Utilise extended deadline to make the right tax-saving investment choices

Avoid errors like investing beyond the permissible limit

With the coronavirus epidemic bringing the entire country to a standstill, many taxpayers, who had procrastinated and left the task of investing for tax saving for the last few days of the financial year, had got stuck. Fortunately for them, the government has extended the deadline until June 30, 2020, for people to make their tax-saving investments for the financial year 2019-20.

This relief will matter especially to those who are not savvy enough to make their investments online. Now that tax savers have got a second opportunity, they should exercise due diligence and make their tax-saving investments with a lot of care. In this article, we shall discuss some of the common mistakes that investors tend to make when doing tax-saving investments.
 

Avoid acting in haste: Now that you have got three additional months, do not once again leave the task of making tax-saving investments for the last few days of June. Most people who make the wrong investments are those who invest at the last moment, and hence buy the first product they are pitched. In their haste, they do not take the trouble to understand the product.

Do not rely exclusively on the sales pitch of salespersons. Such people may only highlight the positive aspects of a product, but may not inform you about its associated risks. If you want to avoid being mis-sold, do some in-depth reading on the product you are being sold, or obtain advice from a financial advisor.
 

Do not give in to pressure from relatives and friends: Many of us have purchased a sub-optimal product just because we could not say no to a friend or a distant relative. You must avoid this mistake as it can take a heavy toll on your financial life.

Insurance plans, especially, are very long-term commitments. Once purchased, you cannot exit them without taking a massive financial hit. Therefore, invest in only those products that fit your financial requirements. Learn to say no to poor-quality products.
 

Stay away from traditional life insurance plans: You must stay away from them for the simple reason that in trying to combine both insurance and investment, they fulfil neither of these two goals well. The insurance cover that you get in these plans is likely to be inadequate. And since they invest mostly in bonds, the returns you get from them are also likely to be low. Over a 25-30-year period, large premiums channelled into such a product that barely gives a return of 4-5 per cent can mean the difference between retiring comfortably and retiring with an inadequate corpus.
 

Retail investors often find it difficult to identify whether the product being sold is a traditional insurance plan. Here is the rule of thumb you should follow. Steer clear if the insurance plan offers investment benefits too. Similarly, if the name of the insurance product comes with keywords such as assured, guaranteed, suraksha, endowment, savings, moneyback, etc., you are most likely being sold a traditional life insurance plan.

If you must purchase life insurance, opt for a term plan. It is the cheapest way to purchase life insurance. For a small premium, you can buy a large cover that will ensure your family’s well-being in your absence.

Unit-linked insurance plans can also be avoided: Though not as bad as traditional life insurance plans, unit-linked insurance plans (Ulips) can also be avoided. In a term insurance plan, the premium remains constant throughout the life of the plan. In a Ulip, the mortality cost (the amount that is deducted from the premium to pay for the life insurance cover) rises with age. Some Ulips can have very high-cost structures. Such products are not in the investor’s interest. It is best, therefore, to keep insurance and investment separate. Use a term plan for your life cover needs and mutual funds to meet your investment needs. And if you do purchase a Ulip, make sure you go with one that has a very low-cost structure.
 

Entire premium is not eligible for deduction: The entire life insurance premium is not eligible for deduction under Section 80C. Annual premium is eligible for tax deduction only up to 10 per cent of the sum assured. Keep this in mind if you are buying traditional plans or Ulips, especially single-premium products. More importantly, in cases where the sum assured is more than 10 times the annual or single premium, the maturity proceeds will be taxable.
 

Be wary when you visit a bank branch: Visiting a bank branch can be a risky proposition, especially during the tax season. You may have gone there to invest in a tax-saving fixed deposit or PPF. Instead, the bank staff could push you into a Ulip or a traditional plan. The branch has income targets that fixed deposits and PPF investments don’t really help achieve. Traditional plans, Ulips and other fancy products do.
 

Take into account all tax-saving contributions: All of us make many involuntary Section 80C investments. For instance, your Employees Provident Fund (EPF) contribution is eligible for deduction under Section 80C. Similarly, principal repayment on home loan and tuition fee paid for two children are also eligible for tax benefit under this section.
 

When you take into account these items, you may find that you have only a small amount left to reach the Section 80C limit of Rs 1.5 lakh. When an investor is aware of this, the pressure on him to make Section 80C investments goes down and he becomes less susceptible to mis-selling.
 

Other tax-saving options also exist: Most taxpayers focus only on Section 80C benefits. But there are tax benefits under other sections also that you can avail of. You can, for instance, avail of deduction under Section 80D for expense on health insurance premium and health check-ups. However, one point that needs to be borne in mind is that the amount of health insurance you buy should be governed by your family’s needs. It should not be limited to the amount of premium on which you will get tax benefit.
 

You get a deduction of up to Rs 2 lakh for interest payment on housing loan under Section 24. Another deduction is available under Section 80E on payment of interest on education loan. Therefore, do not fixate on Section 80C alone.
 

Be aware of the rules: Taxpayers are often not aware of some of the nuances of the rules that govern tax-saving investments. For instance, a buyer is eligible for tax benefit on principal and interest repayment on a home loan only after he receives possession of the house, or once its construction is complete. If you claim tax benefit prior to possession, you could face scrutiny by the Income-Tax Department.
 

Similarly, if you invest more than Rs 1.5 lakh in PPF account, the excess amount won’t earn any interest. Do note that this limit of Rs 1.5 lakh is cumulative for your PPF account and also those PPF accounts where you are the guardian.
 

Finally, make sure that your tax-saving investments help you meet your financial goals. You do not have to be an expert in finance to avoid the above-mentioned traps and pitfalls. Be curious, ask the right questions, and exercise a bit of discipline.