Tax saving: Half-hearted investments can cost you

Why do most people scurry for the tax-saving investments in the last three months of every financial year? The trigger is the mail sent by the HR department asking for investment proof in January. This last-minute rush is a half-hearted approach not just towards investment, but also towards tax saving. You neither invest properly and nor save properly, leading to miscalculation of tax and increased expenses on your pocket.

I will use the example of Amar, a 27-year-old professional, to drive home this point.

Amar chose the new regime of tax to spare himself from the tax saving investment dilemma of every year. In the old regime of tax, an individual pays tax at the rate of 5%, 20% and 30% and one can use many exemptions like 80C, 80 D, 80 CCD.

In the new regime, you do not take any deduction and pay tax according to six slabs of 5%, 10%, 15%, 20%, 25% and 30%. In the old regime, the tax rate jumps from 5% to 20% in just one step  while in the new regime, the benefit of tax is given at a lower rate. But did Amar choose this regime because his tax liability would be reduced?

The reality is that when Amar was in the old regime, he regretted his hasty investment decision which didn’t serve any purpose and he had to discontinue them in the similar hasty manner the way he started them.

First, he bought an insurance, insurance is necessary but should be bought according to your need and not to save tax. ‘Someone’ ( this someone could range from your colleague to acquaintance to relative in disguise of an insurance agent) told him this is the best way but was it ?

An insurance which is not right for you is needless. After paying few half-hearted premiums, Amar discontinued it . Amar’s second mistake was that he started investing in Equity Linked Saving Scheme (ELSS) through SIP, which has a lock-in period of three years. Amar felt that three years is not a long time and he will withdraw money, but later understood that the maturity of every SIP in ELSS will be in three years.

There was nothing wrong with the product he chose. But the reason and timing of Amar’s choice were not right. The choice of every investment should be decided according to an individual’s needs and financial goals and not to achieve the goal of saving tax. You can, of course, choose a new regime if there is more tax savings, but do not choose because you want to run away from investing. Save tax by investing right.

Take a decision on any investment only after doing all your calculations first. For example, if you want to invest to get a savings of Rs 1.5 lakh, then remember that the amount of money you are depositing towards your Employee Provident Fund is also included. After adding it, see how much more money is needed. Then choose the investment that you need and which you understand properly.

For instance, NPS is an option and can help you in building your retirement corpus. If you invest properly using 80C, there can be a tax savings of up to Rs 46,800. It is not necessary to take all the deductions through 80C only. You can get tax rebate on the premium of health insurance under 80D. Health cover will also be available and tax will also be saved. You can get more tax rebate by purchasing health insurance for parents.

A new financial year is about to start and it is ideal to plan whole-heartedly and invest from the beginning of the year and avoid the last minute dash.