6 tax-saving mistakes

Jan 22, 2020

Don’t ever ignore the opportunity to (legally) save on taxes just because it is cumbersome. The less tax you pay, the more disposable income in your hands to either spend or invest. But that is no excuse to goof up.

Here are a few errors individuals inadvertently commit when it comes to their tax-saving strategy.

Mistake I: Tax saving is only about investing.

No. It is also about spending.

There is a provision for tax-deductible expenses. Section 80C allows you to claim deductions on investments up to Rs 1.5 lakh of your total income.

Payment of life insurance premium, tuition fees for children, and repayment of the principal of a home loan are the expenses you must look at. I have covered this in detail in Earn the right to invest.

Mistake II: Tax saving is about fixed return instruments.

A number of individuals tend to look at the Senior Citizen Savings Scheme (SCSS), 5-year bank deposits, National Savings Certificate (NSC) and Public Provident Fund (PPF).

But under the tax-saving umbrella, there are also Unit Linked Insurance Plans (ULIP), Equity Linked Savings Schemes (ELSS), and the National Pension Scheme (NPS), all of which provide an equity exposure.

This is why you must always approach tax planning from the perspective of your overall portfolio. Your personal tax strategy will have a different meaning and emphasis depending upon your circumstances and risk capability. For instance, if your portfolio is heavily tilted towards fixed income instruments, it would not be wise to opt for an investment in NSC. Instead, consider an ELSS. This is exactly the situation of a friend who has zero exposure to equity. In his case, if he required any tax-saving avenue, ELSS would be a better option. I wrote about his case in detail in Focus on financial independence, not legacy.

Which brings us to the next point.

Mistake III: Tax saving is a piecemeal approach.

You cannot afford to be complacent when it comes to tax planning. Good tax management can go a long way toward enhancing your return. But the decision needs to be made in conjunction with your overall portfolio and not in an ad-hoc fashion.

Most individuals rarely think about tax planning from an investment point of view. Hence one finds that they do not approach an investment with a perspective of whether or not it fits in with their overall portfolio. The approach is often just grabbing up investments that will give them the tax break, irrespective of whether or not it will help them reach their determined financial goals or fit into an overall investment strategy.

As a result, it is not surprising to see portfolios heavily skewed towards ULIPs or endowment plans. Or probably packed with NSC, in addition to their EPF and PPF.

Tax planning investments are no different from conventional investments. Hence, it is imperative to obtain an in-depth understanding of all investment avenues available which offer tax benefits and choose suitable ones that will help save tax and achieve goals.

When selling an investment, ask: What are the tax consequences?

When buying an investment, ask: What are the portfolio consequences/impact of this current addition?

Mistake IV: Tax saving is about insurance policies.

In a crazy dash to meet their Section 80C requirement, most investors opt for unit linked insurance plans, or ULIPs, and endowment plans, and often end up with products that are duplicated in their portfolio or do not suit their need.

Life insurance should never be bought with the intention of saving tax. Tax saving is just one of the benefits that come along with it. The main benefit is the provision of finances in the case of death of the policy holder.

Mistake V: Tax saving is for everyone.

Yes, and no.

Yes, it would be downright silly to ignore the opportunity to (legally) save on taxes just because it is cumbersome. The less tax you pay, the more disposable income in your hands to either spend or invest.

No, you may not have to run around figuring a tax investment. It could be the case that you have already maxed the amount under Section 80C. In Tax Saving: Earn the right to invest I have dealt with it in detail. In such a situation, you do not have to be concerned about “investing, to save tax”.

Mistake VI: Tax saving is a last-minute exercise.

If you are doing your tax planning now, this is a mistake you have already made.

Do rectify this going ahead.

You should invest in PPF at the very start of the financial year to avail of the benefit of compounding.

If investing in an ELSS, it is wise to do so via a systematic investment plan (SIP) from April onwards. Do remember that SIPs are implemented for a minimum of 6 months or 12 months (though you can terminate it anytime).

You are most prone to making the wrong investment when it is done in a tearing hurry, with the March 31 deadline looming menacingly.

Plan. If you want your money to work towards one goal, which is creating wealth, ensure that you approach it in an orderly fashion.

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