Yet again the time has come for
all of us to invest to save taxes or by the next month we won’t be able to do
so as new financial year will start. But, the question that keeps hanging over
is, why do we need to wait for the last month to do savings for our Tax
Planning. Why don’t we start this exercise in the beginning (April) only so
that we are on track? What we fail to understand is that Tax Planning is a part
Financial Planning and the investments we do in the name of Tax Saving should
be aligned to our Long Term Financial Goals. And it is not possible to plan
adequately if we wait till the end of financial year to invest for our tax
savings. Let’s keep in mind these common mistakes which an investor might
commit while doing tax saving in the month of March.
1. Investing all money into Insurance Plans:
Insurance by definition itself means insuring your risks. Investments in
Insurance should be really done after careful evaluation as the returns will be
lesser and commissions paid to the distributors are higher. And most of the
time insurance products come with longer term periods of 15-20 years which
might not fit into overall frame of your long-term goals as the returns are way
much lesser if we have to beat inflation.
2. Investing in 5-year Tax Saving FD: You
might be a conservative investor but it doesn’t mean that you invest all your
money into Fixed Deposit which in actual is giving negative real return if we consider
inflation. Yes, you can invest in debt instruments, but you can choose PPF or
even EPF which give better returns as of date in comparison to Fixed deposits.
3. Not utilizing all benefits: Section 80 (C)
is not the only section where you can save taxes. There are various sections
under Income Tax Act wherein you can save taxes be it Section 24 or Section 80
D. If you are doing Tax planning in the end of financial year, you might not
get time to utilize it to its maximum and hence will have to pay more.
4. Putting Lump-sum in equities: You can
invest in Equity Linked Savings Schemes (ELSS) of Mutual Funds to save taxes
and they have a lock-in of 3 years. But, if you invest lump sum in the last
month, you are not using equities in the right manner. Only God knows what will
be the market levels, whether you are buying at right price or are paying more
than the intrinsic value. It is true that nobody can time the market, but then
we have SIP (Systemic Investment Plan) to counter such issues.
5. Inappropriate Asset Allocation: When
you do tax saving in panic mode, you often forget to have right asset
allocation mix as per your risk appetite. There is tendency to go high either
on debt or on equity side without having the right mix due to which the overall
portfolio might not perform as per expectations.
Above All, biggest disadvantage
of doing Tax Planning in the end is that it causes dealignment of your
investments with regards to your Financial Goals. One should not forget that Financial
Planning is a Bigger Picture and Tax Planning is just one part of it. And if
every year we do our Tax Planning in a hurry, we are kind of making new puzzle
every time rather than solving the real and bigger one.
Charu Hastir, CFPCM is founder of http://www.theriteplan.com/. Rite plan is an online financial planning
portal created to achieve a single objective of providing easy and Do It
Yourself Financial Planning to netizens. Rite Plan is wholly owned by Tikkun
Olam Financial Planning Services LLP. Please visit: https://theriteplan.com/index.php?route=common/home/
No comments:
Post a Comment