Tax Planning: Common mistakes to avoid
Tax planning is one of the integral parts of your overall financial planning process. One should start doing it when he/she starts working. Moreover, it needs to be done even after retirement. This means that tax planning is something that you need to do throughout your life. It is observed that, people often look at tax planning just for the sake of saving tax. Although, tax saving forms the major part of tax planning but you need to look at it more objectively. We have listed below some of the common mistakes that one should avoid while planning tax:
Start planning at the eleventh hour
This is the general tendency of people that they run for things at the eleventh hour. This is the reason that January to March is considered to be tax saving month. Even this is the favourite season for most of the insurance agents, as they make more commission in these three months. No doubt that they will sell their products at that time as it is absolutely a no-brainer since that would fetch them the highest commission. So, it is better to start planning at the start of financial year itself. This will not only help you in saving taxes but also save your last-minute run. Not to forget, it will also help you to select the appropriate tax saving product, which would suit your personal financial objectives.
Not linking tax saving instruments to financial goals
This is the general practice where people invest in products just to save tax. That’s it! They don’t even care to understand its suitability and linking them to their financial goals is out of question. This often leads to wealth creation of product selling agents. Therefore, it is important to link your tax saving instruments to your financial goals. Let’s suppose that you have all the financial goals that are medium-term then, investing in Unit-Linked Insurance Plan (ULIP) and Equity-Linked Saving Scheme (ELSS) is not going to help as they are market-linked and requires long-term investment horizon even if their lock-in period is not long-term enough. In such cases investing in tax saving bank Fixed Deposits (FD) makes more sense or you may even have a combination of both, tax saving bank FDs and ELSS.
Mixing tax planning with insurance
This is one of the common mistakes that most people do. They just go on to buy ULIPs and the reason behind - is tax saving and the safety of capital. However, it is crucial on the part of investors to understand that though ULIPs come with tax benefit, just because they are provided with insurance company does not make them risk free. So, it is prudent not to mix insurance with tax planning. Tax planning is not just tax saving. In fact, it concentrates on tax saving along with objective of achieving your financial goals.