by PersonalFN.com
Many of you are too busy throughout the year, in your economic activities intended to make a living. But if you show the same dedication in your income tax planning exercise, the same will enable you to save more and fulfil all your dreams in life.
Experience reveals following four mistakes which individuals do while saving taxes.
** Doing your income tax planning at the last moment..!
The root of all mistakes in income tax planning lies in waiting till the eleventh hour to save income taxes, which eventually leads to mere income tax saving, rather than income tax planning.
And this in return is a sub-optimal way of saving taxes, caused by the sheer attitude of delay. Waiting till the eleventh hour, will often lead you to forgetting or / ignoring the facets of financial planning such as your age, income, ability to take risk and financial goals thus guiding you to not complement your tax planning exercise with investment planning.
Remember: Waiting till the eleventh hour, is just going to lead you to a path of sub-optimal tax planning exercise, which would destroy the essence of holistic tax planning.
** Unnecessarily Buying Unit Linked Insurance Plans.!
At the end of the financial year, many of you might have attended telephone calls of insurance agents pestering you to buy an investment cum insurance plan – typically market linked i.e. Unit Linked Insurance Plans (ULIPs).
And many of you realising the need to save your taxes, even entertain these calls & eventually tear a cheque for buying one. But do you ever wonder whether you have done the right thing?
The answer in our opinion is a sheer “No”. And that’s because of the ignorance and / or arrogance (of not admitting your mistakes) which you have, while doing your income tax saving investments.
Remember when you think of insuring yourself, it should purely mean protecting your life against any contingent events; and thus given that you should be ideally buying only pure term life insurance plans, which gives due importance to your human life value.
It is noteworthy that ULIPs are investment cum insurance plans where for the premium paid, the insurance cover offered under these plans is far less (usually 10 to 12 times of your annual premium) when compared to pure term life insurance plans; where for a lesser premium amount you get a greater life cover – which precisely what a life insurance plan is intended for.
** Ignoring power of compounding through income tax saving mutual funds..!
Many of you despite the fact that age, income, ability to take risk along with financial goals support you to take risk, you absolutely rule out the concept of power of compounding to your portfolio.
It is noteworthy that if you want to meet and / or elevate your standard of living going forward, you need to beat the rate of inflation. And thus, role of equity as an asset class cannot be ignored in one’s tax saving portfolio too.
While some do consider the tax saving mutual funds in their tax saving portfolio the ideal composition (depending on your age, income ability to take risk and financial goals) is not maintained, which leads the tax saving portfolio to give sub-optimal returns.
It is noteworthy that being risk averse is well appreciated by us. But if your age, income, ability to take risk and financial goals, permit you to take equity exposure one should not ignore the same.
** Not optimizing all options for income tax saving..!
For many tax planning starts as well as ends with Section 80C - which enunciates investment instruments for tax saving. But investing only in these investment instruments would not lead to optimal reduction of your tax liability.
To bring to your notice our Income Tax Act, 1961 also considers humane side of our life & also gives deduction for contributions you make on such developments. So, in case if you pay your medical insurance premium, incur expenditure on the medical treatment of a “dependant” handicapped, donate to specified funds for specified causes, contribute in monetary form to political parties or / electoral trusts, take a loan for pursuing higher education or / if you are an individual suffering from “specified” diseases, then all this too can help you effectively plan your income tax obligations, thus optimally reducing your tax liability. Moreover, taking into account the urge to buy your dream home by taking a loan, the Act also extends tax saving benefits to you.
Src: www.PersonalFN.com
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