Six Mistakes to Avoid for Tax Saving
Taxes consume a significant portion of your income. The Government of India has offered various tax exemptions and deductions for taxpayers to help reduce the taxable income. The less tax you pay, the more disposable income you have. But if you wait until the end of a financial year to take tax-saving measures, you might end up making mistakes and paying more in taxes than otherwise. These mistakes can easily be avoided if you are cautious and start your tax planning earlier in the year and make sound investments such as savings plan, etc.
Here are six common tax filing mistakes that you should avoid:
Waiting until the end of the year to begin tax planning:
A common mistake that you should avoid making is delaying your tax planning until the end of a financial year. Your objective should be to make systematic tax-saving investments throughout the year so that you can build a strong and profitable investment portfolio. If you delay your tax-saving investments until the end of the year, you will make hurried decisions without careful research. Moreover, last minute investments deter you from reaping the benefits of your investments.
For instance, if you decide to invest in tax-saving mutual funds and wait until the end of the year to make this investment, you will not be making a wise decision. When you make a lump sum investment, it can may put a dent in your monthly budget. When you buy mutual funds in a lump sum, your NAV (Net Asset Value) is as per the market performance.
Further, if you choose to invest in a money savings plan, you will lose out on the insurance cover for the whole year, as well as lose out on the interest or returns on your investment for the first nine to ten months.
Not considering tax-exempted expenses:
If you are a salaried person, you should be more cautious to avoid this tax planning mistake. All salaried persons are eligible for a standard deduction of ₹50,000. Moreover, if you are paying for the tuition fees for your children, living in a rented house or paying a home loan interest, you get further exemptions and deductions for these entries.
Hence, as a wise taxpayer, be careful of your benefits and make informed decisions to figure out how much you have saved and how much tax-saving investments are needed.
Not taking full advantage of tax* exemptions and deductions:
Section 80C of the Income Tax Act, 1961 allows tax deductions up to ₹1.5 Lakh per year for specific investments. Payment towards investments such as Public Provident Fund (PPF), National Savings Certificate (NSC), Equity-Linked Savings Scheme (ELSS), Senior Citizen Savings Scheme (SCSS), National Pension Scheme (NPS), etc., are eligible for deduction from taxable income under this section.
Further, the premiums you pay for insurance savings plans, housing loan repayment, etc., are also eligible for tax deduction under this section. You can claim deduction of premiums paid for insurance and savings plan taken for self, spouse, dependent children, etc. For this purpose, you can invest in the TATA AIA Life insurance and savings plan. By investing in this plan, you get Tata AIA life insurance tax benefit for premiums paid, along with a secure insurance cover for your loved ones and an element of guaranteed1 returns.
Further, you get flexible pay-out options and add-on riders# to enhance your insurance savings plan. Be sure to max out the Section 80C exemption limit and also apply for tax-saving investments beyond 80C. You can avail of a tax deduction for charity, medical insurance premium instalments, etc., under different Sections of the Income Tax Act.
Choosing inefficient investments:
You have multiple investment options to choose from when making your tax-saving investments. However, a common tax planning mistake people make is choosing inefficient investments that only offer tax exemption. Instead, the objective should be to opt for investment options that offer competitive features, more advantages, attractive returns, along with tax savings.
You should have some fixed-return or guarantee1 instruments such as NSC, PPF, savings plans, etc., as well as a market-based investment such as ULIPS (United Linked Insurance Plans), ELSS, NPS, etc.
Viewing tax planning in isolation:
Another tax mistake you might make is considering tax planning in isolation. Good tax management can help you enhance your income significantly. For this, you need to base your tax-saving decisions in conjunction with your overall portfolio. This means that you cannot only choose an investment because it offers tax savings. Instead, you should study if the concerned investment suits your overall portfolio.
Your investment choices should give you a tax break as well as help you reach your determined financial goal. For example, if you are married and are planning to have kids, you should ideally have a secure income back up and insurance cover for your family. You can consider options such as a money savings plan that gives you tax benefits along with insurance cover and guaranteed1 returns.
Not evaluating the different tax regimes:
Budget 2020 announced a new tax regime effective from the financial year 2020-21. This means that as a taxpayer, you have an option to either file your income tax as per the old or new regime. In the old regime, you get different benefits of claiming tax deductions and exemptions, whereas, under the new tax regime, you cannot claim any exemptions, the tax slabs and rates are lower than in the old regime. However, the suitability of the tax regime depends on your income and financial planning.
For instance, if you are investing in an insurance and savings plan, it is beneficial to file under the old tax* regime as you can claim deduction of premium paid under section 80C.
Overall, tax saving can be confusing and intimidating at times. However, if you plan well and early, you can ensure your hard-earned money is put in the best places to garner maximum benefits and minimise tax liability.