Making Tax-Saving Investments only in March is a bad idea!
Our hundreds of interactions over the past many years have reinforced our belief in one common human tendency. In college days, it was referred to as: ‘The rocket takes off only when the tail is on fire!’ While it can be a joke in some circumstances, it has loss-making consequences when applied to investments and money.
This year, talking about this in November seems strange. Typically, the income tax filing deadline is in July and is then extended to August. This time however, we are yet to reach the deadline for filing of income tax returns for the previous year, and yet the ongoing financial year is going to end in less than 5 months.
Hence, we thought it will be a good idea to list down Three key reasons to plan your tax-saving investments and expenses much in advance – maybe right now. In other words, these are the three points that can save you from financial mistakes and hence, monetary losses.
Let us go step by step.
1. Choosing wrong products
The most common mistake that many people fall prey to is choosing a wrong product when deciding in a hurry. While it is understandable that you could be excited and keen to save over Rs 45,000 in taxes if you are in the 30% tax slab, you might miss out the fact that you are putting Rs 1.5 lakh at stake for that tax saving.
So, if you choose a wrong investment product to save Rs 45,000, then you could be putting the well-being of the entire invested capital of Rs 1.5 Lakhs at stake. For example, many people end up buying expensive investment-cum-insurance policies that demand a high premium payment year after year. By the time investors become aware of this vicious cycle, they have already paid one or more premiums. And stepping out of the cycle at that stage could mean a significant haircut (for you!).
2. Choosing the right product, but without a need!
There are of course many smart people who don’t fall for the trap mentioned above. Unfortunately, some of them end up falling in another trap. Take this: Someone understands very well that investment-cum-insurance plans are a bad idea, hence chooses to use a term insurance plan to fill the Section 80C requirements. But to get all of the 80C benefits, you need to invest Rs 1.5 lakhs, and term insurance premiums are pretty low in comparison.
So while the financial plan of the individual might call for a term insurance of, say, Rs 1 crore, he might end up getting multiple similar policies. This is a mistake because the amount can be better utilised in other places and other financial goals.
This mistake is also common in the form of adding unrelated add-ons to health and life insurance policies. This is not to say that these add-ons or riders are never needed. Some of them are really important, but most of them taken in this manner may not be!
3. Not knowing their taxable income
This is for our young friends. Early on in their career, some of them are unaware about their own finances. It is understandable but needs to be rectified. Along with starting investments at this stage, our young friends also need to learn to read and understand basics about taxation and finance. Apologies, went into lecture mode!
So, what is happening is that we come across youngsters who have made investments up to Rs 1.5 lakhs for 80C benefits, that too in inappropriate products. The kicker is that they did not need to make that much investment at all, because their taxable income is either low, or may not even be taxable at all. It is crucial to understand that the new age salary structures have many components. Your CTC (cost to company) is not your taxable income.
All these mistakes are committed in the rush of the March-end tax-saving spree. Unfortunately, it turns out to be a loss-making proposition for many people. Hence, it is important that you start your tax planning right now when you are neither rushed nor stressed to save tax.
Do remember to save your money, not just your taxes!!