Category: Tax Saving

An individual taxpayer planning to opt for the old tax regime for current FY 2022-23 must complete their tax-saving exercise on or before March 31, 2023. If an individual has not made any investments allowed under section 80C of the Income-tax Act, 1961 then he/she must not wait until last minute.

 

Section 80C allows an individual to claim maximum deduction of Rs 1.5 lakh from their taxable income. By claiming this deduction, an individual’s taxable income reduces which leads to reduction in income tax liability. An individual whose total income is taxed at 30% tax rate and 4% cess, will pay Rs 46,200 as additional tax if maximum deduction is not claimed. Had the maximum deduction being claimed, then tax outgo will reduce by Rs 46,200 (including cess).

 

Here are some of the common options available under Section 80C, 80CCC and 80CCD (1) for saving income tax. Do note the total investments made under Section 80C, 80CCC and 80CCD (1) together must not exceed Rs 1.5 lakh in a financial year.

 

Equity-linked Savings Scheme (ELSS): ELSS mutual funds are one of the common investment options used under Section 80C to save income tax. The maximum deduction that can be claimed is of Rs 1.5 lakh. ELSS mutual funds invest in equity and the returns earned are market-linked, making them one of the most risky investment options in the 80C basket.

 

ELSS mutual fund schemes have a lock-in period of three years. Thus, once invested, an individual investor cannot withdraw the money before the completion of three years from the date of investment. ELSS has the shortest lock-in period among all the other options available under Section 80C. There is no limit to the maximum amount that can be invested under ELSS mutual funds. The minimum amount varies between mutual fund houses.

 

The return earned in ELSS mutual fund will be taxable if the redemption is done. The capital gains will be taxable if the total equity capital gains in a financial year exceeds Rs 1 lakh.

 

Public Provident Fund (PPF): PPF is one of the most popular small savings schemes. This is because PPF has EEE tax status. This means that investment made in PPF is exempted from tax, the interest earned from PPF is exempted from tax and maturity amount is also exempted from tax.

 

PPF is a debt investment, hence, they are not as risky as ELSS mutual funds. PPF is a government scheme, hence, it comes with sovereign guarantee. The interest on PPF is announced by the government in every quarter. For January – March 2023 quarter, the PPF is offering 7.1% annually. The government will review the PPF interest rate on March 31, 2023 for the April- June 2023 quarter.

 

PPF comes with a lock-in period of 15 years, where the lock-in period starts after the completion financial year in which initial investment is made. For instance, if an individual makes the first investment in PPF in August 2022, then lock-in period of 15 years will be calculated from April 1, 2023. Though PPF has a lock-in period of 15 years, it offers loan and partial withdrawal facilities.

 

The minimum and maximum investment amount in PPF is Rs 500 and Rs 1.5 lakh. An individual can open the PPF account either with a bank or a post office.

 

Do note that once PPF account is opened, then minimum investment must be made in the PPF account every financial year. If minimum investment in PPF account is not made in a single financial year, then PPF account will become a discontinued account.

 

National Pension System (NPS): Investment made in NPS is eligible for deduction under Section 80CCD (1) of the Income-tax Act. The scheme offers pension to the investor from his/her retirement age. The returns under the NPS are market-linked.

 

The amount of deduction that can be claimed for NPS investment under Section 80CCD(1) is 10% of salary (basic salary plus dearness allowance). The maximum deduction that can be claimed is of Rs 1.5 lakh. Hence, an individual having basic salary of Rs 10 lakh is eligible to claim deduction of Rs 1 lakh under Section 80CCD (1). To fully-utilise the benefit of Rs 1.5 lakh, he/she will have to explore other tax-saving investment options.

 

NPS has a lock-in period of till the age of 60 years. For example, if an individual started investing in NPS at the age of 25 years, then he/she will have a lock-in period of 35 years. NPS offers partial withdrawal facility, however, such withdrawal is allowed under specified circumstances. On maturity, an individual can withdraw maximum 60% of the corpus as lump-sum. This lump-sum will be exempted from tax. The balance 40% must be mandatorily used to buy annuity plan. The annuity/pension received will be taxable in the hands of individual.

