You open your to-do list for the day and that’s… the item you’ve overlooked for weeks… it says “complete your tax planning.” And today is the last day to submit investment proof….If you can relate to it, know that this laziness towards tax planning can lead you to costly mistakes. Mistakes that cost money in the long run – inefficient investments, tax penalties, etc. So today we understand some of the top tax planning mistakes and how you can protect yourself…
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Mistake #1: Not Educating Yourself About Taxation:
“The most important investment you can make is in yourself.” – Warren Buffett
No, we don’t ask you to study for hours and become a tax expert… What we insist on is, learn so that you have a basic understanding so that you can help yourself. Think of it as an “investment”. Listen to us….it will pay you back many times In the long run…
For starters, take some time out every weekend and start reading tax articles…. Slowly in 2-3 months, you will be able to see the difference…. You will be more confident about your tax choices….
And can impress others in your office with your tax knowledge too… Now that’s not a bad deal, is it?
Mistake #2: Waiting the last minute to do tax planning:
Are you like Kareena in the movie “Jab We Met” who loves boarding a moving train? While there is a distinctly adventurous element that drives people to do so…. But if you find yourself repeating this in your tax planning, it can be risky.
Risky because on the last day of tax planning, you’ll turn to your next cubicle aide for tax advice… risky because you’ll blindly follow him and make investment mistakes you’ll pay for, not him!
After a few years, you’ll be saddled with bad investments for which you won’t have anyone else to blame but you yourself…
So, be smart and proactive and make your plan on time.
Mistake #3: Not being clear about your financial goals:
Nowadays, there are a lot of options for Tax Saving Investments… If you are not clear about your requirements, it is like a maze which can confuse you.
Don’t do tax planning to save tax… This will also help you plan your financial goals and grow your wealth… For example, for need of money to buy a house in the next 8 years, you cannot invest in PPF. can. With a lock-in of 15 years… or for retirement which is 30 years away, investing in tax saving bank FDs with low returns is a bad option
So, follow this three-point approach:
- Learn and educate yourself on personal finance
- List financial goals
- Invest with a financial goal in mind
Mistake #4: Investing without getting proper clarity on product features
Apart from financial goals, you also need to evaluate any tax saving investment on the following parameters:
It simply means, when you need money for your financial goal, will you be able to withdraw it? Is there any lock-in period? Are there any penal charges for premature withdrawal?
Some investments are inherently volatile, for example, equities, but may offer higher returns over the long term to beat inflation. However, you need to ask yourself – am I comfortable with tolerating some volatility? How much equity can I invest and sleep peacefully at night?
- Tax Qualification:
People check tax benefits only at the time of investment. But you should also check things like taxation of income and maturity proceeds, and taxability of early withdrawals. This will give a holistic perspective on the overall tax efficiency of your investments.
Mistake #5: Sticking to Old and Inefficient Tax-Saving Methods
When it comes to tax planning, many people are inadvertently attached to the legacy of their parents and grandparents… As a result, over the years, their investment portfolio tends to lean towards low-return investments, for example , LIC Policies, NSC & PPF….
The financial landscape we live in is very different than that of our parents… Job security no longer exists, joint families look to the past, and inflation runs in double digits for child’s education !!
In this context, these so-called “safe” avenues are actually riskier, as they do not beat inflation… you also lose out on newer and tax-saving avenues such as equity mutual funds and NPS. So, get out of the old world mindset, research deeply and then invest!