Any investment decision that you take in a hurry is prone to error and will lead to regret later.
Moreover, that’s what everyone does, they start planning in the last three months of the financial year, and in a hurry takes a decision that they often regret.
However, you don’t have to worry as today you will learn what mistakes you should avoid while planning for your taxes, whether when to start tax planning or what is the limit of the tax-saving, all your questions are answered below. Following mistakes, you should altogether avoid while planning your taxes
1. Delaying your tax planning
The root of all mistakes regarding your tax planning starts with your delaying in the planning of your taxes. You only start planning your taxes in the last three months of the financial year, which leads to many mistakes and increases odds for penalties and other problems.
Thus, it would help if you started planning early and not until the eleventh hour, which will lead to many more problems.
2. Investing only for tax saving
Is it that time of the year when you receive calls from insurance companies and their agents ask you to buy an insurance-cum-investment plan? These plans are linked with the market, such as ULIPs or endowment plans.
Moreover, you might have entertained these calls and gave them a cheque to buy one to save taxes. You did this only because of lack of awareness, and you were in a hurry to avoid taxes.
Don’t buy any endowment plan to save taxes because you might end up paying a high premium for a much lesser sum assured, and that premium might be paid a commission to a life insurance agent.
3. Not buying health insurance
Not all investments are for profits or wealth creation; taking care of future health uncertainties is also important. Purchasing health insurance will not only cover your health-related issues but will also provide you with a tax benefit.
- Under section 80D of Income Tax Act 1961, you can claim tax benefit on the premium paid for health insurance.
- For the premium paid for yourself, you can avail a deduction of Rs 25,000/-.
- You can avail an additional deduction of Rs 25,000/- for your parents.
- If a policy is for someone above the age of 60, then there is an additional income tax saving limit of Rs 50,000/-
Hence, health insurance should be an essential component of your tax plan.
4. Not maximising your 80C and 80D for tax saving
One of the biggest mistakes that taxpayer do is that they don’t look beyond section 80C of Income Tax act 1961, as it suggests investing in investment instrument for tax saving, but this is not optimal for the overall reduction of your tax liability.
Taxpayer are unaware of other section of the Income Tax Act, like
- Section 80D (Mediclaim)
- Section 80G (Donation to Charitable Causes)
- Section 80CCD (NATIONAL PENSION SCHEME)
Taxpayer lacks knowledge regarding such expenses often end up paying a higher tax.
5. Investing in endowment plans
- You want to invest in tax saving schemes. However, in a hurry, you just ended up investing in endowment plans, that only gives benefit to an insurance agent with a commission of 35% in the first year of premium, and then 5% on subsequent premium.
- Many of these plans are long term in a range from 10-20 years, and you have to keep on investing.
- If you try to redeem in between, you may not even get your initial investment back.
What to do then?
Above five tax planning mistakes are common in taxpayer. Ensure that you are avoiding such mistakes-
- By lessening your tax liability and earning significant savings by investing in better plans like term insurance plan and other plans which are not related to endowment plans.
- Also, start planning early to avoid last-minute surprises.
- Don’t invest for the sole purpose of taxes or up to income tax saving limit, always invest that will meet your financial goals.
Little information and discipline it takes, to avoid such tax planning mistakes.