Most Common Tax Saving Mistakes

Most Common Tax Saving Mistakes

Mistakes you might make in the race to save tax

1)      Buying an unnecessary insurance policy/product

People have completely irrelevant insurance policies as part of their portfolio in order to save tax, largely coaxed into buying by family members, relatives or friends. You must understand if the investment is actually of use to you in the long term and not just to buy insurance to save tax. Otherwise, you aren’t purchasing something useful; you’d just be spending money aimlessly.

2)      Waiting till the end – you can do a tax-saving MF SIP

You don’t have to wait until the last moment to save tax, use instruments such as ELSS mutual funds and start investing smaller amounts from the beginning of the financial year. This way you won’t face a big investment which would pinch you towards the end of the year. Even for FDs and PPFs, it’s better to set up your recurring debits at the beginning of the financial year. This way you save a lot of needless running around come January when you need to submit your tax proof to your company.

3)      Not understanding lock-in periods and their relationship with Inflation

Many investors often fixate on stability and safety, after convenience. With most options having a lock-in period of at least 5- 15 years in case of PPF, you are underestimating the impact of inflation and what your money will amount to at the end of the tenure. You need to ask yourself if you are making the most of your hard-earned money.

With tax saving mutual funds, you are most likely to stay well ahead of inflation, even if inflation goes up. Your tax-saving money can be a significant part of your long term wealth corpus if you invest wisely. A lakh a year invested is no laughing matter when you look at the growth rates the equity market is capable of generating.

4)      Not checking which of your compulsory investments are already being considered under Sec. 80 C

Those that are in a higher salary bracket often don’t realize that they are already fulfilling their 80C investment commitments via their EPF contribution. Do a double check before investing to check if your EPF contribution is on the higher side.

You might not need to make investments or if so then you might need to invest lesser than you might think.

So this tax season, first think about wealth creation and make wiser decisions that will not just help you save tax but also contribute to your overall corpus allowing both financial security and freedom.

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