 

The minimum per NPS contribution is Rs 500 but there is no maximum amount that can be invested in NPS. An individual opening NPS account must ensure that they have made minimum contribution of Rs 1,000 in a financial year to avoid making the NPS account discontinued.

 

Employees Provident Fund (EPF): EPF is one of the most popular tax-saving instruments for salaried individuals. If the organisation is covered under the EPF law, then a salaried individual will be making contribution to the EPF account. An individual is required to contribute 12% of basic salary to the EPF account and employer will make a matching contribution as well.

 

The interest rate on EPF account is announced by the government. The EPF account also has a lock-in period till retirement. However, partial withdrawal from EPF account is permitted for specific situations. Further, if an individual after quitting their job, does not find another job in two months, then he/she can completely withdraw the money from their EPF account and close the account.

 

The amount that can be invested in the EPF account depends on the salary of an individual. However, if an individual wishes to make additional contribution to the EPF account, then same can be done via Voluntary Provident Fund (VPF). The rules of EPF and VPF accounts are same.

 

Do note that if the total contribution to the EPF and VPF account exceeds Rs 2.5 lakh in a financial year, then the interest earned on excess contributions will be taxable in the hands of an individual. The maturity amount received from EPF account is exempted from tax.

 

Tax-saving fixed deposits: A 5-year tax saving fixed deposit is another option available to individuals to save income tax in the current financial year. An individual can invest in tax-saving fixed deposit at a bank or a post office.

 

The interest rate on tax-saving fixed deposit varies between banks. For post office tax saving fixed deposit, interest rate is announced by the government. The interest received from tax-saving fixed deposit is taxable in the hands of the individual.

 

Tax-saving fixed deposit has a lock-in period of 5 years. Hence, once invested, the money cannot be withdrawn before the completion of 5 years from the date of investment.

 

The minimum investment amount for tax-saving fixed deposit varies between banks. The minimum investment amount for post office 5 year term deposit is Rs 500. There is no limit to the maximum amount that can be invested. However, the maximum tax benefit of Rs 1.5 lakh can be claimed.

 

National Savings Certificate (NSC): An individual can invest in NSC as well to save income tax. The investment in NSC can be made by visiting the nearest post office. The interest rate on the NSC is announced by the government every quarter. However, once the investment is done, the interest rate remains fixed till maturity. Currently, NSC is offering interest rate of 7% per annum.

 

NSC has a lock-in of 5 years. Thus, once an individual makes an investment, the money cannot be withdrawn before the completion of 5 years. The minimum amount in NSC is Rs 1000 with no limit on the maximum amount. The tax benefit is, however, restricted to Rs 1.5 lakh under Section 80C. The interest earned on NSC is re-invested and is paid at maturity. The interest earned from NSC is taxable in the hands of an individual. However, as the interest is re-invested, this makes it eligible for deduction under Section 80C.

 

Sukanya Samriddhi Yojana (SSY): This a savings scheme for the girl child. A parent of a girl child can invest in Sukanya Samriddhi Yojana and save tax on it. Every quarter, the government announces the interest rate for Sukanya Samriddhi Yojana. Currently, the scheme is offering interest rate of 7.6%.

 

An individual can open the Sukanya Samriddhi account either via bank or post office. The Sukanya Samriddhi account will mature after 21 years of opening of the account. However, the deposits are required to be made for 15 years from the date of opening of account.

 

The Sukanya Samriddhi account can be opened by a guardian for a girl child below the age of 10 years. Only one account can be opened in the name of a girl child either in bank or post office. This account can be opened for maximum of two girls in a family.

 

The minimum and maximum deposit that can be made in Sukanya Samriddhi account is Rs 250 and Rs 1.5 lakh, respectively, in a financial year. If the minimum deposit is not made in a financial year, then the account will become a defaulted account.

 

Sukanya Samriddhi Yojana also comes with the EEE tax status like PPF.

