These mistakes will cost you more than 80C can save!

Section 80 C is the queen of hearts when it comes to income-tax computation and everyone wants to ensure they have used this master card to the fullest and reduced their taxable income up to Rs. 1.5 lakh in the most effective manner. Sadly, most of us do not really end up using the deductions of Sec 80C to our advantage. In order to ensure maximum gains here is a list of common errors which you should avoid while investing under Sec 80C:

Don’t Start Late

If you want to use Section 80 C to its fullest and take sound investment decisions with adequate planning, then don’t start late. Taking hasty decisions without proper information and due diligence is a recipe for disaster which can hurt your investments in the long-run.

Start with your tax planning from the beginning of the financial year in order to create a healthy and diversified portfolio without a sudden outflow of funds in the last month.

Don’t choose products JUST for tax saving- Build a healthy portfolio

Don’t choose products blindly because they are eligible for tax deduction under Section 80C. Following herd mentality without thinking will not help you meet your financial needs and eventually make your investments suffer. One of the most important aspects of investment planning is that the investments should be in sync with your overall financial goals-long term as well as short term. If you looking at a long-term goal with a risk appetite, then any day your investments in ELSS will give you superior returns as compared to PPF, EPF etc.

Apart from this many people in the last quarter of the financial year buy insurance without properly analysing the need of insurance because they have not explored other options of investments and insurance is a “safe option” because it gives investment, insurance and tax saving and discount the fact that mortality charges reduce the returns dramatically. ELSS gives you the opportunity to invest in equity at much lower cost than ULIPs.

Don’t go overdose in debt

Don’t invest only in debt instruments because they offer capital protection but look at other options for better returns. In order to maximise your returns and tax savings, investment portfolio should be a balance of equity and debt investments. Debt instruments such as PPF, Bank Fixed Deposits, National Savings Schemes, etc. because of assured returns and capital protection hurt in the long run as the inflation adjusted returns are negligible. Moreover, the interest income in case of FDs and NSC is taxable and added to your total tax income making them tax-inefficient.

Allocating a considerable portion of your portfolio in tax saving mutual funds will not only help you earn higher returns but the returns generated in such schemes is completely exempt from tax so the entire investment, plus returns and maturity amount is exempt making it extremely tax efficient.

Don’t opt for dividend option

One of the common misconceptions is to invest in higher dividend schemes because higher dividends is better performance but in reality growth option is always better as compounding helps create a higher corpus at the time of maturity. Hence, don’t opt for dividend option in ELSS just because there is a payout every year.

Don’t look only for investments

You can always claim deduction for expenditures such as principal repayment of housing loan, children’s tuition fees etc in order to reduce your taxable income. One of the biggest mistakes committed by taxpayers is that they look at Section 80C they believe only tax saving investments will allow them to avail the tax benefits and ignore the expenditures which are also qualify as deductions under Section 80C.

Hence, if you do not have funds to invest you can always claim these expenditures as deductions and reduce your taxable income.

You should look for investing in tax saving schemes after identifying your financial goals for medium and long term. Investing in instruments with lower post tax returns after taking into account the rate of inflation will not help achieve your financial goals. On the other hand, ELSS can be a good way to generate higher returns and save taxes as returns generated in equities beat all the asset classes in the long- run.

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