Completing one’s tax planning exercise at the fag end of the FY comes with its own share of risks. In a hurry to save tax, the possibility of making the wrong investment decision is high. There could be simple and common tax-saving mistakes that one may commit in choosing the tax-saving investment options.
1. Waiting till the End
With tax-saving instruments such as ELSS mutual funds, you don’t really need to wait till the last moment. You can make the investment as soon as the financial year starts and better yet do it the SIP way so you won’t face a big payment towards the end. Even for FDs and PPF, it’s better to set up your recurring debits at the beginning of the financial year.
2. Not considering New Tax Procedure
For the first time starting the assessment year 2021-22, the taxpayers will have an alternate option while filing income tax return. In addition to the existing or the old tax regime, one may file ITR under new tax regime, at concessional rates. Therefore, as a taxpayer one needs to calculate tax liability under both tax regimes before proceedings with tax planning.
3. Ignoring Tax-Deductible Costs
The greatest folly of all is ignorance. The majority of individuals are unaware that costs such as health insurance premiums, children’s education fees, home loan payments, and rent are all eligible tax deductions. As a result, they fail to report such costs and wind up paying more taxes. The House Rent Allowance is one of the lesser-known allowances (HRA). Most employees receive HRA from their employers, but if you do not, you can claim a deduction of up to Rs.2000 per month in your income tax returns.
4. Investing in Tax-Inefficient Schemes
A common tax-saving strategy that is preferred by most is investing in long term fixed deposits (FD) or acquiring national saving certificates (NSC). You can make a one-time claim on the investment you make, however the interest you earn on both Fds and NSCs are taxable. This makes such products tax-inefficient. Distinguish tax-saving schemes like PPF and other pension schemes, from usual investments of fixed deposits or recurring deposits and make the most out of them. Investments made in PPF (public provident fund) are eligible for tax deduction and at the same time the interest earned out of them are tax-free. Look for such effective tax-saving schemes.
5. Ignoring Section 80D and others
In addition to Section 80 tax saving investment options, there are certain other ways to save tax. Your health insurance premium qualifies deduction under section 80D. Also, under section 24, your principal repayment towards a home loan comes with a tax advantage. Make use of these tax provisions and take benefit while filing ITR.
6. Not knowing which of your mandatory investments are already eligible for Section 80C deductions
Those in a higher salary bracket often don’t realize that they are already fulfilling their 80C investments via their EPF contribution. If your EPF component is on the higher side, do a double check before investing. You might not either need to make the investment or if so, then you might need to invest less than you might think.
7. Not linking to Goals
Most tax saving investments such as PPF, Ulips, life insurance etc are long term in nature. If you are investing in any one of them do not make the mistake of putting in money merely for saving tax. Link the investments in tax savers to a long term goal and do not exit mid-way before reaching the goal. Even though ELSS comes with the shortest lock-in period of three years, link it to your long term goal. You may continue with ELSS fund value after the lock-in has ended.
8. Not Doing Enough Research on Tax-Saving Products
Every tax-saving investment option may be assessed using three basic criteria. The first criterion is liquidity, which basically refers to how easily you can get your money when you need it. In this respect, you must be aware of the instrument’s lock-in time as well as the conditions for premature withdrawal, including taxation and penalty costs.
The danger of losing money is the second broad element to consider when evaluating a tax-saving financial instrument. Certain investments are inherently risky. And they are often investments that have some element of equity.
| INSTRUMENT | RISK | EXPECTED RETURNS |
| Bank Tax-Saver Fixed Deposit | No | 6 – 7% |
| Equity Linked Saving Scheme (ELSS) | Yes (Moderate) | 12 – 14% |
| National Pension System (NPS) | Yes (Low) | 8 – 12% |
| National Savings Certificate | No | 7% |
| Post Office Time Deposit | No | 7% |
| Public Provident Fund | No | 7 – 8% |
| Sukanya Samriddhi Yojana | No | 8% |
| Unit Linked Insurance Plans | Yes (Moderate) | 7 – 12% |