Do you invest with the only purpose of saving on tax? You might want to rethink your entire investment strategy. Many investors, young or new, while resorting to tax-saving investments at the last moment, often make several investment errors that can be easily avoided. Practicing these unhealthy habits can be otherwise harmful to their financial well being and health. Here are top 4 mistakes that you must avoid at all costs while saving on tax:
- Buying an unnecessary term insurance policy or product
One of the biggest justifications by investors for purchasing completely unrelated financial products or life insurance policies as part of their investment portfolio is the craving to save tax. These investors are often persuaded into obtaining these products or policies by their friends, relatives, or family members. However, one shouldn’t purchase for the sole purpose of saving tax. Take a moment and recognize if that particular investment is actually valuable to your portfolio.
- Waiting till the end to invest in ELSS funds
Equity Linked Savings Scheme, commonly known as ELSS are a type of mutual funds that invests at least 80% of their assets in equity and equity-related securities. ELSS mutual funds are eligible for a tax deduction of up to Rs 1.5 lac each financial year under Section 80C of the Income Tax Act, 1961. One needs to understand that they don’t have to wait till the end moment to invest in ELSS. They can start right away. If arranging the entire investment amount in one go is difficult, you might consider going forward with a Systematic Investment Plan (SIP).
- Failing to understand the idea of lock-in durations and their connection with inflation
Several investors new to the investing world that are looking to save tax usually fixate on stability and safety. Thus, these investors justify the lock-in period. However, with most tax-saving investments having a lock-in period from 5 years to 15 years, investors often underestimate the impact of inflation on their mutual fund investments. They fail to see the depreciative value of their investments at the end of the tenure. With ELSS tax-saving mutual funds, your hard-earned money is most likely to beat the inflation, even if the rate of inflation goes up. Don’t forget that a lock-in period of 15 years will have substantial consequences on inflation.
- Not reviewing which of the mandatory investments have already been considered under Section 80C
Investors falling under the higher tax brackets often forget to understand that they are already satisfying their 80C commitments through their EPF or PPF contribution. If your EPF component is on the higher side, make sure to double check before investing in different 80C investments. On checking, you might realise that you need to invest way lesser than what you are doing.
So this tax season, inculate a healthy habit to initially think about wealth creation and then about tax-saving investments in general. Happy investing!