Plan your tax savings at the beginning of the financial year
Planning for your financial future is very essential before making every investment. Majority of tax saving investments are done in the last three months of every financial year. Most taxpayers wake up only after the dawn of the New Year without undertaking any financial planning.
Tax planning is about reducing your taxable income as much as possible and achieve maximum saving possible on tax outgo. The tendency is to react at the last minute and end up making some investments that give some tax savings. The tax saving potential is never exploited to the fullest.
Following are the common tax planning mistakes made by investors:
- Investing Hurriedly: Most investors make the fundamental mistake of not planning their tax and investments. This tendency leads to inadequate investments, not only for tax saving but also for future financial needs. Finding the investible surplus and allocating funds for investments in different tax saving instruments is possible only if a clear financial plan is chalked out.
A financial plan drawn up at the beginning of the year gives you a complete picture of your finances for the whole year. It would also help you in planning your expenditure and cutting down on wasteful expenditure to utilise the full tax saving potential.
- Stage of Life: Savings plan differs with the life stage you are in and the age group you fall in. Your life stage and your age determine your expenditure needs and impact savings. If you are married and have a child, your current liabilities are higher and your future financial needs will also be higher. Only a financial plan can help better manage both the requirements.
- Aimless Insurance Buying: Buying an insurance product for the purpose of tax saving is recklessness. Your financial needs should determine the kind of insurance cover you buy. If you have a home loan, you need to have a term insurance cover to the extent of the loan. Having inadequate cover with savings-cum-protection life insurance exposes you to life risks.
- Diversify Tax Saving Investments: Many of you tend to have investments concentrated in just a few tax saving instruments. A judicious investment mix of insurance, equities, debt, and fixed deposits should be built over a few years. There is no point buying new insurance policies every year and stacking up on them. That is highly inefficient investing.
- Focus on Protection Not on Deduction: Focus on tax saving should not blind you of the need for health insurance. The premium paid is also allowed as deduction from total income. Health insurance surely reduces tax outgo, but the protection is more important from the point of view of covering financial risks from hospitalisation of a family member.
- Reduce Tax Liability: Certain expenses are allowed as deductions, which reduce tax liability. Tax benefits can be availed on payment of tuition fees of two of your children. Donations made to charitable institutions are also allowed for claiming tax benefits.
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