30 January, 2012

Wrong choices for tax savings

Our investors keep tax saving investments for the last minute – this is the rule rather than the exception. When one does this, there is not much time to evaluate the options and take an informed decision. Also, most have an aversion to finance. Hence, they just rely on whoever is approaching them and just get information from them, before taking the decision. Needless to say, such decision making can go wrong. Hence, they tend to make wrong choices.

1.     1.   Investing in Life Insurance for savings tax is very common.  As common is investing in policies about which they just don’t know anything about – what kind of policy, what are the features and benefits, whether it is suitable to them etc. Such investments are money down the tube.

2.       2. Putting money into medical insurance policies so that it may save tax, when one is adequately covered by a policy from the employer. The compulsive tax saving instinct which is fairly common makes one to put money in medical policies, which is in effect throwing good money.

3.      3.  Investing in low-yielding instruments like NSCs to save tax is hardly a good idea as the inherent post-tax returns are very low. Even though one saves tax, it still does mot make sense.

4.       4. Investing in a home primarily to save tax is a bad option too. Lots of people go in for a home only to save tax. Tax saving for the first residential home is limited to a deduction of Rs.1.5 Lakhs, which translates into a saving of Rs.46,350/- ( for a person in the highest tax slab ). The pressure it puts due to the liability and the EMI for extended periods is phenomenal. It also puts pressure on one’s normal lifestyle itself, if this investment has been stretched.

5.      5.  PPF is a good investment in itself. But, for those who just look at the returns and put in money without looking at upcoming goals, it becomes a bad choice. PPF is a longterm investment instrument and has to be used only when the tenure matches one’s needs. Else, one will be caught with money in the account, but nothing to meet upcoming needs.

No comments: