Everyone is scampering around to make last minute investments to save taxes. Whenever we are in a hurry to do something, we get oblivious to the details and make silly mistakes. The purpose of this post is to give you some insight on the common mistakes people do during their quest to save taxes quickly.
First and foremost “Don’t treat Investments as Tax Saving Instruments”
Yes, you read me right. Investments is nothing but your hard earned money that you are using to buy something. Lets say, I were to come to you with a notebook with the image of Rajnikanth printed on it and ask you Rs. 1000/- for it, will you buy it? You’ll say “NO”. Ok, what if I say, if you buy this book, you will get Rs. 300/- as Tax Benefits and you may be able to sell it to another Rajnikanth fan in future. Would you be tempted? I am sure you would. But, did you really think someone will buy a notebook that is probably worth Rs. 50/- at max by paying so much?
This is what you will end up doing if you make investments with the Tax Saving part in mind. Never and I mean Never make an Investment just because it saves tax. Make an investment that will earn you money and profits. If it gives Tax Savings, then that is like killing two birds with one stone. Treat Investments with respect. After all, we all work hard to earn the money. No one is handing it over to us. Are they?
To know more about Lifecycle Based Tax Saving click here.
Plan your Tax Savings Ahead
According to experts, Tax Planning is not a one-time activity you can do in February for a few days. It is something that you must consider as part of your overall financial goals. You want to save money for your home, for your sons education abroad, your retirement etc. While trying to save tax, you end up investing Rs. 1 lakh or so every year. For someone who has a probably working career of atleast 30 years, imagine how much that would workout to, at even a 5% rate of returns per annum.
Get the picture? Always include your tax planning as part of your overall financial goals. Use this 1 lakh you invest to save taxes to achieve your financial milestones.
To know more about, how to save income tax click here.
Be careful with single-premium life covers
Does the title of this section sound familiar? In one of our earlier posts on Insurance, I had elaborated on this. Be cautious when you buy Single Premium Insurance Plans. You may be tempted to take up one single premium policy for 1 lakh and use it in one shot under Section 80C. unfortunately, the sum assured has to be atleast 5 times the premium you paid. Else, only 20% of the premium paid is eligible under Section 80C for tax benefits.
So, even if you pay 1 lakh for a policy, you can use only Rs. 20,000/- for tax benefits. Be cautious against insurance agents who may mislead you into taking such policies that don’t offer as much tax benefits as they propose.
To know more about Insurance policies and Income tax, click here.
Plan your PPF Investments
You might already know what PPF is and that investments of upto Rs. 70,000/- in every financial year are eligible for tax benefits under Section 80C.
The problem is, most of us invest the full amount in bulk during either February or March and claim tax rebates. Though this is easy and feasible, the money you invest into your PPF account earns an interest only if deposited before the 5th of every month. So, lets say you invest Rs. 50,000/- on 6th of February, you will be losing out on Rs. 333/- interest you would have got if you had deposited the same money on the 4th. A difference of 2 days cost you Rs. 333/- didn’t it?
Another important thing about PPF investment is that, investing Rs. 5000/- every month is much easier and earns you more interest in a year than Rs. 60,000/- invested in one shot. Not to mention, it is easier on your pocket too.
To know more about the various tax saving options available click here.
Make Use of Joint Home Loans
If you are a working couple, then this point is doubly beneficial for you. You already know that interest & principal paid on home loans are eligible for tax benefits with upper limits of Rs. 1.5 lakhs on the interest and Rs. 1 lakh for section 80C. What most people do not know is that, if a working couple take a joint home loan, they both can individually claim tax benefits on this Rs. 1.5 and 1 lakh respectively. This essentially means you are getting double the tax benefit by just taking a joint housing loan instead of an individual one.
Anyways, you and your spouse are going to pay the home loan EMI and plan your home expenses using both your salaries, then why not utilize the tax benefits it offers. Doesn’t it sound like a great idea?
To know more about buying a home, click here.
Don’t forget other Tax Saving Options
Everyone knows Section 80C and utilize the 1 lakh tax saving. But, many people forget the other tax saving options available to them. They are:
a. EPF and VPF Payments
b. House Rent Allowance (HRA)
c. Medical Expenses
d. Infrastructure Bonds
e. Children’s Education Fees
f. Your own Education Loan repayment
To know more about the Indian Income Tax Policies, click here.
We all work really hard to earn the money we get. So, it makes perfect sense to plan our taxes efficiently to minimize the tax we pay. The government has given us so many options to save taxes for a reason. It is perfectly legal to utilize all these tax saving avenues to reduce the taxes we pay. So, plan ahead and use the money wisely.
Happy Tax Saving!!!