Saving Tax Should Not Be The Sole Purpose
Date
04 April 2024
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Category
A blog by Sandip
If your decision of making investment or choosing insurance policies has often been taken for the sole purpose of saving some tax – then you have reasons to worry. This tendency of jumping on the bandwagon i.e. saying ‘yes’ to a product just because it offers some tax saving can backfire or do harm to your overall portfolio of investments and insurance. Let us see, how.
Tinkering with the horizon
When an investment allows to claim deduction from your taxable income under some section, then it often comes with some lock-in period. In other words, you have to sacrifice liquidity for availing the tax benefits. This can be problematic. If you may need money in short-term, then locking-in majority of your investment will make you feel helpless and force you to take desperate measures. Or, if your financial goal may require money sooner or later than the pre-decided timeline – then you will be stuck with your locked-in investments.
Ignoring Risk Profile
If I say capital gains that you made from your equity investment is taxed much lesser or not even taxed at some situations compared to your investment in other asset classes (debt or commodity) – does that mean you ignore your risk profile, goal horizon and invest maximum in equity? You should not.
Compromising Asset Allocation
Investing separately in Gold Fund, International Equity Fund or Debt Fund is not that tax efficient. But that does not mean that you ignore your exposure in such funds and instead invest only in multi-asset allocation fund just because that is tax efficient (though that can be a topic on its own for some other day).
What should be done?
Give achieving your financial goal the topmost priority. Check your risk profile, consider your surplus, find out how much return you should earn – choose your asset class and investment product accordingly. If features of a tax saving product get perfectly aligned with your goal and risk-return profile – then of course go ahead and make that part of your portfolio.