As this is peak time for all salaried class to look for Tax Saving Instruments, I thought to share how you can avoid doing the same mistakes repeatedly.
1) Insurance (Life and Health)– When I ask few salaried people about how they are planning about their tax saving then the first answer they say with big smile is, they have enough Insurance Payment to save tax under 80C (remember not enough cover). They share with proud that they purchased insurance plan either from friends or relatives who are agent of some particular company. Neither you nor your agents worked out how much Insurance cover you required or your “Human Life Value”. Again, you both not bothered about the future value of the returns you are going to get when your invested Policy matures. You may say with proud that you have cover of around Rs.10,00,000 for that you are paying around Rs.75,000 (approx) then what will be the Rs.20,00,000 (Approx Maturity Proceeds) value after 15 yr or 20 yrs of your policy maturity? It may be your 4-5 yrs yearly household expenses. Then what is use of purchasing such a plan, which will not make you to sustain and not fulfil your financial goal?
Hence before purchasing Life Insurance always work out how much Life cover you need and what is the maturity value, not in today’s term but in future term. Also look whether the maturity amount matches your any financial goal or not.
Health Insurance is usually takes care by Employer, but only few people know how much cover they have and who are all covered in that Insurance. In some cases people try to buy through employer to seek cover for their spouse or parents (if are not covered by employer health insurance). However, in such cases employer choose the company not the employee. Employer will deduct from salary for this and employees get relieved.
Have you ever thought which insurance company your employer selected for covering your spouse or parents? How the plan features are and is any other company providing better plan with competitive price in market? To my knowledge, answer is always NO.
Hence please try to get knowledge about the health insurance provided by employer like how much SA covered, who are all covered and what are the plan features. If you are taking new insurance to cover uncovered member of your family member then analyze the plan feature. If it not suites to your need then buy it in market by doing good homework.
2) Mutual Funds: Always people tend to invest lump sum at year-end in Equity Linked Saving Schemes of mutual fund to save tax. However, it is risky to enter equity market with lump sum investments and with waiting period less than or equal to 3 years. Hence, start at the beginning of financial year through SIP route, which will reduce your risk of loss. Therefore, opting for SIP and waiting for more than 5 years may fetch you good returns. It is best if your investment matches your financial goals instead only tax saving. Give time to your equity investment and enjoy the benefit in long run.
3) PPF-This is the good product for long-term and must be goal specific about maturity amount. But use this product just to diversify your investments. Hence, never invest your entire investable amount into PPF. Invest within fifth of each month instead of investing at year-end. If you invest at year-end then you will not get interest on the money invested for that year. However, if you invest monthly then each month’s contribution will accumulate some interest.
4) NSCs and Fixed Deposits-Again these are low yielding products. Hence, always keep in mind that how these are going to help you in diversifying your investments and how the maturity amounts will be utilized to achieve your financial goals.
5) Housing Loan-Taking home loan for your dream home and with intention of tax saving is good. In the same way, it is also important to cover your loan amount with equal amount of term insurance. Suppose something happens to you then your dependents may not be in a financial crunch to repay the loan. Hence suppose if you have taken housing loan of around Rs.50,00,000 then you have to take Life Cover of Rs.50,00,000 and tenure should be equal to home loan period. Nowadays banks started to offer such type of cover while giving loans. The best feature of this is, your Life Cover will also reduce yearly with the decreasing of Loan Amount you owe.
6) Infrastructure Bonds-This is the new avenue of investments started few years back. It is nice to invest in these Bonds if your overall investments under sections 80C, 80CCC and 80CCD are exhausted. Means including all three sections you crossed Rs.1,00,000 permissible limit. You can claim deduction under Section 80CCF by investing in Infrastructure Bonds. However, remember that Bonds are not always risk free investments they tend to fluctuate with interest rate of market or sometime default risk.
These are the few basic mistakes, which I noticed people tend to make in a year-end hurry to save tax. Hence plan your Tax Saving Options in such a way that it has to achieve both tax saving and your financial goals. If your only aim is to save tax then you will end up in a situation where you will not get cash flow for your desired goals.