When it comes to saving taxes, everyone does their best to avoid paying a large tax amount at the end of the financial year. While there are many legitimate avenues available for you to save taxes, there are some unscrupulous schemes that could land you in a financial soup on the pretext of helping you save tax.
For example, a common way for bank representatives to lure people into a debt trap by promising tax savings is offering tax payers a ULIP. Unit Linked Insurance Plans are a risky investment choice and are generally not preferred by investors and financial planners alike. The offer sounds great; you get life cover, you get tax savings, a regular tax free income, and to top it all, a large lump sum amount on maturity. However, many would argue that this offer sounds too good to be true, and rightly so. While at first glance, this might look like the perfect tax saving investment, the returns from ULIPs over the years have been measly even in comparison to a savings account.
Despite all the red flags, many taxpayers get sucked into these schemes every year, either because of lack of commitment or lack of information. People are buying long-term plans with long lock-in periods without realising what they are getting into. Here are a few things you should know to avoid falling into a tax saving trap.
- ULIP Life Covers Are Not Free – No matter what the bank representative tells you, you are definitely not getting a free life insurance with your ULIP plan. Not only will you end up paying mortality charges, ULIPs end up sticking with you for a long time and force you into a long-term financial commitment. You also don’t have the flexibility that an ELSS or a tax saving mutual fund provides, including a long 5 year lock-in period, and surrender charges should you wish to exit before the policy matures.
- ULIP vs. ELSS – ULIPs are not like ELSS schemes. Banks may tell you that the scheme they are offering is just like an ELSS but with life insurance. However, they are only conveying partial information in order to get a sale. Banks do not get a large commision from ELSS schemes, but they do from the sale of ULIPs. Plus, they also make sure that you are compelled to utilise their services for the entire duration of the scheme. Another important point, as mentioned earlier, ULIPs have a longer 5 year lock in period in comparison to the 3 year lock in period of ELSS schemes. They are also not very flexible and require you to pay the bank surrender charges as well, should you wish to exit after a few years.
- Every Insurance Isn’t Safe – Apart from trying to sell you ULIPs, you’ll notice many calls from you bank offering lucrative tax saving insurance deals. They’ll make every effort to make it look like it’s a scheme being offered by the bank itself, but in reality, they are third-party insurance schemes that are being promoted by the bank for commissions. You might feel that they are a safe investment because your bank runs it, but make sure you find out all the details before opting in for such an insurance scheme.
- Investing Large Amounts In One Go – Some banks and wealth managers may even try and convince you to invest a large lump sum in ELSS schemes. While there’s no doubt that ELSS schemes are one of the best tax saving investment options available to taxpayers in India, it is always better to invest in them through an SIP rather than investing a lump sum of money. You can get returns upto 16.5% on average. However, the best way is to invest a SIP with a amount like INR 5000 – INR 10000. Many bank representatives will not tell you this as they would rather you invest all your money into their offerings rather than diversify them like a SIP does.
Financial planning is a serious issue and should be tackled with utmost sincerity and you should always be armed with all the information you can get about your investments. Make sure that you don’t make an unfortunate financial decision and consult a certified financial planner or wealth management firm to help you make smarter financial decisions.