Five Tax Saving Mistakes You Must Avoid

Five Tax Saving Mistakes You Must Avoid

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Five Tax Saving Mistakes You Must Avoid

5 Tax Saving Mistakes

The season to make tax-saving investments is drawing to a close. The last date for making these investments – March 31 – is here, and you can expect calls from your bank’s relationship managers, agents and other intermediaries urging you to complete the exercise. It’s also the time to get smarter and steer clear of these five common pitfalls:

1. Blindly Investing to Exhaust Rs. 1.5 lakh 

Do not rush into investing Rs. 1.5 lakh to avail of deductions under section 80C without weighing other options. Understand the composition of the 80C basket before making the decision. The chances are that you may not need to make additional efforts to claim deductions under this section. For instance, apart from equity-linked saving schemes (ELSS) and life insurance policies, it also allows tax breaks on tuition fees paid towards children’s education and repayment of housing loan principal. So, if your annual expense outgo features these two elements, you need not earmark additional amount to claim deductions under section 80C.

2. ‘Investing’ in Insurance Policies

Life insurance policies are amongst the most popular instruments in the 80C basket. As the typical sales pitch goes, they offer triple benefits of tax-saving, investment and insurance. However, before zeroing in on these products, make sure you compare them with other 80C avenues. More importantly, they entail making recurring payments, which means that you need to ascertain whether you will be able to service the premiums year after year. More importantly, if you compare the return and the risk cover provided by a traditional or endowment insurance policy against the mix of the pure term insurance and other options under 80C bracket, you will surely be inclined towards the pure term plans.

3. Ignoring ELSS

Many taxpayers choose to invest in safer avenues like tax saver fixed deposits, public provident fund, national savings certificate (NSC) and so on, ignoring options that are more attractive. However, younger individuals, who are likely to have a higher capacity to take risks, should consider investing in ELSS funds. For one, these funds invest in equities, regarded as the most remunerative asset class over the long-term. Secondly, entire gains made are tax-free, unlike tax-saver FDs or NSC. Moreover, they come with the shortest lock-in period – three years – amongst all 80C instruments. But be cautious before investing in bulk when equity market is already near to its all-time high as it can impact your return. The best way to invest in ELSS is through SIP mode.

4. Imitating Friends’ Decisions

Since many taxpayers postpone their tax-saving exercise until the last minute, they often end up making investments in a hurry. Due to lack of time, many simply go by decisions taken by their friends or acquaintances, instead of carefully analysing their own requirements. Remember, goals, needs and risk-taking ability of every individual are different; what works for your friend might not necessarily work for you.

5. Borrowing to Invest

Never take a loan to make tax-saving investments. The interest you pay on personal loans could range from 15-25%, which can potentially negate tax benefits as well as any returns on the investments. If you have to use your credit card to make these investments, ensure that you clear the bill within the due date. Use it only if you are confident of discharging the payment well in time.

Neha Joshi
Neha Joshi
Neha Joshi is a Chartered Accountant and has been working with H&R Block for the past 1.5 years as a senior marketing executive. She is responsible for content generation and management. She writes and manages content for website, blogs, social media, PR and other marketing content. She comes with a rich experience in publishing where she wrote books for various international professional qualifications. She was also a trainer for the subjects she wrote.

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