Distributors and brokers must be enjoying the rush of March. With the 31 March deadline approaching, they are able to push high-cost but low-yield products to panicky taxpayers, who are yet to complete their tax planning. The products being pushed do little for the buyer, but offer very generous commissions to the seller. If you are among the stragglers who have left their tax planning for the last minute, here are some common mistakes to avoid.

Investing less than the limit

Under the old tax regime, one can claim a deduction of Rs.1.5 lakh under Section 80C, and an additional deduction of Rs.50,000 for the NPS contributions under Section 80CCD(1b). There are also deductions for medical insurance premium for self, family and parents, as well as the interest paid on home and education loans. However, not all taxpayers claim the entire deduction available to them. Of the 7.4 crore tax assessees who file returns, about 95 lakh reported a taxable income of more than Rs.10 lakh, but there are only 33.35 lakh subscribers under the all citizens’ category of the NPS. There are also a lot of tax returns where the full Rs.1.5 lakh limit under Section 80C is not exhausted, even though the taxpayer earned more than Rs.10 lakh a year. Clearly, taxpayers are not doing enough to save tax and leaving too much on the table for the taxman.Investing more than needed
The opposite of this is also true: many taxpayers could be investing more than they have, to save tax. The tuition fee of up to two children is eligible for deduction.

If you are repaying a home loan of a self-occupied house, the interest is deductible under Section 24, but the principal portion of the EMI is deductible under Section 80C. The interest earned on the interest of NSCs can also be claimed as a deduction. On adding up all these, many taxpayers will discover that they have already crossed the Rs 1.5 lakh deduction limit under Section 80C. Investing more than you need to does not really lead to a loss, but it locks up your capital in the investment for 3-5 years.

Investing at random without a plan in mind
Tax planning is another name for financial planning. The tax-saving investments of an individual should be part of his overall financial plan. However, this is possible only if one carefully assesses the utility of a financial product before investing in it. Section 80C and other deductions give enough scope to fill up gaps in a person’s financial planning. Invest in ELSS funds if your investment portfolio requires equity exposure. Buy an insurance policy if you need life cover. Contribute to the NPS if you want to save for retirement. Invest in NSCs or fixed deposits if you need the money in five years and can’t take risks. Contribute to the PPF if your portfolio requires the stability of a long-term fixed income option. In other words, your tax-saving investments should be in sync with your long-term investment objectives.

Making multi-year commitments in a hurry
No matter what the bank relationship manager says, avoid making multi-year financial commitments without fully understanding the product and assessing its place in your financial plan. Life insurance policies are one such product that require a long-term commitment. Premature closure of a policy will lead to big losses. Assess your need for life insurance cover, your ability to service the premium for the full term and your willingness to accept 5-6% returns before you buy. If buying a Ulip, make sure you understand all its features, especially the switching facility that lets you change the asset mix of the portfolio.

Putting large sums in risky assets at one go
The buoyancy in the equity markets has helped ELSS funds churn out terrific returns for investors in the past few years. The category has generated 37.4% returns in the past year and 18.1% annualised returns in the past three years. However, ELSS are equity funds and investing a large sum at one go in an overheated market is not recommended. If you have to invest Rs.50,000-60,000 under Section 80C before 31 March, put only Rs.15,000-20,000 in ELSS and the rest in a safer option such as PPF, NSCs or tax-saving FDs.

Not taking taxability into account

It is a paradox, but the investors who are keen to save tax often don’t consider the tax treatment of the income from tax-saving investments. The income from fixed deposits and NSCs is fully taxable, so the post-tax returns are very low. Gains of up to Rs.1 lakh from ELSS funds are tax-free. Beyond Rs.1 lakh, they get taxed at 10%. However, as explained earlier, putting in large sums at one go is not the best way to invest in ELSS. The NPS offers the best of both worlds. Taxpayers can invest even large sums in the debt funds of the pension scheme and claim tax deduction. Later, they can gradually shift to equity funds.

The Author IS CEO OF TAXSPANNER.COM



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