It is that time of the year again - the time when we suddenly start taking interest in our finances. After months of hibernation, we suddenly wake up and start planning for saving income tax.
While this is certainly better than not doing anything to save tax, this last minute rush can lead to some costly mistakes. Here are a few things that you should avoid.
1. Investing Just to Save Tax
Since you are in a hurry to save tax, you might take irrational investment decisions where instead of taking into account the overall post-tax return, the investment is based purely to save income tax. Although this can save you some income tax in the near term, over the entire term of the investment, you might lose a ton of money!
You should especially avoid making investments in products like Unit Linked Insurance Plans (ULIPs), where you commit a large sum of money for a very long period. With such products, it is expensive even to terminate the contract when you realize that your decision to invest was wrong in the first place.
2. Investing Purely Based on "Advice"
This is also the time of the year when you would hear a lot from many "advisors". They may call themselves many things - insurance agents, mutual fund advisors, relationship managers or anything else, but basically, they would "advice" you to invest in the product they are recommending.
Sure, the product would offer you tax benefit. After all, who doesn’t want to invest in a tax saving product at this time of the year?
But investing solely based on such advice can do you a lot of harm in the long term. Before making any investment, do your own research – ask friends you trust, check out some personal finance blogs to read unbiased reviews, or ask your financial advisor / financial planner.
But whatever you do, make an informed investment - not a hasty investment.
3. Limiting Yourself to Section 80C
Most people want to max out their Section 80C limit - and many are able to do this. And then they stop. You should remember that investments under section 80C are not the only way to save income tax. There are many other ways too!
In fact, for certain tax breaks, you would not even have to do anything additional - what you have already done might help you save tax! For example, many donations you make during the year can help you reduce your income tax liability. Similarly, if you get House Rent Allowance (HRA), you can save some tax.
The bottom line is that although it is the biggest avenues to save tax, Section 80C is only one of the many avenues. Evaluate other options based on your situation, and if needed, take help from a qualified person to maximize your tax savings.
4. Don't Try to Do Everything on Your Own
This is an extension of the previous point. Many people take pride in doing everything on their own - from making tax saving investments to filing the income tax returns. While this is commendable if done properly, it can also lead to missed opportunities if you have only half-baked knowledge about personal finance and taxes.
Depending on your situation, it might be best for you to take the help of experts. Professionals like independent financial advisors, financial planners and chartered accountants can help you save money by showing you newer or better ways to save tax.
5. Not Keeping Proper Documentation
Not keeping proper documentation of tax saving investments is another mistake people often commit.
If your income tax return comes up for scrutiny, the first thing an assessing officer would ask you is your bank statements, and the second thing would be investment proofs. So whenever you make an investment or make a donation, keep the receipts safely.
Many investments these days are done electronically, where the receipts can be looked up any time using your online account. But you need to be really careful with preserving the receipts when it comes to investments made offline.