For most people, the New Financial Year begins tax-saving calculation. The last three months of the fiscal year (January to March) are when most of taxpayers complete their investments. This is the time of year when a lot of people who chose to pay taxes under the previous system will be rushing to locate investments that would reduce their tax liability.
Choosing the appropriate investment might be daunting because there are so many options available. Frequently, in their rush to save taxes before the March 31 deadline, investors choose assets that only meet the requirements for a Section 80C tax deduction. Majority of them look for investment choices such as insurance policies.
But it’s not the right approach. Not all investment decisions should be made with tax savings in mind. First and foremost, they ought to be a wise investment and a tax-saving choice. That’s because we’re going to be making a large investment of up to Rs 1.5 lakh.
There are many options available under Section 80C such as Bank FD, PPF, Post Office Investments, etc. These are the examples of Debt Products. On the other hand, a tax-saving avenue is the ELSS (Equity Linked Saving Scheme) of Mutual Funds.
Without further ado, allow me to demonstrate an efficient method for identifying the tax-saving investments that best suit your needs based on the following three variables:
- Investment time horizon
- A willingness to take risks
- Liquidity (the ease with which funds may be withdrawn)
Here are some Common Tax-Saving Mistakes that investors do
1. Postponement of tax-saving investments till the last quarter of FY
Making consistent investments throughout the year is essential to develop a strong investment portfolio. Individuals who are not aware of tax deductions sometimes act quickly and decide to make tax-saving purchases at the last minute.
They have no idea that hasty investments might result in poor choices. Investing in tax-saving strategies at the last minute can also prevent you from fully benefiting from them. You don’t want a big one-time expense to throw off your monthly spending plan.
Solution: When it comes to tax-saving investments, timing is crucial. At the start of the fiscal year, begin making investments in tax-saving plans and build a diverse investment portfolio. Make the most of your investments by making the effort to give them careful attention.
2. Investing in Tax-Inefficient Schemes in a hurry
Purchasing national saving certificates (NSC), Insurance products, or investing in long-term fixed deposits (FD) is a popular tax-saving method that most people choose. On your investment, you can submit a one-time claim, but the interest you get on both Fds and NSCs is subject to taxes. These items are therefore tax-inefficient.
Make the most of tax-saving options by differentiating them from traditional fixed-deposit or recurring-deposit investments, such as PPF and other pension plans. Tax deductions are available for investments made in public provident funds (PPFs), and any interest received is tax-free. Seek these kinds of efficient tax-saving plans.
The appropriate proportion of debt and equity investment funds should also be included in your investment portfolio. In addition to investing in debt funds with endowment plans, PPF, and other features, you can choose tax-saving mutual funds that have exposure to the stock market or stocks. To increase your savings, allocate money wisely and create the ideal portfolio.
Solution: Invest a portion of your assets in equity schemes to reduce your overall tax liability and increase your long-term gains. Invest in efficient tax-saving plans while taking your age, risk tolerance, and financial objectives into account.
Also Read – How Salaried People Can Improve Savings in 2024?
3. Investing too much in Endowment Insurance Plans
Plans for endowment insurance are life insurance policies that are beneficial for needed investments and tax savings. However, endowment plans by themselves won’t yield very high returns if you invest a sizable portion of your hard-earned money in them.
Endowment life insurance policies are always the first thing that comes up when you question your insurance agent or walk into a bank about tax-saving options. They tend to convince and sell it to you because they receive the most fee, which is often 35% of the first year’s premium and 5% on successive premiums.
These plans have extremely long terms—typically between 10 and 20 years—during which you must continue making investments. You won’t even receive your initial investment back if you redeem in between. Investing almost the whole allowable amount of Section 80 C in endowment plans is a common error made by taxpayers, who neglect to consider more efficient tax-saving options.
Solution: Invest in term plans rather than endowment insurance plans, which are not eligible for a Section 80 C tax deduction. Avoid allocating a large portion of your tax-deductible funds to endowment plans; instead, take into account other possibilities.
Let’s see some of the popular tax-saving options in brief.
ELSS:
ELSS is nothing but a Mutual Fund Scheme just like any other MF scheme, but has a lock-in period for redemption of money. As the ELSS schemes invest in stocks, they have historically delivered double-digit returns of around 12% to 14% on average. This is because stock market volatility typically levels off after at least five years of investment.
Though it has the shortest lock-in period, investing for a longer tenure will reduce the risk of capital loss. Whether you are an aggressive or conservative investor, a small portion of ELSS ought to be included in your long-term portfolio.
ELSS is the only option that falls under the category of ‘Equity’. Hence, for long-term wealth creation and returns, the recommendation is ELSS. The proportion of ELSS can be different as per risk-taking capacity, hence, complete ignorance towards ELSS is not a good idea.
PPF and NSC:
Those investors who rely on only debt products and fear investing in equities through ELSS can consider safer fixed-income options like PPF (Public Provident Fund) and NSC (National Savings Certificate).
As compared to ELSS, PPF/NSC offers lesser returns being a debt product. Further, there is no volatility in PPF/NEC, and the interest rate is also fixed. However conservative investors can look at investing partly in NSC/PPF and ELSS.
As far as the lock-in period is concerned, PPF has a total tenure of 15 years and money can be partially withdrawn after 6th year. On the other hand, NSC has a tenure of 5 years.
NPS:
There are several benefits associated with the National Pension System, often known as NPS (Tier I), including reduced costs and enhanced tax advantages. While the lock-in period until retirement may seem like a drawback, individuals who struggle to maintain discipline with their retirement investments may find it a godsend.
Therefore, choose the NPS if you’re searching for a retirement plan that offers the annual benefit of tax savings. Furthermore, under the previous tax system, NPS enables you to claim a tax deduction of up to Rs 2 lakh, in contrast to all other alternatives. The other people are limited to just Rs 1.5 lakh.
SCSS:
The Senior Citizens’ Savings Scheme is the default option for a person seeking regular income who is over 60 (SCSS). Its present return of 8.2 percent annually is more than that of any other fixed-income option. Because it delivers regular interest and a sovereign guarantee, it is also the safest choice.
Seniors over 60 are free from paying taxes on interest income up to Rs 50,000 collected during a fiscal year, even though interest income is still taxable. The upper limit of Rs 30 lakh per subscriber is the sole drawback. In the event of a joint, it is Rs 60 lakh.
Conclusion:
To conclude, tax consideration should not be the only criterion for making your investment decisions at the end of the financial year. Investors should ensure that the investment decisions are in line with their financial goals. They should also ensure that there is a right mix of tax-saving investments and Equity-Debt proportion as well.