Wealth Guide: Valentine's Day Special - Mistakes couples make while choosing Income Tax-saving investment options

It’s a strange coincidence that Valentine’s Day falls exactly in the middle of the peak period of tax planning– the January-March quarter. With love in the air, financial prudence tends to take the backseat. Most couples end up picking up the first tax-saving investment that is in front of them or completely ignore any tax planning. 

Before going ahead with tax planning, the couples should remember that from the assessment year 2021-22 taxpayers have two options while filing the income tax return. There is an old tax regime and one that was announced in the previous year. It is better to take the advice of a financial advisor or tax planner before proceedings with tax planning. On the occasion of Valentine's Day, Vikas Singhania, CEO, TradeSmart and Neha Singhania, CPO, TradeSmart, share their knowledge on some of the common mistakes that couples do while deciding on Income Tax-saving investments.

Delaying or ignoring Tax-Saving investments

“Many couples feel that saving a small amount of tax blocking large capital is not a good idea, without realising that these ‘forceful’ savings will lead to a sizeable amount over time. There are also those who feel tax-saving is an annual ritual and pile up all their investment in the final three months, if not in the last month. This results in the monthly budget going out of control and with it their financial planning goes haywire. The way to get out of this bad habit is to systematically invest in a tax-saving fund or in Pubic Provident Fund (PPF) or National Pension System (NPS),” says Vikas Singhania. 

Investing in Insurance Plans

“One common mistake that people make is to invest in insurance plans thinking of them as an investment instrument. Part of the reason is some financial advisors think of their commission above the returns of their clients and sell them investment ideas which gives them the highest commission. Investing in such instruments has rarely beaten the inflation rate. One should rather park their money in a tax-saving mutual fund or PPF,” says Neha Singhania.

Investing in instruments that are taxed on maturity

“There is an attraction for investing in tax-saving fixed deposits in a 5-year instrument or National Saving Certificates (NSC) that give immediate tax benefit but the returns are taxed when the instruments mature. Worst is that interest earned on these instruments is taxed as per the person's income tax slab. Most couples ignore the fact that the interest rate on tax savings FDs is lower than what normal FDs pay,” Vikas added.

A mismatch between financial goals and tax planning

“In many instances, tax planning is an ad hoc event, where the couple invests without keeping in mind their long-term goals. Tax saving should be part of the bigger picture of financial planning. Tax planning gives an opportunity to diversify your portfolio. If you have largely equity instruments in your portfolio, tax planning should be inclined more towards fixed income capital protection instruments. If the portfolio is debt instrument heavy, then one can consider tax-saving mutual funds,” adds Neha.

Not taking advantage of rebates and deductions

“There are many tax-saving rebates and deductions allowed under the Income Tax Act, which unfortunately most couples miss out on account of ignorance or lack of proper guidance and knowledge. Most couples take benefit of savings under Section 80C which has a limit of Rs. 1.5 lakh and covers interest on housing loans, health insurance premium, medical expenses, and donations. The benefits of Section 80D, 80E, and Section 24 are at times ignored,” Vikas further added.

Excess Planning

“There are instances where couples go beyond the required amount needed to save under in tax saving instruments. They need to remember that tax planning instruments may not be the best yielding instrument. Investing more than the marked limit in such an instrument is not going to give them any extra benefits, rather they are blocking their fund which could have earned more had it been invested smartly in other instruments,” Neha advised.

Conclusion

“As long as one learns from their mistakes, corrects them, and moves forward there is no long-term harm done, especially in financial planning. Mistakes in tax planning are rarely irreversible, corrective actions can be taken even after they are committed,” they concluded.

(Disclaimer: The views/suggestions/advice expressed here in this article are solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)