Note to readers: Every year, the last date make our tax-saving investments is March 31. Despite being aware of this deadline, we postpone our income tax planning to the last minute. But this financial year (2020-21) has been tough due to COVID-19’s impact and many lost their jobs or suffered salary cuts. While we hope that the times ahead would be better for our readers, they must plan their tax-saving investments right now. Our first story answered five crucial income tax planning related questions. Our second article gave you the five best tax-saving instruments. In this last instalment of this series, we discuss the four most common mistakes we make while planning our taxes.
The last date for making tax-saving investments for the financial year 2020-21 is March 31. This is your last chance to maximise tax benefits under various sections, unless the finance ministry extends the deadlines again like it did the last time due to the COVID-19 pandemic. But that looks unlikely.
The old tax regime allows deductions from your total income under Section 80C and Section 80D and the like. Section 80C covers investments such as equity-linked saving schemes (ELSS), life insurance policies and Public Provident Fund (PPF). It also allows deduction for payment of home loan principal and children’s tuition fee. You can also claim deductions under section 24 for interest paid on your home loan. You can claim tax breaks under section 80D on health insurance premiums paid.
However, in a hurry to meet the deadline, many tax-payers end up making some common mistakes only to repent later. Here’s quick guide on the missteps to avoid this year.
Putting off investments for the last moment
Those who haven’t adhered to their tax plan through the year would be the ones searching for tax-saver options around this time of year. “Ideally, you should start making your tax-saver investments right at the beginning of the financial year. It will help you in avoiding mistakes due to the last-minute rush,” says Kalpesh Ashar, Founder, Full Circle Financial Planners and Advisors.
Starting early helps you to spread your investments through the year, thus reducing the pressure on your cashflows. For example, if you were to start contributing to your voluntary provident fund (VPF) or investing in equity-linked saving schemes (ELSS) every month from April, through a systematic investment plan (SIP), you will not have had to struggle now.
Making a huge investment at one go can leave you gasping for adequate funds for your regular needs. More so because this also happens to be the period when your employer deducts your balance tax payable, putting severe strain on your cashflows.
Not factoring in existing investments
Again, in a hurry to meet the deadline, many do not pay attention to their existing investments and expenses that entitle them to tax deductions. “If you are contributing over Rs 12,500 per month as your EPF contribution, you do not need to look at making tax-saving investments at all. Likewise on children’s school tuition fee that you would have paid during the year,” says Ashar. Both EPF contribution and children’s school tuition fee are eligible for deduction under section 80C.
If you over-invest your money in tax-saving instruments, you end up locking your funds for many years. So, if you need to buy a house, say, two years down the line, your ‘extra’ tax-saver investment will not come in handy as it cannot be liquidated. “Instead, you could use any surplus to make investments linked to financial goals. Tax planning should always be part of your financial plan and not a task to be completed towards the end of year,” says Pankaj Mathpal, Founder, Optima Money Managers. For example, if saving for retirement is your goal, you can look at VPF and PPF. However, if your goal is just three years away and you can stomach market risks, you can invest in ELSS.
Buying insurance-cum-investment policies in a hurry
Buying a life insurance policy is easy, especially during tax-saving time. Life insurance agents are only too willing to help, making all sorts of return assurances. Many unsuspecting buyers go ahead and buy life insurance policies of the investment-cum-insurance variety that they may not need. “This happens year after year. “Neither is the life cover in such policies adequate, nor do the returns add any value to your overall investment portfolio,” explains Ashar. You would still need to buy a large term insurance policy to secure your dependents financially in your absence. “Moreover, it creates a recurring payment commitment and can be a drain on your cashflows,” he adds. Remember, life insurance policies will lapse if you cannot keep up with your premium commitments.
Borrowing to invest
Arguably, this is the biggest investment-related mistake you can make. Many do not exercise moderation in their expenses through the year, only to find that their savings are not enough to optimise the tax benefits available. Some use their credit cards to make the investments ahead of the deadline. You could get ensnared in debt traps, given the high interest rate of over 40-44 percent per annum that most credit cards carry. “In such cases, when you do not have funds to make tax-saver investments, it is better to let go of tax benefits than pay interest much higher than what 80C instruments can offer,” says Mathpal.