 

Senior Citizens Savings Scheme (SCSS): Only senior citizens can invest in this scheme to save income tax. The interest rate on Senior Citizens Savings Scheme is announced by the government in every quarter. Currently, the scheme is offering an interest rate 8%. Once the investment is done, the interest rate remains fixed for the tenure of the scheme. The interest is paid every quarter to the senior citizen.

 

The scheme has a lock-in period of 5 years. However, the scheme allows premature closure of the account. The premature closure of account invites penalty as well.

 

The scheme allows minimum deposit of Rs 1000 and maximum deposit of Rs 15 lakh. The Budget 2023 has proposed to hike the maximum deposit limit to Rs 30 lakh from Rs 15 lakh currently.

 

The interest received from scheme is taxable. However, a senior citizen can claim deduction under section 80TTB for the interest earned.

 

Unit-linked insurance plans (ULIP): An individual can make investment in ULIP to save tax. It is an insurance product that offers both life insurance coverage and benefit of investing equity. The returns earned from ULIP products are market-linked.

 

The ULIP has a lock-in period of 5 years. Once the lock-in period expires, the individual can withdraw the money.

The amount that can be invested in ULIP depends on various factors such as age of individual, sum insured, policy term. The maturity proceeds from ULIP will be taxable if premium paid for all ULIPs in a financial year exceed Rs 2.5 lakh.

 

Source: Economictimes

Tax saving is a prime tool for many investors, to prevent the erosion of the total income generated. There are various investments that provide this benefit, thereby, significantly increasing the effective investment portfolio in this country as all individuals want to avail this advantage. In this article, let us discuss the best tax-saving investments options that can reduce your tax outgo. Read on!

 

Equity Linked Savings Scheme (ELSS)
Equity-linked savings scheme is one of the most popular market investment tools among investors with the primary aim of tax saving. It is one of the best ways to save tax under section 80C, as well as earn substantial returns by gaining market advantage.

 

Tax saving ELSS funds invest at least 80% of the total portfolio on equity securities, thereby, yielding the highest return amongst any other similar instruments available in the market. This scheme comes with a mandatory lock-in period of three years on an investment amount. Under section 80C, the following provisions are made to ensure substantial tax reduction on funds related to the ELSS scheme.

 

• The total principal amount invested in ELSS is exempt from taxation, provided the amount is under Rs. 1.5 Lakh.

• Any capital gains less than Rs. 1 Lakh is not charged with long term capital gains tax.

Tax saving ELSS funds are relatively liquid instruments when compared to other securities available under the same umbrella.

 

Public Provident Funds (PPF)
Public provident fund is one of the best tax-saving instruments u/s 80C, sponsored by the Government of India. However, PPF comes with a mandatory lock-in period of 15 years. This might harm the liquidity requirements of an investor.

 

The PPF interest rate earned on this tax saving instrument is announced by the government every quarter and remains fixed for the given period. PPF forms a fixed return instrument, as it provides assured interest declared by the central government.

 

A maximum of Rs. 1.5 Lakh can be invested in a PPF account in one financial year, through a lump sum or monthly investments. The entire amount can be exempted from taxation, thereby, making it one of the best tax-saving investments under Section 80C. Any interest earned on an investment amount is also not considered for tax calculations.

 

Senior Citizen Savings Scheme (SCSS)
Senior Citizens Savings Scheme is also one of the best tax-saving investments u/s 80C, as it enables you to enjoy SCSS tax deduction of up to Rs. 1.5 Lakh on an investment amount. However, the eligibility criteria of this scheme are more rigid than other instruments. Only people satisfying the following criteria can avail of this investment tool:

 

• Individuals aged 60 years and above

• Individuals above the age of 55 years availing voluntary retirement

• Any individual above the age of 50 years employed in the defense sector of India

 

The total amount that can be invested in an SCSS policy is Rs. 15 Lakh. The interest rate payable on an investment amount is determined by the Central Government of India, and therefore, poses as a stable return on investment.

