Keep in mind that these last-minute tax savings investments are usually without adequately analyzing the returns, risk and other benefits from one's investments.
With the current financial year drawing to a close, people are looking for investment avenues and getting their taxes and investments organized. According to experts, people who wait until the end of the financial year to plan their taxes are the ones who scramble to make some investments to reduce their tax liability.
If you are one among them, you might be able to manage to lower your total tax outgo. However, your investments are unlikely to align well with your financial goals. The last-minute tax planning may also put pressure on your monthly incomes due to the immediate outflow of money.
Keep in mind that these last-minute tax savings investments are usually without adequately analyzing the returns, risk and other benefits from one’s investments.
Here are some mistakes to avoid while doing your tax planning this year:
Not calculating your taxable income: Firstly, calculate your tax liability, and Income tax on the salary is just one part of it. There are various other incomes, such as business income, interest earned from deposits, capital gains from stocks, mutual funds, rent from property, gold or any other income that you may have. If you do not calculate your taxable income, you will not know exactly how much deductions you need to aim to reduce your taxable income.
Not taking into account saved taxes: All salaried individuals receive a standard deduction of Rs 50,000 if they pay house rent, school tuition fees for a child, home loan principal and interest. These are deductions a salaried gets on his/her taxable income. Hence, figure out how much you have already saved before you look for any further adjustments in your taxable income.
Other things you should factor in is EPF which has already been deducted by your employer as your own contribution, and repayment of principal on housing loan or tuition fees, etc.
Not aligning your investments with your financial goals: While investing for tax saving, avoid zeroing in on a financial product only for the purpose of tax planning. Try to evaluate and find out if it aligns with your financial goals. Hence, while choosing a financial product to invest, link it with a specific goal of yours.
For instance, if you are a single young investor and might need some money accumulated in the near future, opt for options with shorter maturity or easy liquidity options. However, if you are married with kids, and saving for the future, opt to go for investments with a longer period of maturity such as PPF, ELSS, VPF, NPS, and ULIPs, etc.
Not choosing your insurance properly: Most buy insurance in a bid to meet Section 80C requirement. These kinds of people end up having endowment and ULIPs that have savings component to it along with the death cover. However, the primary objective of buying insurance is to protect yourself and your family financially in case you meet an unfortunate incident. While ULIPs and Endowment plans also gives you death cover, it might not be enough despite charging higher premiums.
Not knowing the rate of returns: Taxpayers usually do not know exactly how much returns various investment avenues such as EPF, NPS, PPF, and ELSS fetch. Know your return options, then you can accordingly choose your investment options. Investors with a good risk appetite could consider ELSS. Experts say while investing in ELSS, invest via a systematic investment plan (SIP) in smaller chunks each month.