Why you should not be investing just to avoid tax?
Investments are made to achieve financial goals in future. An investment is expected to earn an estimated rate of return which will help you pay for your needs in future. Hence your investments should be purely based on factors such as your financial goals, your risk profile and time in hand.
An investment can always help you to save tax. For example, an investment in tax saving bank fixed deposit fetches you a tax deduction up to Rs 1.5 lakh under section 80C of Income Tax Act. However that should not be the sole criterion to invest. Consider a situation- Suresh is in his early thirties and has no financial liabilities. He intends to save for his retirement which is due 25 years from now. He should ideally be taking a bit more risk and investing in equities. Equity mutual funds and not fixed deposits is a better prescription for his financial goal of retirement. If keen to save on tax, he should ideally be in tax saving mutual funds and other diversified equity funds.
Also, the attitude of investing for the sole purpose of saving tax makes many individuals myopic. Investments have to be done regularly. But when one joins the 'tax saving' band-wagon, he invariably ends up investing in last week of March, and in many cases, ends up buying something that does not serve his long term financial goals.
Better take all round view of your finances while investing. Tax can be one of the parameters of the checklist you use while investing, not the sole parameter.
Investments are made to achieve financial goals in future. An investment is expected to earn an estimated rate of return which will help you pay for your needs in future. Hence your investments should be purely based on factors such as your financial goals, your risk profile and time in hand.
An investment can always help you to save tax. For example, an investment in tax saving bank fixed deposit fetches you a tax deduction up to Rs 1.5 lakh under section 80C of Income Tax Act. However that should not be the sole criterion to invest. Consider a situation- Suresh is in his early thirties and has no financial liabilities. He intends to save for his retirement which is due 25 years from now. He should ideally be taking a bit more risk and investing in equities. Equity mutual funds and not fixed deposits is a better prescription for his financial goal of retirement. If keen to save on tax, he should ideally be in tax saving mutual funds and other diversified equity funds.
Also, the attitude of investing for the sole purpose of saving tax makes many individuals myopic. Investments have to be done regularly. But when one joins the 'tax saving' band-wagon, he invariably ends up investing in last week of March, and in many cases, ends up buying something that does not serve his long term financial goals.
Better take all round view of your finances while investing. Tax can be one of the parameters of the checklist you use while investing, not the sole parameter.
Happy Investing
Source:Moneycontrol.com
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