One of the most important aspects of personal finance is to plan your savings and investment in a way that would reduce your tax liability. After all you would certainly not want to lose your hard-earned money towards taxes due to faulty investment strategies. In this article, we will look at situations, wherein you end up paying more taxes and the steps you must take to avoid doing so.
No Financial Planning
Tax planning should not be a last-minute resort or a matter to be dealt with at the end of a financial year. It must start at the beginning of a financial year to avail maximum tax deduction benefits. Many tax payers lose out on various tax deductions owing to lack of effective tax planning. Savings and investments are meant for meeting different investment goals, both of which require due diligence to ensure adequate fund availability and returns. It is best to do budgeting with the income you have and allocate a certain amount of money towards investments that can help you save tax.
Lack Of Awareness On Tax Deductions
You can only carry out an effective tax planning if you are aware of the tax deductions benefits available on various avenues. Investments are still largely driven by advice from peer groups and relatives instead of tax saving objectives. Seek help from experts and browse through online aggregator websites to learn about investments that can help you avail tax benefits.
Investment In Instruments With Low Potential
Small investment decisions can make a big difference when it comes to effective tax saving. A lot of people invest in conservative assets such as Bank Fixed Deposit, although it may not be the best tax efficient investment option. Investment instruments such as debt funds and equity-based mutual funds are more lucrative options but are left out of one’s portfolio due to lack of awareness. Equity mutual funds are actually substantially better than many other instruments despite the newly introduced long-term capital gains (LTCG) tax of 10% without indexation.
Not Looking Beyond Deductions Under Section 80C
When it comes to tax deductions, the first thing that most salaried individuals consider is Section 80C. After all this section of the I-T Act offers deductions to the tune of Rs. 1.5 lakh on various financial instruments. But tax payers often do not explore tax saving options beyond Section 80C. Lack of awareness of the possible tax deduction avenues is the prime reason why people end up paying a higher tax. For example, Health Insurance allows deductions worth Rs. 25,000 for premiums paid for self and Rs. 30,000 for premiums paid for senior citizens under Section 80D for the Assessment Year 2018-19. From the next financial year onwards i.e. FY 2018-19, the deduction will be increased to Rs. 50,000 for senior citizen parents.
Likewise Section 80DD allows deductions between Rs. 75,000 to Rs. 1,25,000 for caretaking of a financially dependent handicapped individual, depending on the severity of the handicap. Charity or donation under Section 80G, education loan interest repayment under Section 80E, expenditure made towards any specified disease under Section 80DDB are some such avenues of tax deductions beyond the ambit of Section 80C.
Not Using HRA Benefit
House Rent Allowance (HRA) is that part of your salary component, which is not fully taxable like the basic salary. Depending on certain factors, Section 10 (13A) of the Income-tax Act, 1961, allows tax exemption on some part of the HRA. If you are living in your own accommodation and not paying rent, the HRA you receive from your employer is fully taxable. However, if you are living in a rented accommodation, you can enjoy the exemption benefit and save tax.
Tax Liability Of Other People’s Income
There can be situations, wherein you pay income tax for others as well. This may put some extra burden on you, thus increasing your overall tax liability if not planned well in advance. For example, if you choose to invest in the name of your minor child, the returns are actually clubbed with your income and taxed accordingly. The same happens when any interest income is earned from a minor child’s Savings Bank Account or fixed deposit. Also, you would be liable to pay income tax on behalf of a deceased parent as per Section 159 of the Income Tax Act of 1961.
Paying taxes is your moral and legal duty. You can save taxes only if you make yourself well aware about tax deductions and remain financially alert.
The writer is CEO at Bankbazaar.com