Do you like most investors invest in tax saving investments with a sole aim of saving on taxes? If that’s the case, then you might want to reconsider your investment strategy. What’s more, many investors – young and new in the race to save tax at the last moment often commit several blunders that are quite harmful to their financial well-being and prospect. Are you wondering what are these mistakes? Following are the top 4 blunders that an investor is likely to make in the race to save tax:
- Buying an unnecessary investment product or term insurance policy
One of the biggest justifications for purchasing an utterly irrelevant type of investment or life insurance policies is the craving to save tax. Such naïve investors are usually persuaded into purchasing these financial products or policies by their friends, family members, or acquaintances. However, you shouldn’t get your hands on a particular type of investment just to save tax. It’s important that you understand if the particular investment is adding any value to your investment portfolio. - Waiting till the last moment to invest in ELSS tax saving mutual funds
You do not have to wait till the last moment to invest in tax saving mutual funds. ELSS, also known as Equity-Linked Savings Scheme provide investors with a tax deduction of up to Rs 1.5 lac p.a. under Section 80C of the Income Tax Act, 1961. If you do not have the desired investment amount at the moment to invest in ELSS funds, you can also make an SIP (Systematic Investment Plan) and divide your investment amount into several insignificant investment amount over a period of time. - Failing to understand the notion of lock-in tenures and their affiliation with inflation
Several investors new to the investing world in an attempt to save tax usually fixate on stability and safety. As a result, they often give away and ignore the associated lock-in period associated with these investments. Tax saving investments such as bank fixed deposits, Unit-Linked Insurance Plan (ULIP), and Public Provident Fund (PPF) have a lock-in period of 5 years, 5 years, and 15 years respectively. Investors often underestimate the impact of inflation on the future value of their investments. Note that, with ELSS mutual funds, thanks to the mere lock-in period of three years, your money is likely to stay ahead of inflation.
- Not scrutinizing which of your necessary investments are already measured u/s 80 C
Those falling under the higher tax slab often miss that they are already fulfilling most of the 80C commitments through their EPF (Employee Provident Fund) contribution. If your EPF contribution is on the higher side, ensure to double check the investment amount required to fulfil the Rs 1.5 lac tax deduction.
So, this tax season, develop a good habit to initially think about generating wealth and subsequently aiming to save taxes. Irrespective of the type of mutual fund chosen for your portfolio, ensure that it aligns with your risk profile, investment tenure, and financial objectives. Happy investing!