Income Tax planning is an important part of our overall financial planning. Tax planning allows us to make systematic investments during the year in order to lower our tax liability. However, taxpayers across India make the same mistakes again and again while planning their taxes and end up putting a lot of financial stress on themselves towards the year-end. Let’s have a look at mistakes that we need to avoid!
1. Investing only in Insurance policies : –
Investing only in insurance policies looks like an easy method for saving taxes under Section 80C. Sadly, that’s a terrible mistake to make. A taxpayer should not invest only in insurances policies under section 80C. There are so many options like ELSS, ULIP, PPF & Tax Saving FD etc., that are available at taxpayers’ disposal that he/she can use under section 80C.
I) ELSS Mutul Fund
Under equity mutual funds, Equity Linked Savings Scheme is the only type of fund that has a lock in period. Equity Linked Savings Scheme (ELSS) has a three year lock in period. Investments in ELSS funds qualify for tax exemption under Section 80C of the Income Tax Act. The limit for tax exemption is INR 1,50,000 per annum. However, the returns from ELSS funds are taxable. They are subject to Short Term Capital Gains Tax (STCG) of 15% if the holding period is less than one year. And Long Term Capital Gains Tax (LTCG) of 10% for capital gains above Rs 1,00,000 if the holding is above one year.
Following are the top ELSS Mutual Funds:
Mirae Asset Tax Saver Fund (G)
Axis Long Term Equity Fund (G)
DSP Tax Saver Fund (G)
II) Tax saving FD
A tax saving FD is a fixed deposit scheme that qualifies for tax exemption under Section 80C of the Income Tax Act. The main purpose of tax saving FDs is to encourage long term savings along with tax benefits. Also, FDs come with a lock in period of 5 years. These investments are low risk investments. Hence, they are ideal for investors who prefer fixed income from their investments.
Investment in tax saving FDs qualifies for tax exemption up to Rs ,150,000. However, the interest earned is taxable as per the individual’s income tax slab rate. Additionally, there is a TDS of 10% on interest income above Rs 40,000 (rs 50,000 in case of senior citizens).
III) Public Provident Fund (PPF)
Public Provident Fund (PPF) is one of the popular investment schemes. The Government of India backs the Public Provident Fund. This scheme is a good option for both retirement planning and tax savings. However, the Public Provident Fund has a lock in period of 15 years. Also, this is a low risk investment option. PPF offers guaranteed returns. The current interest rate is 7.10%. Therefore, the scheme is ideal for low risk investors. It is also ideal for investors seeking guaranteed income.
Additionally, the scheme also offers tax benefits. In other words, PPF investments up to Rs. 1,50,000 per annum qualify for tax exemption under Section 80C of the Income Tax Act. The minimum investment into the scheme is Rs. 500 per annum, and the maximum is Rs.. 1,50,000. PPF allows only 12 instalments in a year.
IV) National Savings Certificate (NSC)
National Savings Certificate (NSC) encourages small and medium savings. NSC is a fixed income scheme. The Government of India backs the scheme. Hence, the risk is low. The scheme offers guaranteed returns. Therefore, NSC suits small investors who wish to invest small amounts and seek guaranteed returns.
The minimum investment for NSC is Rs. 100, and there is no maximum limit. However, investments up to Rs. 1,50,000 per annum qualify for tax exemption under Section 80C of the Income Tax Act. Also, there is no TDS for NSC investment payouts. However, the returns are taxable as per the investor’s income tax slab rates.
NSC has a lock in period of 5 years. The current interest rate is 6.8%. The interest earned during the tenure of the investment is automatically reinvested into the scheme. The interest also qualifies for tax exemption.
V) National Pension Scheme (NPS)
The National Pension Scheme is a pension plus investment scheme. Also, it is a voluntary retirement plan. The Government of India backs the NPS. NPS investments are invested across different asset classes like equity and debt. The investor has an option to pick the type of investment they wish to invest in. Therefore, NPS investments are market linked. Hence they do not guarantee returns.
The National Pension Scheme has a lock in period until the investor reaches the age of 60 years. The scheme encourages investors to save for their retirement. NPS contributions qualify for tax exemption under Section 80C and 80CCD of the Income Tax Act. Under Section 80C, investors can claim up to RS. 1,50,000. Additionally, under Section 80CCD, they can claim RS. 50,000.
NPS is suitable for investors looking for retirement savings and is willing to undertake some risk. Historically, the scheme has given returns around 9% to 12% per annum. Furthermore, upon maturity, 60% of the corpus can be withdrawn as a lump sum, and it doesn’t attract any tax. The scheme prescribes at least 40% of the total corpus to be invested in an annuity.
2 Miss out all tax-saving options :-
Several basic expenses, Like children’s School fees, telephone bills (used for office responsibilities), Children’s hostel expenses, and office conveyance expenses, travelling expenses (LTA) are available for tax deductions. Many of us are not aware of the tax benefits of these allowances and do not claim them. Make sure that you check all the options available to us to claim back the maximum amount possible.
3. Not knowing tax implications on tax-saving investments : –
We must understand how returns from tax-saving investments will be taxed before investing in them. For example, Interest from (NSC) National Savings Certificates & five-year tax-saving bank FDs, is added to the taxpayer’s taxable income and taxed according to the taxpayer’s tax slab. Long-term capital gain from the ELSS fund is tax-free up to Rs 1 lakh in a financial year.
4. Not considering liquidity before investing :-
When investing in tax-saving options, it’s important to keep your liquidity needs in mind. Most tax-saving investments have extended lock-in periods and can’t be sold before the lock-in time.
Conclusion :-
A lockup period doesn’t just impose restrictions on selling investments. It also provides an opportunity for investors to grow their investments. A lock in period doesn’t define the tenure of investment. It is a mere restriction put by the AMC or company to preserve liquidity and maintain stability in the market.
It is not mandatory to redeem investment from ELSS funds once the lock in period ends. However, monitoring an investment once the lock in period ends is necessary. Investors can redeem their investments only when their fund isn’t performing in line with their goals. Or, when they need money for any emergency. Investors shouldn’t redeem their investments after the lock in to invest in a new ELSS fund to save tax.
If we invest in NPS under 80CCD (1B), We will have a long lock-in period and will be unable to withdraw funds before retirement. Only partial withdrawals are allowed subject to certain conditions. So make sure you consider your liquidity needs also.
5. Failing to set investment goals :-
Many people fail to set investment goals. As a result, they end up investing in financial products that aren’t suitable for their purposes/goals. You can structure your tax-saving portfolio to match with your investment objectives, such as child’s further education or our retirement.
This will not only help us to save money on taxes but will also make it easier for us to achieve our long-term goals. above are the common mistakes taxpayers must avoid while doing their tax planning. It is important because this financial year is nearing to end and we need to make declarations of tax savings to our employer. We must understand that the ultimate purpose of our investments is to produce long-term wealth for our family.
