Top 5 Mistakes You Must Avoid In Your Tax Planning

You open your to-do list for the day & there it is…the item you’ve ignored for weeks… It says “Complete Your Tax Planning.” And today’s the last day to submit the investment proofs….If you can relate to this, know that this laziness towards tax planning can lead you to costly mistakes. Mistakes that cost money in the long run – in inefficient investments, tax penalties, etc. So today let us understand some top tax planning mistakes & how you can save yourself…

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Mistake # 1: Not educating yourself on taxation:
“The most important investment you can make is in yourself.” – Warren Buffet

No, we don’t ask you to study for hours & 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.” Take our word….It will pay you back many times in the long run…

For a start, take some time every weekend & start reading tax articles….Slowly over 2-3 months, you’ll be able to see the difference….You’ll be more confident of your tax choices….

And may also impress others with your tax knowledge in your office…Now that isn’t a bad deal, right?

Mistake # 2: Waiting for the last minute to do the tax planning:
Are you like Kareena in the movie “Jab We Met” who loves boarding the moving train? While there is a specific adventure element that makes people do so…. But if you find yourself replicating that in your tax planning, it can be risky.

Risky because on the last day of tax planning, you will invariably turn to your next cubicle colleague for tax advice …Risky because you will end up blindly following him & make investment mistakes that YOU WILL PAY, NOT HIM!

Down the line some years, you will end up saddled with poor investments for which you’ll have no one to blame but yourself…
So, be smart and proactive & do your planning in time.

Mistake # 3: Not being clear on your own financial goals:
Nowadays, there are options galore when it comes to tax-saving investments…If you are not clear about YOUR NEEDS, it’s like a maze that can confuse the hell out of you.

Don’t do tax planning for tax saving sake…It should help you also to plan your financial goals & grow your wealth… For example, for a money requirement for buying a home in the next 8 years, you CANNOT invest in PPF with a 15-year lock-in… Or for a retirement that is 30 years away, investing in a low return tax-saving Bank FD is a poor choice

So, follow this three-point approach:

  • learn and educate yourself on personal finance
  • make a list of financial goals
  • invest keeping in mind the financial goal

Mistake # 4: Investing without gaining proper clarity on product features

Apart from financial goals, you also need to evaluate any tax saving investment on the following parameters:

  • Liquidity:
    This simply means, when you need the 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 withdrawals?
  • Risk:
    Some investments are inherently volatile, for example, equity, but can offer greater returns in the long term to beat inflation. However, you need to ask yourself – Am I comfortable in tolerating some volatility? How much equity can I invest & sleep peacefully at night?
  • Taxability:
    People only check tax benefit at the time of investment. But you must also check things like taxation of income & maturity proceeds, and the taxability of early withdrawal. This will give a holistic perspective on the overall tax efficiency of your investment.

Mistake # 5: Sticking to old & inefficient tax-saving avenues

When it comes to tax planning, many people unknowingly bind themselves to the legacy of their parents and grandparents…As a result, over the years, their investment portfolio becomes skewed towards low return investments, for example, LIC policies, NSCs, and PPF….

The financial landscape we live in is a lot different as compared to our parents… Job security doesn’t exist anymore, joint families think of the past, and inflation for a child’s education runs in double digits!!

In this context, these so-called “safe” avenues are actually risky, as they don’t beat inflation… You also end up missing out on newer & tax saving avenues like equity mutual funds & NPS. So, get out of the old-world mentality, do thorough research & then invest!