Invest In Tax-Saving Instruments To Meet Financial Goals

Investment – Taxpayers’ habit of last minute rush to save tax is often cashed in by the financial instrument providers and advisors to meet their sales target instead of identifying and matching the investor financial needs.

There is a rush for identifying tax-saving investments during the annual ritual of submitting investment proof. Often in this stampede taxpayers throw their hard-earned money into sub-optimal investments without knowing all the options. Taxpayers’ habit of last minute rush to save tax is often cashed in by the financial instrument providers and advisors to meet their sales target instead of identifying and matching the investor financial needs. For example, if a person having four dependents may end up buying a high premium policy with lower risk cover without identifying the need of insurance cover required when the required risk cover can be procured with term insurance at a lower premium.

Similarly, ELSS offers higher return and liquidity as compare to fixed deposit while the tax saving is same.  And necessary expenses can also be claimed as an expense instead of rushing for fresh investment such as rent to parents for HRA, stamp duty on purchase of house and children tuition fee.

The Tax Rule

The tax rules for the submission of proofs of investments and expenses for claiming deduction/exemptions are provided under section (u/s) 192 of the Act and details of which are updated in the annual TDS circular annually.  The proof has to be submitted to the employer in the month of January/February.  Section 192 makes it obligatory for the employer to withhold taxes at the time of payment of salaries.  The employer keeps on deducting TDS on the basis of estimated tax on the basis of declaration provided by employees in the month of April and the differential is covered in last 2-3 months on actual investment proof submission.

Investment To Meet Your Goals

Often employees declare higher investments in April to keep the TDS low but fail to invest regularly and get the shock of higher TDS deduction in last months. Sometimes a major part of last month’s salary goes into taxes resulting in cash crunch plus tax loss.

You should not take hasty decisions in this situation and invest to save tax without understanding the instrument required for meeting your financial goal. Tax planning is a complex activity which needs expertise in tax laws and avoiding it results in loss up to 30% of your earnings every year.  And the prime reason for the higher tax is self-planning with limited tax knowledge and misconceptions.

Take Expert Advice To Optimize Savings

Many taxpayers manage their tax affairs themselves, without seeking help from an expert. Just as self-medicating is not advisable when we fall ill, the do-it-yourself approach can prove to be very costly for salaried people. We noticed that they missed out on several deductions and exemptions that a professional tax advisor could have saved for them.

Taxpayers tend to underestimate the real cost of paying too much tax. Even a modest saving of Rs 3,000 a month, if invested for retirement, can grow to a massive Rs 10.3 lakh in 10 years. In 20 years, it would become Rs 50.9 lakh and in 30 years it would reach Rs 1.95 crore. So, poor tax planning could be robbing you of a comfortable retirement. The bigger problem is that a person who does not fully understand the tax laws or hasn’t updated his knowledge with the new regulations can make errors.

Consider Past Investments

While you have submitted your investment declaration, at the time of proof submission you need to actually invest in claiming the tax benefit. However, the investment might be different from the declared one.  Before considering any new investment for tax saving one should consider past investment which is continued including EPF, insurance premium, tuition fee, home loan repayment, stamp duty for a house purchased during the year, interest on home loan etc.  In case the proof is not submitted before the due date the employer is bound to tax TDS. The extra tax deducted by the employer can be claimed while filing the return if the investment is done after the due date of submission.

Submit Correct Proof

Employees should submit the correct proof: Otherwise, the taxpayer has to indemnify the employer for all cost and consequences if any information is found to be incorrect.

(As Published in MoneyControl on Jan 11, 2017)