5 Reasons Why Tax Saving Is Not A Fruitful Investment Strategy

1. Unrelated diversification

Unlike other things in life, long-term goals involving money need planning. There are multiple examples of Indians purchasing ULIPs without understanding the mechanisms or rate of returns and invest only due to the recommendation of an insurance agent who clearly has personal intentions behind making the sale. The biggest misconception here is that you will be saving on tax and building future assets through various investment schemes.

The purpose to make the investment needs to be clear. You either invest for returns or buy an insurance cover for the family. You cannot mix the two with ULIPs. The money will end up gaining very little interest, not compensating for the tax you may have saved. Additionally, age is also a factor in the insurance cover you will get from it.

 

Not understanding future needs and flows of income

Traditional insurance covers are the most popular "financial investment" in India. While it is not a bad idea to have one, many are overly optimistic of how much premium they can pay over the next few years as the premium for the policy and in a period of 2 years find themselves unable to fulfill the commitment and losing all the previous premium payments when the policy lapses.

A common mistake committed by new earners is buying a life insurance policy with no dependents, just to save a little tax, with the illusion of building a corpus for the future. You are better off with an equity-based mutual fund scheme as you can afford to have a bigger appetite for risk in your early years.

Housing Loans

This is another popular tax saving instrument where the investor thinks he/she is making a real estate investment for future use.

Having a self-owned residence, individuals purchase a house in the outskirts of the city for investment purposes, without understanding that the tax saved will be much less than the interest being charged by the bank on the home loan. Additionally, they fail to rent out the second house and one should note that whether or not one rents out the second house property, it is deemed as rented out by the Income Tax Laws. This makes it no so tax efficient.

If the intent is to purchase a house in your hometown for retirement, the investment still holds practical but investing for a future possible hike in real estate rates and eventual profit from sale may not be very wise considering the substantial amount paid as interest.

Multiple goals set on one investment

In 2018, you do not need to buy a house or gold biscuits to make future to payments on your child's education or marriage. There are specifically designed instruments to fulfill educational needs like Sukanya Samriddhi scheme.

You can also start a PPF account (if you are risk-averse investor) which allows you to save as much as you can every year in the name of your minor child and it is also tax-free.

If you have a shorter term in mind, there are ELSS that you can opt for tenures as small as 3 or 5 years with tax benefits.

In conclusion, once the purpose of the investment is clear, make strategic investments with that in mind. For urgent needs, hold a separate emergency fund.

For example, if you want to buy life insurance coverage for your family, go for a term insurance where the cover is larger and the premium smaller than a traditional insurance policy. You have plenty of options to multiply money.

Clean slate

Those with non-salaried incomes always look for ways to hide their income for the sole purpose of tax evasion. They often end up making reckless lavish purchases so that the income is not accounted for.

Apart from hiring expert financial consultants to handle the income and reporting the profits can save you and the family from long-term income tax department scrutiny. It will also make handing over the business to the heir or selling the business easy when legal records are properly mentioned.