Every year, the month of January brings with it the last minute tax saving rush, isn’t it? All the lazy laggards who had kept this task of tax saving till the eleventh hour are now waking up and rushing to save tax.
It is in this rush to reduce and save tax outgo that taxpayers, especially the young earners, end up committing mistakes which can have long term implications on their financial future.?
Tax saving should never be considered just a formality. Instead, you should convert that ‘formality’ into an opportunity to align tax planning process with your financial goals in life. Suppose if you are a young earner, do not just opt for any tax saving option just for the sake of it. As a rule of thumb, you should compare various tax saving options and then choose the ones that are apt for your finances.?
For example, if you have not yet taken insurance, then life and health insurance should be your priority. Not only will you be covered under the insurances, but even both of them’s premiums offer tax benefits too. Similarly, if you wish to go for wealth creation, then compare and choose among investment avenues?such as ELSS, PPF,NPS etc.,?on parameters such as returns, liquidity, investment horizon and risk appetite.
Getting a life insurance policy should always be done primarily for the purpose of providing your family with replacement income in the event of your untimely death. For that purpose, term insurance is the best option for life insurance because it offers a sufficient life insurance policy that can cover atleast 10–15 times your yearly income at extremely low premiums.??
But instead of keeping insurance and investment separate,?taxpayers frequently tend to mix the two and end up investing in ULIPs, money-back plans, and endowment plans, as they tend to confuse them with insurance and/or aim to get the benefits of both insurance and investment from same product. That is where you need to realize the mistake.?
All these products that claim to be a mix of insurance investment tend to have a five-year lock-in period and neither produce optimal returns nor sufficient cover. That is why it's critical to keep investments and insurance separate when doing tax planning. For investment purpose,?compare and choose among investment avenues?such as?ELSS, PPF,NPS?etc.,?on parameters such as returns, liquidity, investment horizon and risk appetite.
Also Read:?From PPF To Insurance-10 Popular?Tax Saving?Options Under Section 80C
Relying on last-minute tax savings to reduce overall tax liability is another common mistake made by taxpayers. Such hurried tax planning can result in erratic choices, which raises the possibility of selecting less-than-ideal investment products. Furthermore, rushing at the last minute may result in a delay in payment clearance or an inability to timely submit investment proofs, which could prevent taxpayers from actually receiving tax benefits.
Additionally, investing in lump sum during the final quarter of the financial year removes the chance to receive the full year's returns on certain tax-saving investment products. Therefore, it is best to plan an effective tax-saving strategy at the start of the fiscal year in order to time investments into tax-saving products and take advantage of the year-long tax savings as well as longer-term higher returns.
Besides the usually common tax saving options that we all know, such as insurance premium, home loan EMIs, PPF, ELSS etc, there are some other tax saving ways which are seldom known to taxpayers. Being aware of these can especially help in last minute tax saving rush. Such lesser known tax saving ways include eligible donations, disabled dependent's medical expenses, education loan repayment, among others.
Also Read:?10?Tax Saving?Options Other Than Section 80C
Last minute tax saving rush is what pushes many taxpayers to disturb their emergency fund. The desperate attempt to lower your tax outgo and thus prevent your in hand salary from getting diminished is what often makes taxpayers to take such a step. But that is where one needs to understand and keep in mind the importance of emergency fund.?
Using your money kept in emergency fund to serve tax saving purpose is a mistake because in case financial emergencies like an unexpected job loss or serious illness arise, your depleted or even exhausted emergency fund would no more be able to rescue you for the actual reason for which it was created, i.e. to tackle financial exigencies. That is why, again, it is important to treat tax planning as a round the year task and not leave it last minute wherein desperate attempts end up pushing you to make mistakes that can harm your finances.
Also Read:?PPF vs ELSS vs?Tax Saver?Bank FD
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