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While it is a wide-known fact that all earning individuals are taxable after a certain income level, there is still a lot of ambiguity about tax planning. While tax planning can be cumbersome and tiring, it is very important that one includes in it their financial plan. In this article, we aim to cover a few points about tax-planning that you may be getting wrong.
Here are four things about taxes you might be getting wrong:
- Investing for the sole purpose of saving tax
Tax planning and long-term financial planning are supposed to go together. When investors resort to last-minute tax planning, they often make all uninformed or ill decision. To avoid investing in the wrong type of investment, you must include tax planning in your short-term financial goals and long-term financial goals. A well-planned financial strategy ensures that you invest in investment options that are suitable for your portfolio. - Investing more than required or not investing the bare minimum
It is always advised to list down the tax deductions that you are looking to claim in a particular financial year. This will give you a fair idea about the investment options you already have in your plate and how much should you invest further. If you have opted for the old tax regime, it makes sense to utilise the Section 80C tax deduction of up to Rs 1.5 lac. Your pf contribution, ELSS tax saving mutual funds, PPF (Public Provident Fund), tax-saving FDs (Fixed Deposit), etc are all a part of Section 80C deductions. - Look before you leap
One of the biggest mistakes investors end up making while saving tax is investing for the sole purpose of tax and ignoring the associated lock-in period. For instance, tax saving mutual funds (ELSS) have a lock-in period of three years, whereas PPF schemes have a lock-in period of 15 years, and tax-saving FDs have a lock-in tenure of 5 years. So, if you wish to invest in tax-saving investments that have a high liquidity, then you might consider investing in ELSS funds. - The everyday expenses can also contribute towards saving tax
You heard it right. You can earn a tax deduction on certain expenses that are incurred in our daily lives. This includes medical expenses, charitable donations, tuition fees, registration fees and stamp duty for buying immovable property, rent receipts, interest on housing loans, etc*. This will definitely help to reduce your tax burden.
As an investor, you must choose tax-saving investments that not help you save tax but also fuflil your other financial goals. For instance, if you wish to buy a life insurance while saving tax, ULIPs (Unit Linked Insurance Plan) might be the right investment option for you. Or, if you wish to grow your wealth while saving tax, you might consider investing in tax-saving mutual funds or ELSS mutual funds. It’s never too late to start planning for your future. If you haven’t already, you can start now. Happy investing!
*Make sure to check the eligibility criteria and other terms and conditions before availing these tax deductions under Section 80 of the Income Tax Act, 1961.