Rushing to Make Last-Minute Tax-Saving Investments? Avoid These Mistakes...
Listen to Rushing to Make Last-Minute Tax-Saving Investments? Avoid These Mistakes...
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The deadline to invest in tax saving instruments and reduce your tax liability is fast approaching. Ideally, you should avoid resorting to last-minute tax-saving exercise to reduce the tax outgo -- it can lead to erratic decisions and you may lose out on the opportunity to implement an effective tax-saving strategy. These mistakes can not only lead to stress but also impact your personal finances.
Nonetheless, if you are yet to invest in tax-saving investments and want to reduce the likelihood of committing mistakes in a rush to save tax within the limited time available, there are ways to steer through these difficulties.
But before that, note that last year the deadline for investing in tax-saving scheme was extended by three months (till June 30, 2020) amidst the disruption caused by the pandemic. If you had invested in tax-saving avenues during the extended period and have claimed deduction for the same in FY 2019-2020, the tax benefits for the same cannot be claimed for FY 2020-2021. Consider this while determining tax saving investment to be made.
So read on to know the common mistakes that can occur while making last-minute tax saving investment and how you can avoid them:
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Choosing tax regime without comparing liability
The finance ministry in the Union Budget 2020 had introduced a new tax regime which gives individual tax payers the option to pay income tax at a concessional rate.
Notably, if you opt for the new tax regime with lower tax rates, you will have to forego the deductions and exemptions including the standard deduction, deduction under Section 80C, interest paid on housing loan, etc. This can be helpful if you do not want to lock-in your funds for a longer period in tax saving instruments such as Tax Saving Bank FD, Provident Fund, etc.
Comparing liability under the existing and the new tax regime while help you to decide on the most suitable option depending on your income and expenses and customize your investment preferences accordingly.
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Failing to ascertain actual taxable income
When computing the taxable income, it is important to take into account all sources of income. Besides the income from salary, you may have income from business, rental income from property, interest from bank/post office deposits, capital gains from assets, or any other source.
Determining the taxable income is an important step in streamlining your tax planning exercise which will help you to correctly estimate the amount of tax-saving investment to be made for reducing your tax liability.
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Taking the wrong approach to insurance
The primary purpose of life insurance policy is to provide financial protection to dependents in case of the untimely demise of the insured person. Simply opting for a policy because it offers a tax deduction under Section 80C of the Income Tax Act, 1961 is an imprudent approach.
There is a possibility that you may end up investing in investment cum insurance policies such as endowment policies, money back plans, or ULIPs that provide tax saving component along with life cover in a bid to meet tax saving requirement. However, you must know that these products will neither provide adequate cover nor generate optimal returns. A simple term plan is enough to take care of your life insurance requirement at a very reasonable premium.
[Read: Why Senior Citizens Need To Choose Their Tax-Saving Avenues Thoughtfully]
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Not aligning investment with financial objective
When you invest in tax saving instruments, it is important to analyse the risk associated with it, the rewards and other benefits as well as its suitability to your needs. If you are a conservative investor looking to earn decent returns while ensuring the safety of corpus, products like Public Provident Fund, Tax Saving Bank FD, National Saving Certificate may be best suited for your tax saving needs.
On the other hand, if have the ability to bear market volatility to earn higher returns, you can consider investment in tax saving mutual funds (ELSS). ELSS has the lowest lock-in period of three years compared to other tax-saving instruments. In addition, it has the potential to give a boost to your wealth creation journey.
But ensure that you do not delay investment in ELSS, waiting for the market conditions to turn favourable. Instead, opt for the SIP route to stagger your investment. This will not only help to reduce the impact of market volatility on your portfolio, but you will also benefit from compounding of wealth.
[Read: Considering ELSS for Tax-Saving? Choose Your Schemes Carefully]
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Relying only oninvestments under Section 80C
Section 80C of the Income Tax Act allows you to claim deduction of up to Rs 1.5 lakh in a financial year. But if you have already exhausted this limit, you can explore options beyond Section 80C. Besides, certain payments that are eligible for deductions such as payment of house rent, expenses towards children's school tuition fee, interest payment on home loan. Here are some other options to minimise tax liability:
Section 80CCD - Contribution towards NPS
Section 80D - Payment for medical insurance premium
Section 80E - Interest paid on education loan
Section 80G - Charitable donations
Section 80EE - Interest repayment n home loan for first-time owners
Section 80TTA - Interest earned from saving bank account
Ensure that you take these into account when assessing the need to make further tax saving investment.
[Read: 5 Ways of Saving Income Tax in 2021]
To conclude...
With the deadline for tax saving investment approaching, ensure that you invest sensibly taking into account your income, expenses, and risk taking ability. Keep the investment proofs that need to be submitted to your employer ready so that the employer deducts TDS on your estimated taxable income. And for the next financial year, start tax planning early during the year to avoid a strain on your finances and losing money on hasty, ad-hoc investments.
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Warm Regards,
Divya Grover
Research Analyst
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