Bad tax planning and bad investment

The main and complex work for any serviceman or businessman is to work on tax planning. Every person wants to save tax and do some investments from which one can save the tax liability. But this is the practice among peoples that they plan the tax planning in the financial year ending. In this time, they fast approach to different investments (tax saver) and many of them invest which one called bad investment. 
Bad investments are those investments which may be duplicate or unwanted investment which fetch no return or minimal return to the investment. Tax planning should be done very carefully and doing it in rush may lead to bad investment which may damage more to the financial position than helping.

There are many ways in which people may do bad investment like medical insurance. Medical insurance is the insurance which also called medicliam. In which the insurance company foots the bills in case of hospitalization or any surgery. It’s good and every person should have the medicliam. But not for only tax planning.
People rush to mediclaim for tax planning, even they are covered by the company. Mediclaim comes under section 80D of income tax act where the tax saving exemption is
Rs. 15000 for self and family
Another 15000 for parents which is 20000 in case of senior citizen.

But to the tax context, one needs to buy medical insurance policy of 10000-15000 annually just to save 4635 rupees of tax (highest tax bracket, which is reduced in case of lower tax bracket). Is it worth to have many insurance policies where the mediclaim company gives the floater option where one of the family members can use the entire insured amount in case of emergency?

Mediclaim policy is the must for now a days but one shouldn’t apply it for tax saving purposes.
The security that an insurance policy provides is simply a footnote that many forget to read. When the tax season looms and the employer has delivered an ultimatum to show proof of tax saving investments, the scramble begins. Then, the helpful insurance agent utters the magic word - a policy that will help them save tax - Invest in an insurance policy, get the proof, submit it to their office - and life is bliss! The problem: Most are unaware of the policy they have invested in, whether that policy is suitable to them, whether the tenure invested is appropriate, what returns it could offer and whether it is a traditional or a unit linked product and so on. In a nutshell, they have not evaluated the product for its merits and have just invested to save tax.

Another favorite among people is to buy a home to save tax. If it is the first home, the deduction available is just `1.5 lakh a year and tax savings would amount to ~46,350 in a year. For this reason, if one were to buy a home, it can put enormous pressure on one’s finances. Due to this, one’s lifestyle can become crimped. And it will continue to stay that way for years. It might have been much better just to have paid the taxes, invested the money after that, live life decently due to better cash flows ( in the absence of constricting loans ) and end up buying a property later, when it is actually required. This kind of investment is very common and quite harmful.

First, they invest a big sum of money in a product that they may not need -that too, a product that may require them to service for a long time.
Second, once someone points out pitfalls, they want to exit it in a hurry but many times the math forces them to hang around for years. For instance, if a policy has a lock-in for five years, there is little you can do. Yes, there would be some surrender value if you exit in the interim. But it will be most probably at a significant loss.
Third, even though they have been alerted, paying premiums at times becomes a habit. As a result, people forget to exit them at the right time.

Now, comes the most interesting part. Borrowing to save tax! Come December and the scramble to submit proof sets in. Those short of cash, resort to borrowing to save tax. People are known to take personal loans or credit card loans to invest in tax saving instruments. If one were to calculate the costs and efforts vis-à-vis how much money is being saved, it may not make much sense to do it in the first place.

Any investment made, even if it made for tax savings, should make sense in the overall scheme of things. It needs to be a good investment. We need to realize that if we actually calculate the total costs, it may be much costlier saving taxes than paying taxes, in many cases. Save taxes, where you can. Simply pay it, if it does not make sense. You would be much better-off.
Tags-bad tax planning,bad investment,what is bad investment,tax planning tips in india,india tax planning,what is bad tax planning
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About Nitin Aggarwal

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