5 mistakes you must avoid while investing to save income tax
January, 12th 2018
Come January and salaried individuals get into the last lap of tax saving investments. The reminder mails from human resource department makes many wake up and look for some option that will help them save tax. This rush hour typically leads to some mistakes individuals commit. Avoid these to ensure better financial results.
Not knowing how much you should be investing
This ignorance is common for most individuals. Though Section 80C of the Income Tax Act lets you save tax on investments up to Rs 1.5 lakh each year in stipulated investments, you should not blindly cut a cheque of Rs 1.5 lakh. Your existing commitments such as contribution to employee provident fund, school fee payments, premium paid towards life insurance policies, repayment of housing loan principal will account for this Rs 1.5 lakh amount. You need to invest that much money which will be left after accounting for all these payment. Also consider the taxable income. If there is no taxable income after accounting for investments made already, then there is no need to invest more. So to put it straight - don’t over-invest.
Paucity of time makes investors opt for what is easily available. The sales pitch of ‘fill the form and you are done’ makes them invest in that one ‘easy to do’ investment available at the door-step. That leads to putting all the money in one avenue. For example, a mail from bank offering ‘Tax-Saving-Bank-Deposits at a click of a button makes an individual invest all his money in this easy to do investment. This approach ignores his investment needs and financial goals.
Take a stock of your existing investments, your risk taking ability and your investment needs before investing your hard earned money.
Ignoring the world beyond Section 80C
Do not forget to account for your contribution to NPS under section 80 CCD and health insurance premium under section 80D. If you have donated money to designated institutions then you are eligible for tax shelter under section 80G. This reduces your tax liability. Account for these while investing.
Ignoring future commitments
Just because a friend asks you to buy a life insurance policy, do not jump for it. Think of the future premium payments. Same applies to investment avenues such as PPF and NPS. These investment options expect you to contribute every year. If these avenues do not serve your investment needs, then you will repent for rest of the years, as you will be forced to contribute year after year or let the money go which was paid in the first year.
This is a common mistake many investors commit. The easy way out is to sort all investment options on the basis of the past returns and pick the one that has offered the best returns in the recent past. Some just try to copy their neighbours and friends – follow the herd. This invariably lands them in unwanted situations. Take a stock of your financial situation and invest in an avenue that suits your needs.
Consider a situation, Suresh is 58 years old and a conservative investor. He has a PPF account that has run for 13 years. He will retire at the age 60 and plans to build a bunglow for his golden years after he retires. He should consider investing in PPF as the account will mature when he will need money for his goal of home building.
Sometimes, it makes sense to settle for a bit less return and accomplish one’s financial goals while planning your taxes.