 

Sukanya Samriddhi Yojna (SSY)
Sukanya Samriddhi Yojna poses as one of the best ways to save tax under section 80C of the Income Tax Act. The SSY tax benefits amount up to Rs. 1.5 Lakh per annum. However, an account under the Suaknya Samriddhi Yojna can only be opened by a person having a daughter who is less than ten years old.

 

As a part of the ‘Beti Bachao Beti Padhao’ policy, the interest rate provided by the government on this amount is higher than other government-mandated instruments such as Public Provident Fund. Any investment which is higher than Rs. 1.5 Lakh in a year is not considered for SSY tax benefits.

 

Tax Saver Fixed Deposit (FD)
Fixed deposits with a lock-in maturity period of five years are eligible for tax exemptions under Section 80C. It is one of the popular investment tools among risk-averse individuals, as it assures guaranteed returns at a fixed interest rate.

 

However, it should be kept in mind that any premature withdrawals made nullify any tax benefit on such investments. Interest earned under this scheme is taxable.

 

National Pension Scheme (NPS)
National Pension Scheme is a systematic investment policy aiming to provide financial security to investors on retirement. It is one of the best tax-saving investments under Section 80C, with a claim deduction of up to Rs. 1.5 Lakh on the total principal amount. The national pension scheme accepts funds from both employers and employees in the case of salaried individuals.

 

Under Section 80CCD (1), a tax-free investment can be made by an employee up to 10% of his/her salary. For self-employed individuals, NPS tax benefits of an additional Rs. 50,000 can be claimed under Section 80CCD (1B).

 

Funds invested in an NPS account can be partially reinvested in equity schemes, subject to the discretion of an investor.

 

National Savings Certificates (NSC)
National savings certificate aim to provide secure investment to individuals wary of stock market fluctuations. The tax-saving benefits under this policy are immense, with exemptions of up to Rs. 1.5 Lakh on the principal amount and the reinvested interest amount. The maturity period on this investment remains fixed at five years and ten years and is up to an investor to choose between any of the two periods.

 

Unit Linked Insurance Plans (ULIP)
Unit-linked insurance plans are also one of the best tax-saving investments under Section 80C available in the market, with exemptions on both investment and premium amounts payable.

 

The portion of money dedicated towards the investment part under this scheme is entitled to tax redemption of Rs. 1.5 Lakh, along with 10% of the total premium (provided the value is less than Rs. 1.5 Lakh).

 

Life Insurance
Under section 80C, a premium paid on a life insurance policy is deductible under the income tax calculations. The total amount allocated towards premium payments should not exceed Rs. 1.5 Lakh to avail this tax exemption benefit

 

All these tools aim to provide tax exemptions to investors. However, the returns remain fixed under all instruments except the ELSS plan, as it is market-oriented. Tax saving ELSS funds offer the highest returns as its portfolio primarily comprises equity-oriented schemes. It comes in with a mandatory lock-in period of three years, giving it enough exposure to the stock market to realize substantial profits.

 

Conclusion
While there are multiple ways you can save tax, it is wise to select an option that offers you dual benefits of tax saving as well as wealth creation. Remember to plan your taxes in advance, seek the best way to optimize your taxes, and utilize the tax exemption limit completely.

 

Source: Groww

New Year’s resolutions are often made with good intentions, but many go unfulfilled. Tax-related promises, however, should not be neglected. The tax authorities are strict with deadlines and harsh with those who fail to pay their taxes. To ensure peace of mind and long-term financial stability, consider making the following tax-related resolutions.

 

Utilise All Available Deductions

■ Returns filed by taxpayers show many people don’t fully utilise the deduction limit under Sec 80. This leads to unnecessary outgo of tax on hard earned income.

Plan out investments so that you can claim the full benefit of tax-saving options to reduce your taxable income by up to Rs 5 lakh-6 lakh as follows: Section 80C (max Rs 1. 5 lakh), Section 80CCD(1b) (max Rs 50,000), Section 80D (max Rs 75,000-1,00,000) and Section 24 (max Rs 2 lakh).

