It's said, if you fail to plan, it means you plan to fail. So, it's better to plan before you make your tax-saving investments, so that you may reach your financial goal comfortably.
Tax-saving investments are attractive because the investors get instant extra return in the form of taxes saved in the same financial year. So, for an individual at the top tax bracket, getting extra 30 per cent return through tax savings in the year of investment itself is a huge gain. Even earning 20 per cent or 10 per cent extra by saving taxes may serve as big motivators for saving for the future.
However, one should invest for the sake of investment, not just for saving taxes by realising the aim, benefit and goal of saving money. People generally make following mistakes by making last-minute investments to save taxes, which may hurt your finances in the future.
1. Investing without planning: The financial goals and preferences differ from person to person and hence the nature and quantum of investments should be decided accordingly. The government provides tax benefits on certain long-term investments to encourage people to save and investment, but you should know what are your financial goals and choose the tax-saving products accordingly. The current 80C tax benefit limit of Rs 1,50,000 may be too big for some individual, while it may prove too small for some others, depending on differences in their level of income and standard of living. So, making investments only up to the tax-saving limit without planning may lead you to a situation, when you may have to make compromises by lowering your standard of living due to improper corpus you generate.
2. Waiting for the end of financial year to invest: You should not wait for making tax-saving investments till the year end because investing your hard earned money in hurry will increase the probability of making financial mistakes, which would ruin your future financially. So, chalk out your financial plans early and try to invest at the beginning of the financial year to get whole year’s return along with saving taxes.
3. Choosing a wrong tax-saving product: If you fail to plan your investments on time and continue to wait till the financial year end, you would investment in a product unsuitable for you, and as a result, you may end up too short of your financial targets, creating a hardship in your life after retirement. Moreover, there are some tax-saving products, which give tax deductions only u/s 80C, but no tax benefits on maturity. If you choose such products in hurry, the tax liability will only get deferred and you may even end up paying more tax on maturity than what you saved while investing.
4. Channelising contingency fund into tax-saving investments: Tax-saving investments are long-term investments, in which you money gets locked for certain period. If you invest money out of your liquid reserve to avail tax benefits, you will not be able to avail the money in case of any contingency. As a result, at the time of such a financial emergency, you may have to take loans to meet the cash requirements, which would put your finances under further stress.
5. Taking undue risks: Without proper planning, you may end up taking a risky tax-saving product in hurry in contrary to your risk appetite. In such case you may redeem your investments prematurely out of fear in case of market turmoils, losing substantial part of the capital invested. So, before investing, you should study the products and choose a product that would meet your financial goals without taking unduly high risks.
6. Investing in one go: If you invest in lump sum at the end of financial year, you would not only lose the opportunity to earn full year’s return, but in case of a risky product, you will take more risk than that of periodic investments. Especially in case of market-linked products, it is always better to do SIP than making lump sum investments as the investor would get the advantage of rupee-cost averaging in case of SIP, lowering the risks.
7. Investing in only one tax-saving product: The features of tax-saving products differ from product to product. You should diversify your investments in tax-saving products according to your need. Investing entire savings in one product without any planning may sink your finances. For example, investing only on a life insurance product may hinder your quest to amass a good corpus. On the other hand, investing only in a market-linked product would leave your family without any risk cover.
It’s said, if you fail to plan, it means you plan to fail. So, it’s better to plan before you make your tax-saving investments, so that you may reach your financial goal comfortably.