The clock has started ticking for those who have still not made tax-saver investments to claim deductions of up to Rs 1.5 lakh under Section 80C.
Ensure that you start now instead of leaving it literally to the last minute. If you treat tax planning as an isolated exercise, instead of an integral part of your overall financial planning strategy, you could end up making mistakes that will prove to be detrimental in future.
Here are some mistakes you ought to avoid.
Not accounting for existing investments
Do you even need to commence the tax-saving exercise now? If you look closely at your portfolio, you might not even need to. Confused? Here’s what we mean.
Also read | Top five tax-saving investments for last minute tax planning
If you are a salaried employee, your employees’ provident fund (EPF) contribution will take care of a substantial chunk of this limit. Some tax-payers end up making tax-saver investments to exhaust the Rs 1.5 lakh limit without ascertaining whether they need to make any in the first place.
“Likewise, children’s tuition fees paid during the year should also be taken into account. You need not stick to the proposed investment declaration submitted to your employer at the beginning of the year. Before 80C benefit maximisation, review your current situation vis-à-vis the scenario in April,” says Kuldip Kumar, personal tax expert and former Partner, Global Mobility Services, PwC India.
Also read | Last-minute tax-saving tips: Should you invest in NSC and tax-saving bank fixed deposits?
Buying long-term life insurance plans
Though this is a common phenomenon every tax-saving season, life insurance agents seem to be on an overdrive to sell traditional endowment policies this time round. The reason? Budget 2023 proposal to tax income earned on such policies at maturity, if the aggregate annual premium paid exceeds Rs 5 lakh.
Put simply, maturity proceeds, under Section 10(10D) on such policies purchased after April 1, 2023, will not be completely tax-free.
It is easy to fall prey to such pitches, especially when you are racing to meet the deadline, as agents offer to handle all the paperwork with minimal inconvenience to you.
However, remember that investment-cum-insurance policies come with longer tenures and recurring premium payment commitment, which you may not necessarily be able to meet in subsequent years.
“The returns are low and they offer little flexibility (to make withdrawals) and liquidity. If you need life insurance cover, it is best to buy a pure-protection term policy and invest through mutual funds,” says Nisreen Mamaji, Founder, Moneyworks Financial Services.
Also read | Beware! Insurance agents pushing high-premium policies before March 31 to escape tax
Swiping credit card to buy policies
If you have not started tax planning earlier in the year, you could face a liquidity crunch on the one hand, and the deadline to complete the exercise in March, on the other.
This could compel some tax-payers who are short of funds to swipe their credit cards to, say, buy life insurance policies. You might have to pay a huge price later. “This can lead you into a debt trap. Credit cards come with a steep interest rate of 3-4 percent per month. Even today, many are not aware that paying just the minimum balance is not enough,” points out Mamaji. It is best to use credit as just a spending, and not borrowing, tool - and only when you are confident that you can pay off the bill in the subsequent month.
The interest payable will keep accumulating, ensnaring you in a debt trap. “You will have to sacrifice important goals to repay this debt. Your savings and investments will take a beating, leading to a bleak future,” she says.
Leaving tax planning to March
Completing the tax-saving exercise in March rather than in the early part of the year is the biggest mistake you must avoid next financial year. Postponing the task to the end of the year leads to several challenges. For one, you could fall short of funds in March to make a huge investment at one go.
“This is the time when people have to arrange funds for vacations or even school fees, besides other expenses,” says Mamaji.
Instead, adopting a systematic approach towards tax-saving investments will ensure that you do not feel the heat in March. “Assuming you have to invest Rs 1.5 lakh, you can start an SIP (systematic investment plan) in an equity-linked saving scheme (ELSS) in April. You will need to invest Rs 12,500 per month, which means no liquidity squeeze in March,” she adds. Moreover, unlike a lump-sum investment, systematic approach will help you tide over turbulent market conditions.
If you still haven’t done your tax-planning for the financial year 2022-23, you should do it right away. You’ve got just a few days left. But from next financial year (April 1, 2023), make sure you start your tax-planning as the year begins.