Due to different reasons, you may be calculating how to save on tax only when the end of the financial year is close. While you can avoid bad decisions due to haste by planning your taxes in advance, steer clear of these four moves that can harm your finances in the long run or simply be too costly to rectify later.
Investing without financial goals
While you may choose to make your investment decisions without a financial planner or chartered accountant, when you make last-ditch investments, make sure that they are aligned with your financial goals and income. Not only does this mean considering the tenures of any investment you choose to ensure they mature when you need them, but it also means considering the returns you get, and whether or not you are really saving taxes.
It is quite easy to get carried away, and sometimes even dip into your emergency reserve solely for the purpose of saving taxes, which may not be so profitable. Will the amount you claim deductions for today demand a tax liability tomorrow? Further, are you choosing an instrument with low returns when you need to invest aggressively, or vice versa?
Limiting your investments to Section 80C, and not diversifying your portfolio
While Section 80C is popular for saving taxes, there are other sections that you can turn to in order to claim tax deductions. For instance, Section 24B allows you to claim tax deductions up to Rs 2 lakh on the interest repayment of your home loan. This, added to the Rs.1.5 lakh cap of Section 80C, allows you to claim up to Rs.3.5 lakh as a deduction easily.
Other tax-saving sections include Section 80 TTA for interest on savings account, Section 80E for deductions on the interest portion of an education loan, Section 80GG for deductions based on house rent, and several more.
Additionally, don’t forget to diversify your investment portfolio in a rush to save on taxes. Consider investing in Equity Linked Savings Schemes, and stabilise your portfolio with Public Provident Funds and tax-saver fixed deposits, to create a well-rounded investment plan that yields good returns for you.
Buying insurance to save tax without adequate research
While insuring yourself and your loved ones is essential, turning to this instrument during times of hasty tax-saving calls for caution. You don’t want to be stuck in a situation where you may be paying premiums for inadequate coverage, or paying high premiums for coverage you may not need.
Pay attention to your coverage and take the time out to read the fine print. This way you are sure you aren’t spending money unnecessarily only to end up shelling out money again during medical emergencies.
Forgetting to set aside time to correct investment mistakes
Despite reading through the coverage of an insurance policy, or doing thorough research on an investment, it is possible for you to make a few mistakes that will require time to be corrected. Make sure of the free-look period that insurance policies grant you, and give yourself the time to build a diversified portfolio by checking your asset allocation as per last year, your current income, your future obligations, and more.
By ensuring there is enough gap between when you select your cover and investments until March 31, you can get everything in order.
The writer is CEO, BankBazaar. The article has been published in collaboration with BankBazaar. Opinions expressed are those of the author.