Tax planning 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.
Investing in tax-saving instruments is important to reduce tax liability, but investing solely for tax-saving purposes can be a mistake.
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Tax planning is an essential part of financial planning. However, many taxpayers make simple mistakes that impact their tax liability and overall financial goals.
For instance, most taxpayers rush for tax-saving investments at the end of the year. “One should start evaluating the available investment options at the beginning of the year based on the potential return on investment. If these investments also provide a tax benefit, it will be the cherry on the cake. Tax benefits should not be the only eligibility criteria for a taxpayer to invest,” says Naveen Wadhwa, DGM, Taxmann.
Some other tax-planning errors one can make are failure to keep accurate records, claiming deductions without supporting documents, overlooking deductions and credits, and not staying up to date on changes in tax laws, among others.
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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.
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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.
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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.
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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. It is important to review your tax planning strategies annually and make necessary changes to maximize tax savings and achieve financial goals.
“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,” says Adhil Shetty, CEO, Bankbazaar.com.
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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 such as not availing of tax deductions, failing to maintain proper documentation, investing solely for tax-saving purposes, not planning for long-term goals, and not reviewing tax planning strategies regularly, you can reduce your tax liability and achieve your financial goals effectively.
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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
