Income tax is one of the major forms of direct taxes levied by the government of India under the regulatory guidelines of Central Board of Direct Taxes (CBDT). This tax is imposed on income generated by individual persons. For salaried persons, income tax is levied on the earnest monthly salary and varies from one taxable slab to another. Section 80C of the Income Tax Act, 1961 allows deductions for specific investments which taxpayer take up for the purpose of saving taxes. However, while planning to invest in income tax saving plans and schemes, there are some common mistakes that taxpayers tend to make. These mistakes can cost you more than you’d expect and must be avoided –
Mistake 1 - Delaying your investments in the last quarter
Making systematic investments over a period of time are important for building a good investment portfolio. People tend to hurry and take last moment decisions to invest their money to save tax; little do they know that these last moment investments hinder you from reaping its full benefits. Therefore, it is ideal to start investing early on, starting from the beginning of a financial year to create a diversified investment portfolio.
Mistake 2 - Not calculating your taxable income:
It is the right thing to calculate your tax liability and Income tax on the salary, but you should also remember that there are various other incomes like business income, interest on deposits, mutual funds, capital gains from stocks, rent from property, gold etc. If you do not calculate your taxable income properly before hand, you will not know exactly how much deductions you need to aim to reduce your payable taxes.
Mistake 3 - Not choosing your insurance properly:
Most buy life insurance plans in a bid to meet Section 80C requirements. However, many people end up having too much invested in endowment and ULIPs but without being aware of the benefits they actually have. However, the primary objective of buying an insurance policy must be to protect yourself and your family financially in case of an unfortunate incident. For instance, the iSelect Smart360 Term Plan by Canara HSBC Life Insurance offers options like Whole life cover and limited pay options along with Tax benefits.
Mistake 4 - Not taking into account tax-exempted expenses
All salaried individuals receive a standard deduction of Rs.50,000 as per Income tax Act, 1961 and if they are paying school tuition fees for two children, house rent, or home loan principal and interest are also eligible exemptions/ deduction on account of the same as per Income Tax Act, 1961 subject to conditions provided therein. Hence, it is important to make informed decisions and figure out how much you have already saved before you look for any further adjustments in your income. Other thing you can consider is EPF, which is deducted by your employer as your own contribution.
Mistake 5 - Not knowing the rate of returns:
Taxpayers usually do not know the exact returns offered by various investment avenues. Know your return options and invest accordingly. If you have a good risk appetite, you could consider ELSS or ULIPs. Before investing, make it a point to analyzing possible alternatives and not invest abruptly. Look for getting better returns, instead of focusing merely on saving taxes.
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Tax-Saving Investments Basis Rate of Return:
Type 1: High-risk, high-return investment
Example: ULIPs provide dual benefit of an insurance coverage, and savings with flexible investment options.
Type 2: Low-risk, lump-sum investment
Example: PPF lets you deposit regular amounts for a long-term for a fixed rate of interest.
Mistake 6 – Not aligning your investments with your financial goals:
While looking for tax saving instruments, do not invest in a financial product only for the purpose of tax planning. Consider factors like your family’s needs, your long term financial goals and your life stage based requirements, to evaluate and find a plan that aligns with all your goals. For instance, if you are a young and unmarried, you might want to accumulate money in the near future to meet specific goals like marriage, a lavish trip etc. In this case, you shall opt for options with shorter maturity and easy liquidity options. However, if you are married and are planning kids, you might want to opt for investments with a longer period of maturity, keeping your children’s future expenses in mind. The Guaranteed Savings Plan by Canara HSBC Life Insurance offers guaranteed benefits along with the flexibility to choose your savings horizon, to meet your specific life goal.
Tax saving can get confusing and may seem tiresome at times. However, it is important to ensure your hard earned money is put in the right places. So, research and plan thoroughly before making investments to gain the maximum and more relevant returns.
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