BackAvoid these mistakes, plan your investments
Investments should be made in a planned and systematic manner to make the most of themPPF is a good tax-saving investment per se, but if someone wants liquidity, it would not be the right option for them
PremiumNew Delhi: Sumedha Roy, 28, takes great pride in the fact that she has been financially independent since she was 21. The software engineer gave private tuitions and took up freelance projects even when she was in college so that she wouldn’t have to rely on her parents for money. But Roy’s “financial independence" is incomplete. Although she brings home the money, Roy neglects to save it efficiently. Most of her investments are in tax-saving instruments, something that she has entrusted her father to do.
“Since I started my job, my father has been managing all my savings, since I’m not very savvy about investing. He primarily invests my money for the purpose of saving taxes," Roy said, adding that he also helps file her taxes. Like many Gen Xers, Roy’s father firmly believes in safe investments and this had led him to put a large chunk of her savings in fixed deposits. The remainder was in a unit-linked insurance plan (Ulip) that was hard sold to her guaranteed return-loving father. Roy was disappointed when she realized that the fixed deposits were earning her meagre returns and Ulip didn’t give her enough insurance.
Roy is not alone. Many millenials think of tax saving as yet another complicated financial responsibility that they would rather avoid. But letting someone else decide on investments for them is one of the mistakes they make. Here are a few other mistakes to avoid.
Pause. Don’t rush
Investments should be made in a planned and systematic manner to make the most of them. This usually happens when you are saving for a larger financial goal. But when you make your goal tax saving, investments decisions tend to be rushed. “People tend to keep it all for the last moment, at which point all they want is to have a receipt to submit to their employer for tax saving," said Suresh Sadagopan, founder of Ladder7 Financial Advisories.
Investing a lump sum all at once can throw your budget off balance. It would also deprive you of the safety that staggering your investments through a systematic investment plan would provide. “Investing at the last minute means not being able to focus on product attribute, whether it ties in with the big picture, lock-in, return range or asset class," said Amol Joshi, founder of PlanRupee Investment Services.“Investors need to consider if these factors are in line with their requirement and expectations before investing."
Don’t follow the herd
Financial instruments are not one-size-fits-all products. Investing in something just because it works well for someone else can be disastrous. According to Joshi, this behaviour is common. “A major mistake many people make is investing based on tips or recommendations without analysing their own needs," he said. In Roy’s case, for instance, the mistake was to entrust her father with her investments because she was left staring at a debt-heavy portfolio, when, at her age, she could benefit from a more aggressive portfolio.
“People tend to ask friends and acquaintances what they have done for tax saving and blindly follow their advice. That is not a proper considered decision, since what may have been suitable in another person’s situation might not be in theirs," Sadagopan said. “For instance, PPF (Public Provident Fund) is a good tax-saving investment per se, but if someone wants liquidity, it would not be the right option for them."
To make the right choices, you need to carefully consider what your financial goals are. “Tax saving itself cannot be an objective. By all means save tax, but along with that your core investment objective must be fulfilled. If you can find an instrument that aligns with your financial goal and also save tax, you should go for it," said Sadagopan.
Know what to claim
It is important to take all the deductions you are eligible for into consideration before deciding how much more you need to invest to save tax. People often become too focused on investing to save tax, while ignoring the fact that certain expenses are also eligible for tax deduction.
“Make sure whatever compulsory investment you are making is factored in. For instance, the employee contribution to EPF (Employees’ Provident Fund), which gets deducted from your salary every month, is eligible for deduction under Section 80C," said Kuldip Kumar, partner and leader-personal tax, PwC.
“Donations to charitable institutions is something people can claim deduction on under Section 80G, but they have to preserve the receipt and details in order to do so. Often, people fail to claim this deduction. They also miss out on expenses like children’s tuition fees and the repayment of principal on a housing loan," said Kumar. To avoid missing out on exemptions, take stock of all your eligible expenses and existing investments. Don’t forget the leave travel allowance exemption, which you can claim for two journeys in a block of four years.
Don’t forget deadlines
No matter what you invest in, failing to submit investment proofs on time can mean paying higher tax deducted at source (TDS). The deadline set by employers to submit proof is usually between mid-January and the end of March.
While you can claim these deductions even after the deadline, your employer will deduct TDS if you fail to submit the relevant investment or expense proof on time. If TDS gets deducted, you can get a refund by disclosing the investments, expenses and other deductions while filing your return by 31 July, the last date for filing tax returns.
If you missed the deadline for filing your tax returns for 2017-18, the you can file a belated income tax return (ITR) by paying a fine before 31 March. You can also revise your ITR for the last fiscal by the same date.
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