Many consider tax saving a chore. You only invest randomly in tax-saving instruments towards the end of the fiscal year, in February or March.
Some may even take out loans to buy or invest in tax saving instruments as they do not have enough free funds. After all, if someone in the highest tax bracket exhausts the entire limit of Rs 1.5 lakh available under Section 80C, they can save up to Rs 46,000 in taxes.
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It may seem attractive to save such high taxes. But it’s not doable when you look at the effects. There are costs associated with borrowing. If you take out a loan from a relative or acquaintance for which you do not pay interest, this has further consequences.
Your employer will deduct taxes from your salary every month. If you want to save on taxes at the last minute, you need to refund the extra taxes you paid. Refunds take time. You would have other monthly commitments as well. When you take out loans, they will suffer.
The bigger problem is that you can fall into a debt trap. When you take out a loan, it means that you cannot pay the cost out of your pocket. The equal monthly installments (EMIs) of a loan will add an extra cost to your income. You may need to borrow more to meet other obligations, which leads you into a debt trap.
Borrowing to invest under normal circumstances is not a good idea. The same risks also exist if, despite the tax advantage, you want to take out loans to invest in tax-saving products. It takes great financial discipline to repay the loan, which will not be easy for someone who was not disciplined to begin with and has not saved regularly.
Tax saving has to be a part of your overall budget and you have to start early. There are other advantages to planning your tax investments ahead of time. For example, you should invest in the Public Provident Fund (PPF) before the fifth of each month to receive the interest payment for that month. In the case of ELSS, the investment will work in your favor through a systematic investment plan (SIP), as it will determine your purchase price.
It is better not to save on taxes this year if you need to borrow. From April onwards, plan better for the next fiscal year.
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