Utilise extended deadline to make the right tax-saving investment choices

With the coronavirus epidemic crippling the entire country, many taxpayers who had procrastinated and given up on tax-saving investing in the final days of the fiscal year were stuck. Fortunately for them, the government has extended the deadline until June 30, 2020 for citizens to make their tax investments for the 2019-2020 fiscal year.

This relief will be especially important for those who are not savvy enough to make their investments online. Now that tax savers have a second chance, they must exercise due diligence and make their tax savings investments very carefully. In this article, we will discuss some of the common mistakes that investors tend to make when making tax-saving investments.

Avoid acting hastily: Now that you have three more months, do not leave the task of making tax investments again for the last days of June. Most people who make the wrong investments are the ones who invest at the last minute and therefore buy the first product they launch. In their haste, they don’t bother to understand the product.

Do not rely exclusively on the arguments of the sellers. These people can only highlight the positive aspects of a product, but cannot inform you about the associated risks. If you want to avoid being sold poorly, read the product you’re selling in depth or seek advice from a financial advisor.

Don’t give in to pressure from relatives and friends: Many of us bought a suboptimal product simply because we couldn’t say no to a distant friend or relative. You should avoid this error as it can take a heavy toll on your financial life.

Insurance plans, in particular, are very long-term commitments. Once purchased, you cannot leave them without suffering a financial blow. Therefore, invest only in products that meet your financial needs. Learn to say no to poor quality products.

Stay away from traditional life insurance plans: You must get away from them for the simple reason that by trying to combine both insurance and investment, they do not achieve these two objectives well. The insurance coverage you get in these plans is probably insufficient. And since they mainly invest in bonds, the returns you get are also likely to be low. Over a period of 25 to 30 years, large premiums channeled into such a product that barely gives a return of 4 to 5% can make the difference between a comfortable retirement and a retirement with an inadequate corpus.

Individual investors often find it difficult to determine whether the product sold is a traditional insurance plan. Here is the basic rule that you should follow. Avoid if the insurance plan also offers investment benefits. Likewise, if the name of the insurance product is accompanied by keywords such as insured, guaranteed, suraksha, endowment, savings, reimbursement, etc., you are most likely sold a traditional life insurance plan.

If you have to take out life insurance, choose a term plan. It’s the cheapest way to buy life insurance. For a small premium, you can buy a large blanket that will ensure the well-being of your family in your absence.

Unit-linked insurance plans can also be avoided: while not as bad as traditional life insurance plans, unit-linked insurance plans (Ulips) can also be avoided. In a term insurance plan, the premium remains constant for the duration of the plan. In an Ulip, the cost of mortality (the amount that is deducted from the premium to pay for life insurance coverage) increases with age. Some Ulips can have very expensive structures. These products are not in the interest of the investor. It is therefore preferable to separate insurance and investment. Use a forward plan for your life coverage needs and mutual funds to meet your investment needs. And if you buy an Ulip, be sure to go with one that has a structure at very low cost.

The entire premium is not eligible for the deduction: The entire life insurance premium is not eligible for a deduction under section 80C. The annual premium gives entitlement to a tax deduction only up to 10% of the sum insured. Keep this in mind if you buy traditional plans or Ulips, especially single premium products. More importantly, in cases where the sum insured is more than 10 times the annual or single premium, the product of the maturity will be taxable.

Watch out when you visit a bank branch: Visiting a bank branch can be a risky proposition, especially during tax season. You may have gone there to invest in a tax-efficient fixed deposit or PPF. Instead, bank staff could push you into an Ulip or a traditional plan. The branch has revenue targets that fixed deposits and PPF investments do not really achieve. Traditional plans, Ulips and other fancy products do it.

Take into account all tax savings contributions: We all make many involuntary investments under Section 80C. For example, your contribution to the Employee Provident Fund (EPF) is eligible for a deduction under section 80C. Similarly, the repayment of the principal of the housing loan and the tuition fees paid for two children are also eligible for a tax benefit under this section.

When you take these elements into account, you can see that you only have a small amount left to reach the limit of section 80C of Rs 1.5 lakh. When an investor is aware of this, the pressure on him to make investments under Section 80C decreases and he becomes less sensitive to abusive sales.

Other tax saving options also exist: Most taxpayers focus only on Section 80C benefits. But there are also tax benefits in other sections. For example, you may be able to claim a deduction under Section 80D for health insurance premium costs and health checkups. However, one point to keep in mind is that the amount of health insurance you buy should be based on the needs of your family. It should not be limited to the amount of the premium on which you will receive a tax benefit.

You get a deduction of up to Rs 2 lakh for the payment of interest on the home loan under section 24. Another deduction is available under section 80E on the payment of interest on the home loan studies. Therefore, do not attach only section 80C.

Be aware of the rules: Taxpayers are often unaware of some of the nuances of the rules that govern tax-saving investments. For example, a buyer is only entitled to a tax benefit on the repayment of the principal and interest on a mortgage only after taking possession of the house or once its construction is complete. If you apply for a tax benefit before possession, you may be subject to scrutiny by the Income Tax Department.

Similarly, if you invest more than Rs 1.5 lakh in a PPF account, the excess amount earns no interest. Note that this limit of Rs 1.5 lakh is cumulative for your PPF account and also for PPF accounts in which you are the tutor.

Finally, make sure your tax-efficient investments help you reach your financial goals. You don’t have to be a finance expert to avoid the pitfalls and pitfalls mentioned above. Be curious, ask the right questions and exercise a little discipline.


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