5 common mistakes to avoid when making tax-saving investments
February, 22nd 2019
Taxpayers should always choose a mix of investment and insurance products such as Equity Linked Saving Schemes, life insurance, medical insurance, Public Provident Fund and National Saving Certificates
The end of the financial year is approaching and you must be looking for investment instruments that can reduce your tax outgo. In this last-minute rush, taxpayers tend to make mistakes and often choose investment options that can help in maximising tax saving but may not help them in achieving long-term financial goals. This is not a healthy approach and may affect your financial future in the long run.
The provision of tax saving by the government has been provided to individuals with an objective to ensure they save for a healthy financial future. This essentially means to have enough savings by way of investments to take care of your post-retirement years, a security cover by way of insurance, which takes care of your health and your family.
Here are some mistakes one should avoid while deciding on tax saving investments.
1) Putting all eggs in one basket
Never put all your eggs in one basket. This is an old advice but an effective one too. In this context, it simply means don’t develop an affinity for just one kind of method for tax-saving. Diversify your tax saving investments in various instruments. Go for a mix of investment and insurance products such as Equity Linked Saving Schemes (ELSS), life insurance, medical insurance, Public Provident Fund (PPF) and National Saving Certificates (NSCs).
2) Considering only how to save taxes, forgetting about growth
Tax-saving instruments should not be seen merely for tax-saving purposes but for wealth creation and financial growth as well. It is advisable to consider those investments that not only help you in availing tax benefits but also provide inflation-beating returns in the long term. This strategy will let you have the double benefits of saving taxes and appreciation of investments. You should choose investment instruments that not only help you in saving tax but also facilitate wealth creation.
3) Not considering your age and risk-appetite
While making investments, you must consider your age and assess your risk-taking ability. You should not limit your investment options to safe options or traditional ones only, instead look for options that offer the best possibility of post-tax returns.
For instance, if you are up to 30 years of age, your focus should be to create long-term wealth through the use of ELSS mutual funds rather than settling for the “safe” debt investments. Since age is by your side, equities offer you the best possibility of high returns in the long term. The prime tax-saving avenues for this age group should be ELSS. On the other hand, if an investor is older than 50 years, his priority should be capital conservation, and therefore he should focus more on safe options such as PPF and NSC.
4) Not thinking beyond Section 80C for deductions
In the last-minute rush, people often tend to ignore or are oblivious to some investment instruments that can get them further tax deductions beyond Section 80C. You can claim deductions for health premium paid for self, spouse, children and parents under Section 80D.
Similarly, Section 80DDB can help you avail a deduction for healthcare expenses incurred for a dependant relative. You can also claim a deduction for donations made to charitable institutions, political parties under Section 80G and 80GGA. In order to reduce your tax liability, make sure you are aware of all the expenses and related sections that can help reduce your tax liability.
5) Relying on the last quarter for tax saving
In a rush to meet the deadline, taxpayers often don’t give much thought to the investments they undertake and make bad choices that don’t yield impressive returns. It is always wise to start your tax planning from the beginning of the financial year. Choose your investment options after thorough research and try to diversify your investments to get the best results.
Tax saving instruments should not always be seen as merely for tax saving but also for generating wealth going forward. Keep these points in mind to avoid any mistakes that can have an impact on your financial future.