 

Harvest Long-Term Gains By March 31

■ Stock markets have done very well after the Covid scare. If your stocks and equity funds have gained during the year, harvest up to Rs 1 lakh of long term capital gains to lower your future tax. Long-term capital gains up to Rs 1 lakh from stocks and equity-oriented funds are tax-free in a financial year, but you need to book profits before March 31 to pocket the tax-free returns. The same stocks and equity funds can be bought back again, but their price of acquisition for tax computation will get reset at a higher level. The same strategy can be used for equity funds. Ask your mutual fund house or CAMS or Karvy for a capital gains statement to know how much of capital gains needs to be harvested.

 

Pay Advance Tax

■ Many taxpayers don’t report their interest or dividend income because they are under the misconception that if TDS has been deducted, no more tax is due. But TDS is only 10%, while both interest and dividends are taxed at the normal rate applicable to you. If you have invested in bonds, NSCs or bank deposits, or have received dividends, make sure you pay the tax on these incomes by the due date. All these incomes will show up in your annual information statement (AIS), so there is just no way you can escape the liability. Also, keep in mind that unpaid tax attracts a penalty of 1% per month of delay.

 

Check AIS When Filing Returns

■ The annual information statement (AIS) has details of all your financial transactions during the financial year. It will have details of income (salary, profession, rent, interest and capital gains) as well as expenses(foreign exchange, purchase of gold above Rs 50,000 in cash and Rs 2 lakh by card) and investments (mutual funds, stocks, bonds). It also has details of the tax paid on your behalf by your employer and the TDS deducted by others. Be sure to check your AIS and verify that the details of your financial transactions are correct.
Verify TDS Details In Form 26AS

 

■ Form 26AS is your tax credit statement and has details of the TDS deducted on your behalf, and the tax collected at source (TCS) paid by you. Access your Form 26AS through the income tax department portal or your netbanking account and check if the TDS and TCS deductions are correctly mentioned in it. If some TDS or TCS has not been credited to you, you must contact the deductor immediately. A periodic check of Form 26AS will ensure you are not running around at the time of tax filing.

 

Don’t Ignore Foreign Assets, Earnings

■ Tax compliance becomes a little complicated if you have foreign assets. All foreign bank accounts, financial interests, immovable property, accounts in which an individual has signing authority, and any other capital asset held by the individual outside India, must be reported in the tax return, irrespective of the total income of the individual. Many taxpayers omit this, but this is not recommended. Not disclosing foreign assets can invite serious charges under the Black Money (Undisclosed Foreign Income And Assets) and Imposition of Tax Act, 2015. Even if a return for a previous year has been processed, cases can be opened up to 16 years later and penalties levied.

 

Source: TimesofIndia

At the end of every fiscal year, you start looking for ways to reduce your taxable income. Instead of looking for quick ways to reduce your taxable income at the end of the financial year, it is prudent to begin tax-saving in advance, with proper knowledge about the best ways to save tax on your income.

 

The government allows various exemptions to allow citizens to save their taxes. There are various tax-saving instruments which can reduce your tax liability by decreasing your taxable income. You can save your taxes through these 4 basic components:

 

• Investing your savings
• Buying insurance
• Paying back your loans
• Donating to charitable institutions

Read on to understand how:

 

Tax benefits under section 80(C)
The most popular tax saving options are available under Section 80(C) of the IT Act. It includes various investments and expenses that can be used to reduce your taxable income. The government allows deductions up to Rs. 1.5 lakhs for investments made in the instruments as specified in this section and its sub-sections. Some of them are as follows, – Invest your savings in government schemes like Public Provident Fund (PPF) accounts, National Savings Certificate, Kisan – Vikas Patra

 

• Plant your savings in 5-year fixed deposits
• Invest in notified pension schemes like National Pension Scheme
• Pay life insurance premiums
• Invest in Unit Linked Insurance Plans (ULIPs) or Equity Linked Savings Scheme (ELSS)

 

Save tax on your health insurance
Your Health Insurance Package can turn out to be an efficient tax saving tool for you. You can claim tax deductions under Section 80(D) of the IT Act for paying premiums towards health insurance for yourself, spouse, children or parents. Amendments made in the Union Budget, 2018 have further extended tax benefits by raising the exemptions under this section.

