4 Mistakes individuals do while saving tax
We recognise the fact that many of you are too busy throughout the year in your economic activities intended to make a living. But if you show the same dedication in your tax planning exercise, the same will enable you to save more and fulfil all your dreams in life. My experience reveals following 4 mistakes which individuals do while saving taxes.
1. Doing tax planning at the last moment:
The root of all mistakes in tax planning lies in waiting till the last minute to save taxes, which eventually leads to mere tax saving, rather than tax planning. And this in return is a sub-optimal way of saving taxes, caused by the sheer attitude of delay. Your last moment hurry, will often lead you to forgetting or ignoring the facets of financial planning such as your age, income, ability to take risk and financial goals thus guiding you to not complement your tax planning exercise with investment planning..
2. Unnecessarily Buying Insurance Plans for the purpose of Tax Saving:
As you near the end of the financial year, many of you might have received telephone calls from insurance companies and agents pestering you to buy an investment cum insurance plan – typically market linked i.e. Unit Linked Insurance Plans (ULIPs) or some kind of Endowment plans.
And many of you realising the need to save your taxes, even entertain these calls and eventually tear a cheque for buying one. But do you ever wonder whether you have done the right thing?
The answer in my opinion is a straight No. And that is because of the ignorance and / or arrogance (of not admitting your mistakes) which you might have, while doing your tax saving investments.
3. Ignoring power of compounding through tax saving mutual funds:
Many of you absolutely rule out the concept of power of compounding to your portfolio despite the fact that your age, income, ability to take risk, along with your financial goals supporting you to take risk. It is noteworthy that if you want to meet and / or elevate your standard of living going forward, you need to beat the rate of inflation. And thus, the role of equity as an asset class cannot be ignored in tax saving portfolio too. While some do consider – tax saving mutual funds in their tax saving portfolio, the ideal composition (depending on your suitability) is not maintained, which leads the tax saving portfolio to give sub-optimal returns.
4. Failing to optimize all available options for tax saving:
For many, tax planning starts as well as ends with Section 80C – which enunciates investment instruments for tax saving. But investing only in these investment instruments would not lead to optimal reduction of your tax liability. There are many other options available other than section 80C which you should look into. Thinking beyond 80C may help you save more for your other financial goals.