Not availing of tax deductions
One of the biggest tax-planning mistakes is not to take advantage of the various tax deductions and exemptions available. For instance, under Section 80C of the Income Tax Act, individuals can claim deductions of up to Rs 1.5 lakh on investments made in various instruments such as Public Provident Fund (PPF), Equity-Linked Savings Scheme (ELSS), National Savings Certificate (NSC), and more. Similarly, under Section 80D, individuals can claim deductions of up to Rs 25,000 on health insurance premiums paid for themselves, spouse, and dependent children. It is, however, important to understand the various tax deductions and exemptions available to you and take advantage of them to reduce your taxable income and save on taxes.
Investing only for tax-saving purposes
Investing in tax-saving instruments is important to reduce tax liability, but investing solely for tax-saving purposes can be a mistake. Consider other factors such as the investment’s risk profile, returns, liquidity, and suitability for your financial goals. For instance, investing in ELSS can be a good tax-saving option, but it is important to consider the volatility of the stock market and the investment scheme’s past performance first.
Failing to plan for long-term goals
Another tax-planning mistake is failing to plan for long-term financial goals. Many taxpayers focus only on short-term tax-saving options and fail to consider long-term goals such as retirement planning, children’s education, and more. So, you should have a diversified portfolio of investments that not only helps you save on taxes but also helps you achieve your long-term financial goals. This may include making investments in mutual funds, stocks, real estate, and more.
Not maintaining proper documentation
Maintaining proper documentation is crucial for tax planning. Many taxpayers fail to maintain proper records of their income, expenses, and investments, which can lead to errors in tax filings and even tax notices from the income tax department. It is important to maintain proper records of all income, expenses and investments, and retain them for at least seven years. This includes salary slips, Form 16, bank statements, investment receipts, and other relevant documents.
Not reviewing tax-planning strategies regularly
Another common tax-planning mistake is failing to review tax- planning strategies regularly. Tax laws and rules are subject to change, and it is important to stay updated on the latest tax regulations and adjust your tax-planning strategies accordingly.
“Most of us only need three options for tax savings. First is health insurance for yourself and members. Second is term insurance for yourself, if you have dependent family members or financial responsibilities. The third option is ELSS, also called tax-saving mutual funds. ELSS is one of the best ways to save money, create wealth, save taxes, have liquidity and pay a very low rate of tax on the returns. It is a silver bullet solution to several problems,”
One can also save tax by investing in some government-backed schemes such as PPFA, SSY, SCSS etc. However, it is important to consider your financial goals and returns on your investment before you make a decision.
Tax planning, thus, is an important aspect of financial planning. By avoiding common tax planning mistakes, you can reduce your tax liability and achieve your financial goals effectively.
BIG IMPACT
* Failure to maintain accurate records, overlooking deductions and credits, claiming deductions without supporting documents, can impact your tax liability
* Investing in tax-saving instruments is important to reduce tax liability, but investing solely for tax-saving purposes can be a mistake