 

• A maximum deduction of Rs.25,000 is allowed for paying health insurance premium for your family
• An additional deduction of Rs.30,000 is allowed for health insurance premium of your senior citizen parents
• Exemption of up to Rs.50,000 is allowed for Health insurance premium if the applicant is a senior citizen
• A maximum deduction of Rs.1,00,000 is allowed for senior citizens against critical Health insurance premium

 

Tax saving on home loans and education loans
You can also claim tax benefits by availing a Home loan or education loans under different sections of the IT Act. Tax planning for saving on income tax with a home loan is highly beneficial as you can claim deductions under three different sections.

 

• You are allowed to claim deduction U/S 80C for repaying the Principal amount of your Home Loan
• You can claim tax deduction up to Rs.2,00,000 for interest paid on your Home Loan U/S 24
• You can claim an additional exemption of Rs.50,000 U/S 80EE for your first house purchase
• You can claim tax deduction against Education Loan for you or your family U/S 80E

 

Remember, the best time to start your tax planning is the beginning of the fiscal year. Don’t procrastinate until the last quarter to avoid frantic investments to save taxes. With tax-saving tools like a health insurance plan or a home loan plan, you can also attain financial security and establish your long-term goals.

 

Source: Bajajfinserv

Morgan Stanley’s advertisement on tax-saving showed a catchy line, “You must pay taxes. But no law says you have to leave a tip.” The ad highlighted the importance of not ignoring the opportunity to legally save on taxes. Because, the lower amount of taxes you pay, the greater is your disposable income.

 

Mistake 1: Delaying Tax Saving Planning Till March

Many people delay executing a tax-saving plan until the end of a financial year, i.e., March. However, this is far from a good strategy. The truth is that the sooner you start working on your tax-saving planning, the better.

 

For instance, if you invest money in your PPF account in the first month of the financial year, you will receive a lot more tax-free interest for the year than investing the money in March.

Similarly, starting financial planning early in the financial year allows you the convenience of investing in an ELSS fund via the SIP route. Otherwise, you will have to put a large chunk of money later in the year. And this can be pretty troublesome from a cash flow perspective. Moreover, you may also end up borrowing money from credit cards to invest, which is a horrible idea.

So, don’t make the mistake of waiting until March to start your tax planning.

 

Mistake 2: Tax Saving Is Only About Investing

People often assume that tax saving is only about investing money in tax-saving products. It happens because much of the marketing effort is attracting your attention to products like ELSS, tax-saving fixed deposits, insurance policies, etc.

However, investing is only one part of sound tax management. The other important part that doesn’t receive due attention is how you manage your spending. Income tax laws allow for several deductions from your taxable income for certain expenditures that you make. For instance, payment of children’s tuition fees, health insurance premium, repayment of home loan, education loan, and house rent are expenses that quality for a tax deduction.

As a taxpayer, you need to explore all such tax-saving options to determine what works best for you. The more prepared you are with the tax laws, and the sooner you act on them, the better are your chances of minimizing your tax outgo.

 

Mistake 3: Not Evaluating Enough On Tax Saving Products

You can evaluate every tax-saving investment option on three broad parameters. The first parameter is liquidity, which simply means the ease you can access and withdraw your money when you need it. In this regard, you must have a clear understanding of the instrument’s lock-in period in addition to the premature withdrawal rules, including its taxability and penal charges.

The second broad parameter when evaluation a tax-saving financial product is the risk of losing money. Some investments are inherently volatile. And these are generally the investments that have some component of equity in them.

