5 Tax Saving Mistakes To Avoid In 2019
Here are some of the most common tax saving mistakes, which you must avoid
It's that time of the year when most tax payers must be looking to minimize their tax outgo by investing in various tax saving investments. During such last minute tax saving quests, the rush to reduce tax liability often pushes taxpayer towards a number of mistakes, which may impact their financial future in the long run. Here are some of the most common tax saving mistakes, which you must avoid:
Ignoring the importance of wealth creation during tax saving- Tax payers looking to invest in tax saving instruments must align their tax planning process with their long term financial goals. Even though tax saving might be the primary purpose of investing in tax saving instruments, it should never be the sole purpose, and the objective of wealth creation should be given equal weightage.Apart from taking note of the investment’s tax benefits, make sure you take into consideration factors such as returns, liquidity and risk to facilitate wealth creation. During tax planning, make sure the objectives of wealth creation and tax saving go hand in hand, in order to maximize the benefits of investing your hard earned money in any tax saving instrument.
Limiting your portfolio to traditional tax saving instruments-The risk averse nature of many tax payers prevents them from investing in market linked instruments, that offer higher returns than traditional tax saving instruments such as PPF,NPS,NSC or tax saver fixed deposits. Such investors are either unaware or simply ignorant towards the fact that tax saving mutual funds (ELSS) not only provide tax benefits of up to Rs.1.5 lakhs under section 80C, but also inflation beating returns, which are usually much higher than those of its tax saving peers.
Moreover, gains from ELSS are tax free up to Rs.1 lakh, and long term capital gains (LTCG) tax is only levied on gains above Rs.1 lakh in a financial year. Including ELSS in your tax saving investment portfolio also provides greater degree of liquidity, as it involves the lowest lock in period of just 3 years. However, since ELSS are equity oriented funds, and equities have consistently outperformed its peers by providing inflation beating returns over the long term, its prudent to remain invested even after lock in period ends. This would assist in achieving the of objective of wealth creation through higher returns over long term, besides claiming the tax benefits each year.
Disturbing your emergency fund for tax saving investments-The desperation to reduce your tax liability, especially during the last quarter of the financial year, often leads many tax payers towards the decision to channelize their emergency fund into tax-saving investments. Investing the money originally designated for financial exigencies to avail tax benefits, is not adviseable. This may lead to the investor exhausting his/her credit card limit or avail a high interest loan, to fulfill monetary requirements at the time of financial emergencies such as a sudden job loss or severe illness.
Being unaware of lesser known tax deductions- While claiming tax deductions, tax payers are usually unaware of some lesser known tax exempt expenses that can be claimed as deductions. Some of these expenses include expenditures incurred on a specified disease (Section 80DDB), health expenses of a disabled dependent (Section 80DD); children’s tuition fee (section 80C); registration fee, stamp duty and other direct expenses related to transfer of house property to assessee (section 80C);donations to specified institutions, funds, temples, political parties (Section 80GGA, 80G, 80GGC) and interest earned up to Rs.10,000 on bank savings account (Section 80TTA). Tax payers lacking knowledge regarding such expenses often end up paying higher tax than they should have. Therefore, make sure you learn about all such expenses in order to further reduce your overall tax liability.
Relying on last minute tax planning-One of the most common tax planning mistakes is the repeated reliance on last quarter of the financial year for all tax saving decisions and investments. More often than not, such last minute tax planning leads to erratic decision making and increases the chances of choosing sub optimal investment instruments. Moreover, last minute planning may even put you at risk of failure to actually get the tax benefits, due to reasons such as failure to timely submit investment proofs or delay in payment clearance. When you invest at one go (lump sum) in the last quarter of a financial year, you lose the opportunity to earn the full year’s returns on the selected products. Therefore, it's prudent to devise an efficient tax saving strategy in the beginning of the financial year itself. This allows you to time your investment into tax saving products, and enables you to take the dual benefits of tax benefits for the whole year, and higher returns over the long term. Remember that the more you delay tax planning, higher the chances of paying higher tax than you should.
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