A Wiseman once said - "Haste Makes Waste"
Its that time of the year when people go helter-skelter to save taxes. Most of the time because of poor planning, people end up "buying" products that hardly help them save taxes or avoid helping them build savings corpus. In this blog, we thought we would bring to fore some grave mistakes that People do in the name of "Saving Taxes"
Horror#1 - Buying Traditional Insurance Policies
In our small life as Financial Planners we have not come across a person in 30% tax bracket who has bought a LIC policy to save tax. That is because they already bought a 15 year policy when they were in 20% tax bracket. Now google "Charges paid on Insurance", you will understand that there are multiple charges that sum up to almost 20% of Premium amount like Document charges, Morbidity Charges, GST, Etc., To save 20% Income tax, People end up paying 20% in other form. So where did you save tax? So buyers of Insurance policy, All that you achieved was paying "Charges" instead of "Taxes". You did not save any money at all.
Horror#2 - Making a Lumpsum Stock Market Investment.
We mean buying a ELSS fund at one shot. It is okay to make such investment only under the guidance of a good advisor. Otherwise, it is observed that most of the times people make such investment when the market has performed significantly well in the recent past, meaning that the markets are over valued and not ripe for lump sum investments. Since the lock in period is only 3 Years for ELSS funds, People tend to look at the returns at the end of 3rd year and redeem the money since the returns are below average (sometimes even lesser that Bank FDs). This is because the stock markets either cool off or consolidate after strong a bull market and need to be given a bit longer time to either give average or above average returns.
Horror#3 - Locking up your Money in PPF or NPS.
Then there is this lot of People who believe that Insurance companies "dupe" & assume that Stock market is akin to "Gambling". They piously put all of their money in Public Provident Fund or NPS. They fail to understand two things -
- One is that their money is locked away for painfully long years (15) and
- Two is that some of their money is already in PF via the Salary deduction and Employee contribution.
Our advice to such people is, it is very important to have appropriate asset allocation and more importantly the PPF/NPS returns are mostly closer to Inflation rates which means your money hardly grows. Then there is issue of money getting locked meaning in an unforeseen situation, When need money to handle a big expense, we either have to sell an asset or get a loan at higher rate while our own money is kept away from us. We strongly recommend that one should not put all their money in NPS or PPF neither to save tax nor for investment.
Horror#4 - Under Estimating the Health Cover.
One of the weird things that we have noted is that people are obsessed with Sec 80C and the 1.5 lacs exemption that this section provides. It is like people almost forget that there are exemptions under other Sections as well which are very useful. We have a feeling that people have an psyche that only if they use the 1.5 lac under 80C, will they be let to use exemptions under other sections. We have to overcome this notion. One of the golden exemption sections we have is Sec. 80D which gives up to one lakh (50K + 50K) Tax exemption on Health Cover purchased for Self/Spouse + Parents. We believe that it is the 1st Exemption that people should make use of when they Plan to Axe the Tax. More on that in our next blog.
Legendary Investor Charlie Munger once said -
All I want to know is where I'm going to die, so I'll never go there.
We believe we have told our readers where they will financially die, we hope that our readers will not commit any of the above horrors in the name of saving tax or investing. We still have almost 3 months to go before the tax on our Income is sealed. It is quite enough time to avoid making haste in tax saving process and also avoid making waste of our hard earned money.
For financial planning and investment-related queries, write to us at dropletadvisory@gmail.com or call us at 9962399924 / 9551373455.
www.dropletwealth.com
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