The financial year 2012-2013 is almost coming to its end now. Many of us will be involved in our tax planning searching for various avenues to provide proof to the employer. These are also months when most Life insurance, Health insurance and Mutual Funds companies advertise heavily to garner your share of money.
But year-end tax planning can strain your finances if decision is made in a hurry. If there is shortage of funds, many resort to borrowing to save tax up to the maximum limit. In many instances the interest in the product is also lost after tax benefit is availed.
It then becomes equally important to analyze these avenues and ensure your finances remains in manageable limits. Here are few tips to consider before making that last minute decisions:
1. Know the Rules: The tax benefit rules changes very frequently and many instruments gets advantageous or disadvantageous due to this. For e.g. In Life insurance policies issued after 1st April 2012, tax saving under section 80C is available only when the basic coverage (excluding bonus and other benefits) is at least 10 times the premium you are paying and stays throughout the term. Similarly, while investing in PPF, contributing to your spouse account does not make you eligible for tax benefit. Like these, there are many rules on which one should be very clear before considering any avenue.
2. Avoid Borrowing- Many avail short-term loans to ensure the salary cut do not happen. But the money you repay to the lenders is much more than the tax saving you would have done. Also, it inculcates a force borrowing behavior which is repeated in case of need. This may result in mismanagement of finances jeopardizing the financial well- being.
3. Choose Options Wisely: There are host of instruments which give benefits under Section 80C. All these options have different terms, investment mandate and different risk return characteristics. Due to this, they may not suit all category of investors. If you have surplus then buying a long term instrument with regular contribution in this last minute may not be viable unless you do a deep analysis of your goals. Similarly, you may prefer high risk instruments which may not suit your risk appetite. So, look at instruments which can do the last minute job for you. Product like fixed deposits or NSC comes handy for making a lump-sum investment and saving tax. They may not be the most viable option but will help you in reducing your taxability this financial year.
4. Know Your Exemptions- Many miss on tax saving due to low awareness on exemptions available. HRA, Conveyance Allowance, LTA and Medical Allowance are the common ones included in your salary. It’s always wise to calculate your taxability after taking all such in consideration and then plan to invest if required.
5. More than Investments- There are tax benefits available on loans such as home & education which reduces your taxability. If one is availing either of them the taxability will have been reducing to a good extent. Also there are host of other deductions covered in income tax. For e.g. 80DDB covers expenses for treatment on any specified illness or ailment for any dependent which include spouse, children’s, parents and even brothers & sisters. Identify all such benefits to know if you need any further investment.
6. Understand The Product Difference: Last year tax free bonds and tax saving infrastructure bonds were issued at the same time. There was not much difference between the two and many investors were caught in the wrong foot assuming the tax free bonds for tax saving. Do not make such mistakes. Understand the product which is new in the market. This year too Rajiv Gandhi Equity scheme has been thrown up for new investors to avail additional tax saving. Being a direct equity instrument it has its risk return characteristics. For youngsters it will be an attractive proposition to avail the additional tax deduction. Ensure you understand the product and your risk appetite to get the maximum out of it.
Tax Planning is an integral part of financial planning. Although it should be planned in the start of financial year, you should evaluate your options if you have missed this year. At times, it may be wiser to pay the tax and keep your finances in control.