There are only a few days left for the financial year 2020-21 to end. In such a situation, taxpayers who have not yet met their target of tax saving, are aggressively looking at all investment options so that maximum tax deduction can be availed. By the way, tax saving is an ongoing process throughout the year because some hasty mistakes are made in the hurry at the last minute which results in some loss in achieving the financial goal. Although some people are unable to make time for this throughout the year, they consider tax saving options at the last minute. In such a situation, there are some mistakes that should be taken care of so that your financial goals are not negatively affected.
Pay attention to these mistakes
- Excessive investment: In order to reduce your tax liability in the current financial year, it is important to know how much you should invest in tax saving instruments. Estimate your total income in the current financial year and estimate tax-saving investments accordingly. Excessive investment can lead to a financial crisis for an emergency.
- Insurance-cum-Investment Products: In the month of March, most people invest in insurance-cum-investment products like traditional insurance plans and endowment policies to save tax. However, these typically have lower returns than pure investment options such as ELSS, PPF etc. Apart from this, they also get a lower life cover than the plain vanilla term insurance policy and also have to pay a higher premium. Traditional insurance is a long-term investment and it may incur a lot of loss if you surrender in the initial years. In such a situation, it can be better to invest in ELSS, VPF and other small savings schemes according to the return expectation, liquidity requirements and risk appetite. Apart from this, a term plan or health insurance plan can be taken for insurance needs.
- Investing by taking loans: It is not prudent to take loans for tax-saving investments in excess of your capacity. This will raise the worry of repaying the loan without needing you. Taxpayers should think about investing by creating a balance between tax-saving and liquidity needs. It is advisable to invest by taking loans only at a time when there is a problem of liquidity for some time, such that there is a delay of 10-15 days incoming salary. It is not prudent to withdraw by investing through a personal loan or credit card. If it is very important, you can take a loan from a friend or relative or take advantage of the FD against the overdraft facility. Apart from this, if an investment has matured, then the funds received from it can be invested in tax saving schemes.
- Investment in tax saving scheme according to short term: One should not compromise his financial goal for investing in tax saving scheme. Choose a tax-saving product that helps in achieving long-term financial goals. Never invest in tax saving instruments according to short term financial goals because all tax saving instruments have a lock-in period of 3-15 years. It cannot be liquidated before this lock-in period has passed.
- Non-diversifying tax saving instruments: Most people invest their entire funds in one asset class at the last minute. One should avoid making such mistakes because investing in more than one asset class helps in reducing the risk. Apart from investing in multiple asset classes, you can also invest in different schemes of the same asset class. For example, instead of just investing your funds in ELSS, you can invest in ELSS as well as NPS, Tax Saving FD, PPF, Gold etc.
Article By: Kapil Rana, Founder & Chairman, HostBooks Ltd