Sometimes it is seen that people tend to invest in too much in their tax-saving instruments. The salaried employees leave no stone unturned to make their last-minute investments in order to protect their income from tax.
Majority of the companies demand their employees to submit the evidence of their investments in January to evade deduction of high taxes.
Some people tend to invest more than needed in order to save on taxes. They even invest in wrong products while deciicng where to invest. It is seen that insurance industry does most of the business in the tax-saving season falling between January and March annually.
Financial experts are of the opinion, “Often we tend to buy products or make investments without doing the due diligence on our total tax structure. Having a tax plan in place at the start of the financial year will help you make better decisions and even reduce the burden on financials at the end of the financial year.”
A Small 80 C Basket:
Section 80C is concerned with all about tax planning.
The Employees Provident Fund and life insurance premiums are normally covered under Section 80C besides the Principal repayment of housing loans. This implies that most of the regular employees can invest only some extra thousands under Section 80 C.
Look before you choose:
While planning your investments to save tax, it is imperative for you to consider financial expenses which are incurred as tax breaks.
Mr. Vineet Agarwal, director, KPMG, India said, “The philosophy of healthy investment has two essential elements: returns and associated tax savings. While returns depend on the risk appetite, tax savings are determined by various parameters such as income level of the tax payer, income tax slabs, etc. ”
There are more sections:
As against the popular belief, section 80C is not the only one that can help salaried individuals to save maximum tax. There are many other similar ways such as you can obtain deduction up to 30,000 on interest applicable on a loan taken for the renovation of a property.
More is not always smart:
As per the financial experts, many people become defensive on being told that they are investing more than needed in order to save taxes. An expert says, “We always maintain that investors make last minute tax investments in such instruments which are much publicized, than what is actually required. You may end up buying an expensive recurring product, like an insurance scheme, thinking that much amount will be saved from a tax perspective every year even as it earns a return of 5-6% per annum which is even lower than inflation.”
Nitin Vyakaranam, founder & chief executive officer, Artha Yantra, a financial planning firm, mentioned, “Having a tax plan in place at the start of the financial year will help you make better decisions and even reduce the burden on financials at the end of the financial year.”
Look before you choose:
Mr. Vineet Agarwal, the , director, KPMG, India says, “The philosophy of healthy investment has two essential elements: returns and associated tax savings.
While returns depend on the risk appetite, tax savings are determined by various parameters such as income level of the tax payer, income tax slabs, etc,”
Two important things to be kept in mind while planning to save on taxes are expenses available as tax breaks and expenses incurred.
According to Mr. Agarwal, “Your normal expenditure such as house rent, medical expenses for the family or spending on your children’s school fees have tax exemptions. You have to understand the nature of each tax break; and depending on the shortfall, the remaining amount should be invested in tax-saving instruments.”
Experts believe that it is not a simple task to save on taxes as you are parting with your hard earned money that could have spent for better returns.
Generally tax-saving schemes come with a lock-in period. Experts say, “The subsequent premium payment for the next 15-20 years becomes a commitment when the policy holder could have simply split the money between a term cover and ELSS and earned higher returns.”
Remember a 6-year NSC or the 15-year PPF or a 5-Year tax FD is quite illiquid so you can land in difficulty in times of need or emergency when you direly require cash.