While Making Tax-Saving Decisions, Don’t Make These Common Mistakes
By Adhil Shetty, CEO BankBazaar.com
As we’re approaching the end of the financial year, many of us are on the hunt for a tax-saving investment plan or insurance policy. Last-minute tax-saving decisions have the potential to be poorly thought. This means that in your hurry, you may buy an investment or insurance policy that has poor returns, low liquidity, heavy charges, and low coverage. Since it’s your hard-earned money you’re spending on these tax-savers, it’s key that you avoid making mistakes. After all, your money should be available to you when you need it. Let’s take a look at some well-known tax-saving mistakes you’ll do well to avoid.
NOT KNOWING YOUR TAX LIABILITIES
Firstly, know what you’re liable to pay the government this year. If you don’t know your tax dues for the year, your tax plan is going to be incomplete. Therefore, gather information about all your various incomes – salary, business income, interest from deposits, capital gains from shares, mutual funds, gold, etc., rent from your property, or any other income you have – and calculate your tax liability. Use an income tax calculator for this. Once the calculator provides you an idea about your taxable income, refer to the income tax slabs for 2019-20 to understand what you’re going to need to pay.
NOT TAKING STOCK OF TAXES ALREADY SAVED
You may have already achieved some tax-savings through the year without investing or buying insurance. Some well-known ways this happens are as follows: payment of rent, payment of school tuition fees for your children, payment of home loan principal and interest, and healthcare costs incurred for senior citizen parents. Also, you get a standard deduction of Rs. 50,000 as a salaried individual.
NOT KNOWING THE RATE OF RETURN ON YOUR INVESTMENT
While buying any investment, always stop to ask what its rate of annual returns would be. Debt investments like PPF or fixed deposits will advertise a rate of return, while market-linked investments such as ULIPs or ELSS, whose values fluctuate daily, cannot advertise a fixed rate of return. That said, your investment’s potential for post-tax returns should be ideally better than PPF (currently 7.9%, tax-free) and EPF (currently, 8.65%, tax-free). If your investment doesn’t have the potential to beat these returns, you should reconsider buying it.
MIXING LIFE INSURANCE WITH INVESTMENTS
Another classic mistake is completing your investment and insurance needs through traditional life insurance products. These provide low returns, lack liquidity, have hefty charges which reduce returns, may not have an adequate sum assured, and cost a lot. Therefore, to meet your tax-saving needs under Section 80C, you are locking up your money in an instrument that doesn’t pay and insures inadequately. This jeopardises your finances in several ways. Therefore, pick investments that help create wealth through better returns, and buy a term insurance plan that can provide you a large cover at affordable rates.
NOT BUYING HEALTH INSURANCE
Owning health insurance should be right on top of your financial plans. The tax-saving benefits of buying health insurance are secondary. First, you must secure your finances against the harm that can be brought upon by the costs of a hospitalisation or a critical illness. With health insurance, you can confidently meet those challenges. Without it, you could lose all your hard-earned savings.
NOT HAVING A WEALTH CREATION PLAN
Tax-saving is only one aspect of money management. But if you invest only to save taxes, you will have a problem with other aspects of money management, such as creating wealth, maintaining liquidity for urgent needs, having adequate insurance coverage, and achieving life goals such as homeownership and retirement. Therefore, you need a wholistic money management plan that addresses all these needs and make saving taxes a part of it.
Remember to read the fine print and ask questions about the points above when you buy a tax-saver. When in doubt, consult an investment advisor.
Disclaimer: The writer is CEO, BankBazaar.com. The liability for the article solely rests with the author/brand. The content has not been created or verified by India TV channel and IndiaTVNews.com.
