investing in debt instruments is important as it provides stability to your portfolio. But having too much of debt such as public provident fund, employees provident fund, fixed deposits etc may not be good for the overall return of your portfolio. So, keep the debt-equity ratio balanced. If your portfolio is already debt heavy, it would be wiser to invest in equity instruments. Figure out the ideal debt-equity ratio for your portfolio and choose the instrument accordingly.
2) Not looking Beyond section 80C: Most of you know that you can claim a deduction of up to Rs 1.5 lakh under Section 80C but you can also claim tax deduction against the premium paid on your health insurance. So, if you think your health insurance cover is not sufficient, you can think of increasing it. Similarly, if you are involved in philanthropic activities, you can also claim deduction against donations to political parties and for scientific research, rural development and government relief works are also deductible. So, try to know more about the deductions you can claim. Look beyond section 80C.
3) Investing in lumpsum in equities: Some of the investors do invest in equity linked saving schemes offered by mutual funds which qualify for tax deduction under Section 80C. But the mistake they do is they invest in lumpsum, which makes them more prone to the risk of losing money as by investing in lumpsum, they are actually timing the market. Therefore, it is always advisable to spread the investments throughout the year.
4) Investing in endowments insurance plans: If you walk to a bank during tax saving season, the representative is likely to push various products which will be earning high commission for the bank but may not be the right product for you. Endowment plans are one of them.
Most people do not realise that an endowment plan is a long-term product with a maturity period of 10-20 years. If you pay premium for only five years and then redeem the investment, it's likely that you will get less than even your principal. They also do not realise that a part of the endowment plan premium goes towards mortality charges and distributor commission.