Your Tax Planning may not be effective due to some common lapses. Circumvent these lapses and enjoy the full benefits of Exemptions, Deductions and Rebates provided by Income Tax Act!
You labour all through the year and earn some money. And, when it is time for filing Income Tax, you feel are dejected to part with your money. You scramble with last minute efforts and go about investing in some tax-free investments to reduce your tax burden.
These last minutes moves may not be very effective. These common mistakes may be avoided.
1. Last Minute Tax-Planning
Most people make the mistake of Tax planning at the last moment. To create a good investment portfolio, make Income Tax planning investments all through the financial year and not in the last days of March.
Some of the consequences could be:
· Making Tax free investment in just one month may be hard on that particular months’ budget.
· You may miss out some tax deductions at the last moment
How this mistake could be avoided: It is therefore necessary to plan your taxes just as you plan how to earn money all through the year.
2. Lack of Awareness of Tax-exempt Expenses
Expenses towards Children’s tuition fees, house rent, house loan payment are exempt from tax. Many persons are not aware of these tax-exempt expenses. In a hurry many persons do not show these expenses and pay extra tax unnecessarily.
While Section 80C provides us details of Tax-saving investments there are other deductions like expenses towards social donations, medical expenses, interest on housing and education loans.
Many people do not know that House Rent allowance is tax-exempt. Most people receive this allowance from their employer. In case the employer does not give you this allowance you may claim a deduction of Rs.200/- per month while submitting your returns.
How this mistake could be avoided: You need go through the entire tax-exempt expenses list that the IT Act provides and then plan your taxes.
3. Unwise Investment while Tax planning
There is a need to plan for proper balance between tax-exempt mutual funds related to debt funds and stock market with endowment plans. A proper portfolio is the need of the hour.
Most people invest in long term fixed deposits (FDs) and/or National Saving Certificates (NSCs). Investment is tax-exempt but its interest is not and hence this will be taxable in future. So, this year’s deduction can be a tax burden in future.
PPF and some pension schemes and their interest are eligible for tax deductions and are hence better investments than most FDS and NSCs.
How this mistake could be avoided: Plan your wealth portfolio keeping in mind - risk, age and tax saving schemes and then invest.
4. Buying More Endowment Insurance Plans Than Necessary
Most Insurance agents advice you to invest a big amount in Endowment life insurance policies. The agents receive big commissions so they make you buy them. They are long term plan and you have to invest regularly. In case you redeem them, you lose the principal investment. Yes, these policies are tax-exempt under Section 80C, but there are other ways to go about it.
How this mistake could be avoided: The best option for you would be to look into various options and diversify in for example term plans.
5. Awareness of Section 80C limit
According to Section 80C, every tax payer has a basic tax deduction limit amounting to Rs.1,50,000/-. Most people do not know this and pay extra tax. Tax planning should involve in-dept study of all details in Section 80C of Income Tax act.
Other rules in the Section have to be analyzed as well for Tax planning purpose. Only up to 10% of sum assured amount of the total Life Insurance premium is tax-exempt. Be aware that Life premium tax exemption is only for that 10% and not more than that. Many rules such as these needs to be kept in mind while Tax planning.
How this mistake could be avoided: Invest the Rs.1,50,000/- amount wisely. Comprehend what Section 80C says and plan your portfolio accordingly.
Overview(with Table containing details of Tax deductions under 80C)
Type of Investment | Description | Interest rate | Type of risk | Timeline |
ELSS | Equity Linked Saving scheme | 12-15% | Stock market risk | 3 years |
PPF | Public Provident Fund | 8.1% | No risk | Till retirement |
NPS | National Pension scheme | 7-10% | Stock market risk | 15 years |
FD | Fixed Deposits with tenures 5 or 5+ years | 7-9% | Risk free | 5 years |
ULIP | Unit Link insurance plans | 8 – 10% | Stock market risk | 5 years |
Sukanya Samariddi | Programme for a Girl child | 8.6% | Risk free | 21 years |
Senior Citizen Savings Scheme (above 60 years) | 8.6% | Risk free | 5 years |
In Conclusion
The first and foremost way to reduce your tax burden is to note what investments are tax free. As a measure of encouraging investment, the Government announces that some investments are tax-free. These include Public Provident Fund, Health Insurance.
Keep this in mind and then submit your Income Tax returns. Save your hard-earned money without paying unnecessary taxes and be a relieved soul.
Leave Comment