Top News

Smart Financial Planning: People often make financial decisions solely to save on taxes, only to suffer the consequences for years. In the pursuit of the ₹1.5 lakh deduction under Section 80C of the Income Tax Act, many people impulsively invest in traditional insurance plans or park their money in the wrong avenues.

If you, too, are investing with the sole objective of saving taxes, take heed. Here are three major mistakes that are eroding your wealth instead of growing it.

**Mixing Insurance and Investment**

The most common mistake people make to save tax is purchasing endowment or money-back policies. The returns on these policies hover around just 4% to 6%, failing to even beat the inflation rate.

A smarter alternative is to keep insurance and investment separate. Opt for term insurance for life coverage; it offers substantial coverage at a low premium.

**Investing Without Understanding Lock-in Periods and Returns**

Putting money into tax-saving FDs (which have a 5-year lock-in) or similar products—where the post-tax return is negligible—merely to exhaust the Section 80C limit is a mistake. The harsh reality is that the interest earned on bank FDs is taxed according to your income tax slab, further reducing your actual returns.

If your risk appetite permits, consider investing in Equity Linked Saving Schemes (ELSS). These come with a lock-in period of just three years and offer the potential for returns ranging from 12% to 15% over the long term.

**Mistaking Insurance Policies for Wealth Creators**

Many people pay premiums for years on guaranteed-return policies, believing their money is safe and they are saving on taxes. A ₹20 lakh fund received 20–25 years from now will not even match the purchasing power of ₹5–6 lakh today, due to inflation. In other words, even while keeping your capital safe, you are losing purchasing power.

The Simple Math of Smart Saving

Proper asset allocation is crucial for saving taxes and building wealth. While traditional insurance plans offer average returns of just 4%–6% alongside long lock-in periods of 10–20 years, ELSS (tax-saving mutual funds) offer impressive estimated returns of 12%–15% with the shortest lock-in period of just 3 years, plus tax benefits under Section 80C. Additionally, the PPF—with its 15-year tenure—offers a completely tax-free return of 7.1%. Meanwhile, the smartest strategy—combining a term plan with an index fund—allows you to claim the Section 80C deduction on the term plan while simultaneously generating robust long-term returns exceeding 12%.

How to Make a Smart Start?

Saving taxes should be a small part of the investment process, not the primary goal. First, secure adequate term insurance and health insurance tailored to your age and needs. Then, allocate your remaining funds into high-performing instruments like ELSS, PPF, or NPS, based on your risk profile.

Disclaimer: This content has been sourced and edited from Money Control. While we have made modifications for clarity and presentation, the original content belongs to its respective authors and website. We do not claim ownership of the content.