Tax Planning - Some common mistakes to avoid

Ensure your tax-saving investments are effective and part of your overall financial plans

   With only a few weeks left, many taxpayers will be flocking to make last minute investments to save tax. Often, decisions taken in haste tend to go wrong. The possibility of ending up with unsuitable products that do not yield good returns is high when you make hasty investments.

   Here are some tips to help you avoid bad investments:

Go by risk appetite    

Base your investments on your risk appetite, asset allocation and financial commitments. Randomly investing in instruments under Section 80C merely to save on tax is not wise.

Consider your financial needs    

In the last-minute rush, many investors over-look their financial needs. Investments must be in sync with both long-term and short-term financial commitments. If you want to build a retirement corpus, you can invest in pension plans or the National Pension Scheme. If your portfolio lacks equity exposure, equity-linked saving schemes (ELSS) could fill the void.

   For long-term financial needs, Public Provident Fund (PPF) is ideal to lock away your surplus.

SIP good for small sums    

Investing a lump sum in ELSS is not a shrewd strategy for small investors struggling to time the markets. Systematic investment plans (SIPs) allow you to invest regularly at period intervals, thus eliminating the need to time the markets. Equity exposure should be staggered over a wide timeframe rather than making a bulk purchase of mutual fund units.

Due diligence must    

Do your own research and understand the product before locking your hardearned money in it. Exert due diligence when investing in products with long time horizons. Premature withdrawal or closure could attract hefty penalties that could lower your overall returns significantly.

Insurance should suit your needs    

In a hurry to meet the tax deadline, many end up with insurance products that are simply not meant for them. Insurance products come in a variety of flavours from pure risk to money-back policies. You must choose a policy based on your unique needs, dependents, and other debt obligations and commitments. Both being under-insured and over insured are undesirable and a waste of money.

Make tax-saving part of plan    

Make tax-saving a part of your overall financial planning. Do not treat tax planning as a separate last minute activity. Every investment decision must work towards reaching your bigger financial goal.

   Be aware of modifications made to laws pertaining to tax. During every budget session, the ministry adds or withdraws some benefits. If you are unsure you can hire the services of a professional for major tax planning decisions.

   Do not limit yourself to Section 80C tax-saving instruments alone. Explore other investment options as well that could be better suited to your needs though they might not have the tax saving edge.

   Tax-saving investments without proper strategy can lead to over-diversification or insufficient diversification of your portfolio.