The famous saying, ‘A penny saved is a penny earned,’ holds. As an eligible taxpaying citizen of the country, there are several ways to save on taxes legally. In doing so, there are a few common tax-saving mistakes that you must avoid. To help you with it, we’ve detailed them below.
1. Planning tax savings at the end of the financial year
Humans tend to take action at the last hour or only when required. Many people calculate their taxable income for the financial year and plan tax savings at the end. Making investments in February or March provides limited tax relief. Tax planning and strategy are essential at the beginning of the financial year.
Professionals employed in organizations are requested by their human resources/finance department to submit tax exemption documents by December. This allows the concerned team in the organization to calculate the taxable income of the employee and levy income tax accordingly.
This does not mean you start implementing tax-saving strategies only in November. Do not make these tax-saving mistakes. Begin your tax planning in April or as soon as you get to know that you are eligible to pay taxes in the current financial year. This will facilitate you in increasing your disposable income.
Companies start the process early to verify the documents and calculate and file taxes of all the employees in the organization on time.
2. Considering investment as the only form of tax saving
It is a common misconception that making investments on which the returns are unpredictable is the only way to save taxes. Extensive advertisements of investment products that aid in saving taxes is the main factor in creating this misconception. Such advertisements are created to promote the sales of investment instruments.
Multiple ways to invest that offer you the benefit of saving on income tax. As per Section 80 of the Income Tax Act, 1961, you can avail deduction on income tax for the following expenses.
- Tuition fees (up to two children)
- A premium of life insurance
- A premium of medical insurance
- Cost of preventive medical check-ups
- Interest paid on home loan
- Interest paid on education loan
- Medical expenses for treatment of critical diseases
- Medical treatment cost of disabled dependents (biological parents, spouse, children)
- Donation to a recognized body
- House rent
- Donations for scientific research
Every item listed above for deduction of income tax has a maximum limit. List down the expenses you can utilize to claim for a deduction. Against each expense, mention the total amount you have incurred for the financial year. This will give you an idea of the maximum amount you can claim individually and in total. It will help you legally save on taxes.
3. Not exploring tax-saving products
There is a range of tax-saving products in the market. Explore all the options and choose the ones that suit you the best. Increase your disposable income by investing in tax-saving products. We’ve detailed them below for your reference.
|Investment Product||Lock-in period||Returns on Investment (ROI)|
|Fixed Deposit (FD) in a bank||5 years||6%-7% p.a.|
|Public Provident Fund (PPF)||15 years||7%-8% p.a.|
|ELSS Funds||3 years||15%-18% p.a.|
|National Pension Scheme (NPS)||Active till retirement||12%-14% p.a.|
|National Savings Certificate||5 years||7%-8% p.a.|
|Sukanya Samriddhi Yojana (SSY)||N/A||7.6% p.a.|
|Unit Linked Insurance Plan (ULIP)||5 years||It depends on the plan you choose|
4. Investing in insurance products without evaluation
Insurance policies provide security in return for the monetary investment you make in the form of a premium. Since it is a no-risk investment, it attracts people. This is the quickest tax-saving investment people make right before they need to submit tax exemption documents.
A life insurance policy is a much safer bet when compared to other insurance policies that double up as investment products. For example, money-back policies, endowment policies, etc., must not be included in your tax planning and strategy. These products deliver lower returns than other saving products such as PPF, Post Office PF, and National Savings Certificate.
Another drawback is that money-back and endowment policies do not sit well during inflation. You will have to commit for 10-20 years to such products once you invest in them. Also, heavy penalties are levied upon premature withdrawal. In short, it is not wise to include it in your tax-saving strategies.
5. Not diversifying investments
As the famous saying goes, ‘Do not put all your eggs in a single basket; do not make your entire tax-saving investment in one product. There’s 100% risk in making your entire investment in one type of tax-saving product. Diversify your investment to safeguard your money.
Choose the tax-saving products and the amount of investment you want to make in each. Diversify your investments to increase your disposable income and legally save on taxes every year.