As FY2021-2022 comes to an end in a few days, you might be aggressively looking for ways to invest money to make full use of the tax deduction benefits available. However, tax-saving should ideally be a year-long process that is designed to meet your financial goals, and not a last-minute exercise. When you take such decisions in a hurry, you might end up making mistakes.
Here are five common mistakes to avoid when making last-minute tax-saving investments.
Choosing The Wrong Product
Making tax-saving investments in a last-minute rush could mean choosing products that do not suit your financial goals. “For example, if you are a risk-averse investor, choosing to invest in PPF (Public Provident Fund) and tax-saver fixed deposits (FDs) is more appropriate. But, if you fall under the 30 per cent tax bracket, then investing in tax-saving FDs may not fetch you good post-tax returns. So, it is advisable to calculate your tax liability at the beginning of the financial year and then plan your tax-saving investments accordingly. Also, investing regularly will help reduce the financial burden of investment in the last quarter,” says Archit Gupta, founder and CEO, ClearTax, a tax portal.
Buying Investment Plans In Family Member’s Name
Taxpayers should note that some deductions can be claimed even if the investment was made in a family member’s name while others need to be in the taxpayer’s name. “For instance, life insurance policy premium paid for self, spouse or children will be allowed under Section 80C; medical insurance for self, spouse, children and dependent parents can also be claimed. However, deduction under ELSS (equity-linked savings scheme) has to be under the taxpayer's name only and not in the name of any family member. One must understand this provision to avoid making mistakes,” says Gupta.
Clubbing Insurance And Investment
Keep your insurance and tax-saving investments separate. Traditional life insurance products, which combine insurance and debt investment, generate poor returns; often, lower than what PPF and other small savings schemes give. They also have long tenures, low liquidity and premature closure penalties. Buying such policies at the last moment will mean that you are saddled with inefficient products.
Borrowing Money For Investing
Borrowing money to invest in a tax-saving product at the last minute creates debt unnecessarily. Try to strike a balance between tax-saving and liquidity needs. You may borrow to invest in a tax-saving scheme only when you have a short-term liquidity crunch, like your salary has got delayed by a few days or if a payment that was supposed to get credited into your account is taking longer to arrive.
Avoid using your credit card or availing a personal loan to invest in tax-saving schemes. If at all there is an urgent need, borrow from friends or relatives for a short duration. You may also use overdraft facility against FDs or any other eligible investment. If any of your investments have matured, you can use that fund to invest in a tax-saving scheme. You should ideally aim to use your savings first for any such need, rather than using any other resources.
Not Diversifying Your Tax-Saving Investments
When you diversify your investments, you reduce risk to a great extent, irrespective of whether it’s a tax-saving or a regular investment. When you rush in at the last minute, you often put your entire funds into a single asset class. While investing in a tax-saving instrument, you should ideally spread your funds across different asset classes and different schemes within the same asset class.