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Mistakes To Avoid When Investing In Tax-Saving Plans

Mistakes To Avoid When Investing In Tax-Saving Plans

Income Tax saving plans

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+ Term Plan by Canara HSBC Oriental Bank of Commerce Life Insurance offers options like Whole life cover and limited pay options along with Tax benefits.

Benefits of Life Insurance

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.

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 Oriental Bank of Commerce 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.

Speak to an insurance specialist now!

FAQs Related to Tax Saving

First of all, your gross total income is taken into account and all applicable deductions/exemptions are deducted out of it, the resultant amount is the net income, upon which the Income Tax is calculated, on the basis of income tax slabs that are announced each year in the Union Budget.

How much tax you can save depends on your financial portfolio and profile. The most common avenue for tax-saving is Section 80C, which allows you deductions up to Rs 1.5 lakh in your taxable income. The implication is that you can save up to Rs 46,800*in taxes in a year, depending upon the income tax slab you belong to. Similarly, other avenues like interest on loans, health insurance etc also provide deductions capped at a certain amount.

*Tax saving of Rs.46,800/- is calculated at the highest tax slab of 31.2% (including 4% Cess) for an individual assessee on life insurance premium of Rs.1.5 lakh, who is having taxable income upto Rs.50 lakhs.

You can choose from many investments that are tax-exempt: not an exhaustive list, but includes Equity Linked Saving Scheme (ELSS), Public Provident Fund (PPF), life insurance plans, Unit Linked Insurance Plans (ULIPs), Sukanya Samriddhi Yojana, Senior citizens Savings scheme, National Pension Scheme (NPS), tax-saving bank FDs.

First of all, make investment of Rs 1.5 lakh in investments instruments covered under Sections 80C to reduce your taxable income. Claim deductions for the interests paid on home loan and/or education loan if any. Get a health insurance policy and claim for other medical expenditure like preventive medical healthcare check-up, expenditure on rehabilitation of handicapped dependent relative, among others. Mainly, the idea should be finding out which tax saving avenues fit well with your larger financial goals and invest in them!

The maximum limit of investment that will reap the benefits of deduction from taxable income under Section 80C is Rs 1.5 lakh.

There is no limit to the number of tax-exempt investments one can have in a financial portfolio. However, it is important to note that there is a limit to how useful any instrument can be for the purpose. This is because the amount of deduction that can be claimed for specific instruments is capped at a maximum value. At the same time, keep your financial portfolio balanced so that it also provides safety, returns and liquidity.

First of all, make use of the Rs 1.5 lakh deduction allowed under Section 80C. This can be done by making investments in life insurance premium, Equity Linked Saving Scheme (ELSS), Public Provident Fund (PPF), Unit Linked Insurance Plans (ULIPs), Sukanya Samriddhi Yojana, Senior citizens Savings scheme, National Pension Scheme (NPS), among others.

Second, make use of the deductions available in respect of health insurance and other medical expenses. Under Section 80D of the Income Tax Act, 1961, a deduction of up to Rs 25,000 is allowed in a year in terms of the premium paid towards a health insurance policy of Self and your family i.e., Spouse and children. This can include preventive healthcare check-ups too upto Rs 5000/-. Under section 80D you can also claim additional deduction upto Rs. 25000/- (Rs. 50000 in case of senior Citizen) for health insurance of your parents.

Apart from Section 80C, various deductions and exemptions has been provided under the provision of Income Tax Act, 1961 like deduction under section 80D can be claimed for the payment of health insurance, deduction upto Rs 50,000 on home loan interest under Section 80EE. Any donations you make to charitable institutions are also allowed as deduction under Section 80G, subject to condition prescribed therein.

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