If you’re a salaried person, it’s that time of the year – time when you’ll probably scramble around to get proof of investments and tax saving.
If not, then hopefully you are well sorted in terms of tax planning, and the below content may not be too relevant to you!
There are several ways you can save taxes, with appropriate “expenses” and investments. And there are several ways by which you can mess your tax planning.
Here are 5 common mistakes while doing tax planning in India.
1. Not planning taxes well in advance
Financial year in India starts in April and ends in March the following year, Yet, very few people “plan” their tax savings within fist few months & then rush to save taxes by around end of the year (or when the accounts department asks for “proof”). As a result, they not only end up not doing proper research & investing with limited knowledge, but also fail to take full advantage (e.g. you can get more interest on PPF/ VPF if you invest at beginning of the year, by virtue of higher interest rates they offer vis a vis traditional savings accounts & fixed deposits).
At the same time, few people are left scrambling for cash to invest at the end of the year, and susceptible to take bad financial decisions (e.g. defaulting on credit card to ensure enough cash flow).
2. Not using Section 80C efficiently
Investing under Section 80C is a popular way to save taxes. One can invest via ELSS (Equity Linked Savings Scheme), PPF (Public Provident Fund), PF (Provident Fund, usually deducted by the employer for a salaried employee), VPF (Voluntary PF, which you can contribute to if you are a salaried person), NSC (National Savings Certificate), Sukanya Samriddhi Yojna, Hone Loan Principal and so on.
However, many people don’t use the entire limit and thus are inefficient in tax savings. At the same time, if one has spare cash, he/ she can use the entire PPF amount (max limit of Rs. 150,000) and/ or top up your PF via VPF and also invest in Sukanya Samriddhi Yojna, if eligible. The rationale being that these instruments give good rate of interest and withdrawals are tax free too.
In other words, one can invest in these instruments for good returns and not just for tax saving.
3. Buying insurance to save taxes
How often is insurance being sold as a tax saving plan!? While tax saving is a benefit of buying insurance, it should not be the primary objective.
The primary objective of getting insured is managing risk (risk to life, risk to health etc.). Tax saving happens to be a collateral benefit.
However, this is not the worst thing about the way insurance is sold. Endowment policies (which have premium much higher than term plan) or ULIPs (Unit Linked Insurance Plan) which gives very limited cover (but good agent commission for “selling”) are often sold as instruments offering tax savings, “assured” returns & insurance. And in effect, offers a mishmash of the three – without helping you make the best of any of these “benefits”.
4. Taking home loan to save taxes
You can save taxes on home loan via principal repayment (Section 80C, where you have many more options) and interest repayment. In addition, you may get few other tax benefits on home loan, depending upon several factors like construction & occupancy status.
However, with home loan you are taking a huge repayment commitment (including principal and substantial interest you end up paying) and also restricting your flexibility & cash flow, if you are stretching your financial limits and your sources of income don’t grow on expected lines. And all that for saving taxes, if that’s your objective.
Buy home only if –
– You plan to live in it, OR
– You expect to get rental income & expect property prices to appreciate (use your own judgment here.)
But don’t take home loans to save taxes. The tax savings may not be worth it, in context of the overall financial commitment needed.
5. Forgetting to claim some exemptions
Donated to a charity? Spent on kids’ education? Took a health insurance? Spent money on parents’ medical treatment? Living in a rented apartment?
You can claim exemptions for many of the expenses you incur. And they can help you plan taxes. So keep your eyes and ears open on the exemptions you can claim.
Looking to be more efficient in saving taxes? Then, as a rule of thumb, be lookout for things where tax saving is not the only benefit. Probably you’ll get more value than just saving taxes.
(Disclaimer – This is keeping in mind a typical salaried person in India, which may or not be applicable to all. At the same time I don’t claim to know everything about tax planning, and the above points are based upon my observations)