Do NOT make this tax-saving mistake

By Larissa Fernand |  18-01-21 | 
 

Don’t ever ignore the opportunity to (legally) save on taxes just because it is a bit of a bother. The less tax you pay, the more disposable income in your hands to either spend or invest. And that should be motivation enough to get rid of your nonchalant attitude towards tax planning.

Folks hobble from one tax season to another. With no cohesive thought process, the ad-hoc decisions made at the end of the financial year defeat the very purpose of a smart portfolio. As long as individuals view tax planning as an annual occurrence at the start of the calendar year, their portfolio will bear testimony to their missteps.

In a crazy dash to meet their Section 80C requirement, they end up settling for unit linked insurance plans (ULIPs), and endowment plans. They often end up with products that are duplicated in their portfolio or do not suit their need. A portfolio bloated with insurance policies does not ensure that you are aptly covered, neither does it put you rightly on the path to wealth creation.

This is the single biggest mistake investors make; they view tax planning as separate from their overall financial planning.

If you want your money to work towards creating wealth, ensure that your tax planning decisions are never conducted in isolation. Every single decision must be made keeping in mind the overall financial plan.

Every investment must complement the other, not compete with it. To draw an analogy, the 64 black-and-white squares on a chessboard complement each other and give structure to the layout. Each occupies a different position and serves a purpose. A chess board must have both.

Depending on a host of factors, you will have to arrive at your own equity and debt allocation. You then work within that framework.

If your portfolio is heavily tilted towards fixed income instruments, it would not be wise to opt for an investment in National Savings Certificate (NSC). Instead, think of an equity linked savings scheme (ELSS). On the other hand, if you are only invested in equity funds and stocks, then you should focus on fixed return investments that offer a tax break.

A colleague used to shun any fixed return investment because, with retirement at least three decades away, he preferred staying in stocks and equity mutual funds. So he naturally exhausted his Section 80C with ELSS. But when emergencies crop up, he sells either his stocks or fund units. So he decided to opt for a Public Provident Fund (PPF) account which has a long lock-in period that can be a forced retirement savings.

Personally, I max the entire amount (Rs 1,50,000) in PPF every single year. I have an equity heavy portfolio and continue with monthly investments in equity funds. But I am also slightly risk averse and a long-term fixed-return investment with assured safety fits nicely in my portfolio.

Within the respective asset allocation, you will have to fine tune. For instance, if the equity portion of your portfolio is heavily skewed towards large-cap stocks and funds, then ensure that the ELSS you opt for has a tilt towards mid-cap stocks.

Also, the time frame of your goals matter. If you are looking at tucking away money for over a decade, then definitely the Public Provident Fund, or PPF, would score. If you need the money in a few years, then the NSC would be a more suitable option.

Most importantly, 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.

Taxes are inevitable. No one likes paying taxes.

I like to believe these are near-universal truths. Having said that, there are always legal ways to mitigate its impact. But make sure it’s not some harebrained plan that will work against you. Don’t stash away money in financial products just to save tax; ensure that it serves your other investment goals. The goal of tax saving is not an end in itself, it must also aid your wealth creation.

When you approach tax saving with a holistic mindset, you are in a win-win situation. Because you can make sensible decisions only if you take an integrated view of your investments and goals. If you focus only on tax saving to the detriment of returns and product suitability, the price you end up paying could be really high. Unfortunately, you may realise it only much later, when it is probably too late.

Investment Involves Risk of Loss.
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