INSTRUMENT	UNDERLYING ASSET CLASS	RISK (LOSS OF CAPITAL)	EXPECTED RETURNS *
Public Provident Fund	Debt	No	7 – 8%
Equity Linked Saving Scheme (ELSS)	Equity	Yes (Moderate)	12 – 14%
Sukanya Samriddhi Yojana	Debt	No	8%
National Savings Certificate	Debt	No	7%
Post Office Time Deposit	Debt	No	7%
Bank Tax-Saver Fixed Deposit	Debt	No	6 – 7%
National Pension System (NPS)	Equity & Debt	Yes (Low)	8 – 12%
Unit Linked Insurance Plans	Equity & Debt	Yes (Moderate)	7 – 12%

* Estimates Based On Historical Performance; May Not Sustain In The Future

That said, it is also crucial to factor that the presence of equities allows instruments like ELSS, ULIPs, and even NPS to offer inflation-beating returns over the long run. So as an investor, you need to ask yourself how comfortable you are in tolerating some volatility in the portfolio to make more returns.

Finally, the third parameter you need to consider when picking tax-saving products is their post-tax returns.

INSTRUMENT	TAXATION
Public Provident Fund	Tax-Free
Equity Linked Saving Scheme	10% Tax Payable On Long Term Capital Gain Exceeding ₹1,00,000
Sukanya Samriddhi Yojana	Tax-Free
National Savings Certificate	Interest Earned Is Taxable
Post Office Time Deposit	Interest Earned Is Taxable
Bank Tax-Saver Fixed Deposit	Interest Earned Is Taxable
National Pension System	60% Maturity Is Tax-Free; Rest 40% Goes To Annuity Which Is Taxable
Unit Linked Insurance Plans	Mostly Tax-Free Except Where Annual Premium Exceeds ₹2,50,000

Investors generally check for tax benefits in terms of the deduction it allows. For example, a PPF or ELSS offers deduction under Section 80C. NPS provides a little more.

But what’s equally important to understand is the taxation on the income earned by that asset. And also how the maturity proceeds and early withdrawals will be treated from a taxation perspective.

Understanding these aspects can not only help you zero in on the right investment product, but it can improve your post-tax returns as well.

A big problem with not having an acceptable awareness or knowledge of tax-saving instruments is the inherent inefficiency in the planning process. This inefficiency often passes down as a legacy from parents and other well-wishers.

Consequently, many investors continually invest in LIC policies and other small saving schemes that typically struggle to beat inflation. While such investments with subdued returns can help you save some taxes in a particular year, you may end up wasting a lot more in potential returns on your money by investing in these products.

 

Mistake 4: Investing In Insurance-Cum-Investing Products

Every year in March, millions of Indians blindly invest in traditional life insurance plans like endowment and money-back policies to save taxes.

Such is the last-minute rush that life insurance companies have effectively marketed the month of March as India’s tax-saving season. And it should come as no surprise that insurance companies rake in around 20% of the entire year’s traditional life insurance policy sales.

Now, from a utility perspective, these insurance-cum-investment plans offer meager returns and often struggle to catch up with the long-term inflation rate, which is about 6%. Not just that, these products deliver lower returns than what a PPF, National Savings Certificate, or other small savings schemes offer.

Additionally, these insurance plans come with an investment commitment that runs from 10 to 20 years, and any attempts at a premature withdrawal or policy closure attract a heavy penalty.

 

Mistake 5: Not Diversifying Your Tax Saving Investments

All the tax-saving products come with lock-in requirements. As a result, they seldom align with your short-term financial goals. That is why you must understand how these investments fit within your overall long-term financial goals.

Most individuals rarely look at their investments in PPF, EPF, and other instruments as part of their overall financial portfolio. In effect, such investors grossly miscalculate their asset allocation.

Consequently, they invest less in the equities and miss the chance to accumulate a bigger corpus in the long run. While they think they are in a particular risk profile, unfortunately, their investments are stuck in a different risk basket.

 

Conclusion

Tax planning investments are no different from conventional investments. The basic principles such as asset allocation or diversification apply to managing tax-saving investments as well. Now that you know the most common and avoidable tax-saving mistakes, you can reflect on how you work your tax-saving activities.

Source:etmoney.com