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/