Don't make this mistake

Relying on free tax advice from acquaintances and brokers could prove very costly if you end up makng the wrong investment.

     Print Edition: February, 2010

So, who is your financial adviser? Ask this question and the answer is usually the same—friends, relatives, colleagues or neighbours. Very few taxpayers actually do their own research or seek professional advice on this crucial matter. Most are content with free advice.

However, this guidance can prove very costly if you end up making the wrong investment decision. The 'adviser' may be acting in good faith, but unless he is aware of the income-tax rules and understands various investment options, he may not be able to guide you.

The problem worsens if the counsellor has a vested interest in recommending the financial product. Like bank executives. When Delhi-based Sukhmani Bhagat went to her bank recently to withdraw money, a bank employee saw the fat balance in her account and immediately advised her to invest in a pension plan that would ensure a steady stream of income for her. It seemed like good advice. The only glitch: at 74, Bhagat, a retired professor, should have been withdrawing from her investments, not making fresh ones.

Even those who sport fancy tags like 'investment consultant', 'wealth manager' and 'financial adviser' often end up mis-selling. "An investment consultant is a distributor of financial products and there is bound to be a conflict of interest between what he sells and what a taxpayer needs," says chartered accountant Suresh Surana. Consider this: the second largest ELSS fund has underperformed the category and even fixed-income instruments in the past three years. If Reliance Taxsaver is managing assets worth Rs 2,088 crore, it is certainly not because of the 7.3 per cent annualised return it has earned since 18 January 2007, but because of aggressive marketing by brokers.

The same is true for Ulips. If this is the hottest selling insurance policy, it is not because of the flexibility it offers, but because of the selective information given to customers. Few agents will suggest a term plan, even though it is the best and cheapest form of life cover. To a certain extent, investors are also responsible for the situation. They are unwilling to spend on unbiased advice from a professional financial planner. If they did, they would know it is money well spent.

Other common errors
Waking up late: Waiting till the fag end of the financial year to do tax planning.

Choosing unsuitable options: Looking at investments only for tax savings, leading to suboptimal choices.

Ignoring taxability: Few taxpayers know about the clubbing provision or how to avoid it.

Not keeping records: Forgetting or misplacing receipts of donations or other expenses that are taxdeductible.

Failing to avoid TDS: Paying excess TDS because of delay in making tax-saving investments.

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