Do you invest in tax saving investments with the sole purpose of saving tax? You might want to rethink your strategy. Additionally, several young and new investors, while resorting to tax saver mutual funds at the end moment, often make several investment errors that are fairly avoidable and can be otherwise harmful to their financial health and well being. Following are top 4 mistakes that you are likely to make in the race to save tax:
- Purchasing an unnecessary term insurance policy or product
One of the biggest excusesfor buying entirely irrelevant life insurance policies or some financial products as part of their investment portfolio is the desire to save tax. These investors are often coaxed into buying these policies or products by their family members, friends, or relatives. One shouldn’t buy for the sole purpose of saving tax. Take a pause and understand if the investment is actually useful to your portfolio.
- Waiting for the end to invest in tax saving mutual funds – ELSS funds
If you are wondering what is ELSS, Equity Linked Savings Scheme ( ELSS) are tax saver mutual funds that invest in equity and equity-related securities. ELSS mutual funds are eligible for a tax deduction of up to Rs1.5 lakh for a financial year under Section 80C of the Income Tax Act, 1961. You don’t really need to wait until the last moment to invest in ELSS. You can start right away with a Systematic Investment Plan (SIP). SIP permits you to invest a fixed amount at fixed intervals for a specific period of time.
- Not understanding the concept of lock-in periods and their relationship with inflation
Many new investors who are looking to save tax often fixate on safety and stability. This results in the lock-in period being justified away. However, with most tax-saving investments having a lock-in period of 5 to 15 years, investors are often at the risk of underestimating the impact of inflation and what your value of investments will amount to at the end of the tenure. With ELSS funds, your money is most likely to stay well ahead of inflation, even if the rate of inflation goes up. Remember, a lock-in of 15 years will have significant consequences on inflation.
- Not inspecting which of your obligatory investments are already considered under Section 80 C
Those belonging to the higher tax bracket often forget to realise that they are already fulfilling their 80C commitments through their EPF contribution. If your EPF contribution is on the higher side, make sure to double check before investing in 80C investments. You might need to invest lesser than what you are right now, or better would not require to invest in the first place.
So this tax season, make a healthy habit to first think about wealth creation and then about tax-saving investments. Happy investing!