Extra tax saving investments even when they are not needed

Arnav Pandya

There are quite a few tax saving investments that are available in the market and every individual tries to make the most out of the situation by completing their requirements during the financial year. While this is a good thing there is a peculiar position that many people find themselves in as they actually end up making far more investments then what is actually required for their tax savings. This can actually lead to a situation where there is either a cash crunch or the amounts are not utilised effectively and this impacts financial planning activities in some other area. Proper knowledge of the situation can ensure that this situation is avoided. 

Basic mistakes

One of the main reasons why such a situation actually occurs is due to the fact that there are a lot of salaried individuals who end up making a wrong calculation for their tax saving requirement. There is the information available with people that a total of Rs 1 lakh can be invested in tax saving investments that will provide deduction from the taxable income. What many people are not clear about is the exact areas that are actually included in this list that comprises this benefit.

The impact of this is that there are times when the individual actually fails to take into consideration the detail that they are contributing to a provident fund each month that should be part of the eligible tax saving instrument list. Missing out this element ensures that there is a situation wherein the individual will realises that a large part of the Rs 1 lakh investment actually remains to be done when this is not the case and hence this leads to extra investments.

Another reason why there are lots of extra investments is due to poor record keeping whereby individuals do not have a proper list of the tax saving investments done. This leads to some item being missed out which ultimately leads to extra investments being done in the last minute rush to complete the process.

Traditional debt investments

There are a lot of people who use the traditional debt route of making tax saving investments and hence for them using a few instruments are like a mandatory process. A couple of such areas cover Public Provident Fund (PPF) and National Savings Certificates (NSC).   A person who is making use of the entire limit available under PPF and who also has a salary where in provident fund is being deducted along with the use of other investments will find that at the end of the day he is paying an amount that is higher than what is actually required for the purpose of tax savings. This is one area that needs careful attention and planning to see how a balance can be built in and where there can  be a reduction to end the extra investments so that the available limits  are  well utilised.

Insurance premium

There is also a problem as far as regular investments are concerned especially where the payments will continue year after year. A very good example is insurance policies where the premium has to be paid each year rather than just once for a long time period that can stretch up to 15 or 20 years. The end result of this situation is that the individual will find that there is a long list of regular payments that need to be made and this has to be done each year. If the total of the entire payments is added along with the other investments then it could well be that the figure will come to more than the Rs 1 lakh limit for specified investments. This is a situation that is tough to tackle because the individual will not be able to ensure that there is a reduction in this area unless some policies actually come to the end of their premium paying term.

Impact

Having more than the required investments as far as the tax saving routes are concerned actually means inefficient use of funds especially when there is a lock in present that can restrict access to the investments. Further there can be a situation where the individual will find that some of the investments are also not in tune with the asset allocation requirements so this is not yielding the desired results. There can also be a lower yield on the portfolio as a whole since the tax saving investments are restricted in terms of exposure available.

Arnav Pandya can be reached at arnavpandya@hotmail.com .