View quick summary A salaried person gets a fair idea about his total income at the beginning of the financial year. That’s the best time to start planning your tax-saving investments. Unfortunately, people tend to procrastinate these crucial financial decisions till it is very late. In the process, they sacrifice returns or safety, or both, when they buy in a rush. Worse, they end up buying costly financial products which don’t serve any practical purpose in their financial plan. The common mistakes that taxpayers make in this tax-saving rush are as follows:
Investing without a goal:
Suppose you need to travel from Delhi to Mumbai. You will fix the date of journey and then choose an appropriate mode of transport, based on the time it will take and the price you are willing to pay. A tax-saving investment is no different. Just as you choose the best mode of transport to reach your destination, you need to assess the investment option that can help you achieve your financial goals. This is why you need to match your choices with your financial goals.
Not considering available options:
Taxpayers often overlook the choices before them. ELSS funds are a good way to save tax for someone who has a high risk appetite. However, if the taxpayer has woken up late and there is not enough time, he may put his money in a low-yielding and tax inefficient NSC or a bank fixed deposit. Senior citizens may be lured to invest in other options even though the Senior Citizen’s Savings Scheme also gives them tax benefits under Section 80C.
Falling for the insurance lure:
The tax planning season is the busiest time of the year for the insurance industry. As panic sets in, insurance agents know they can make a killing. In their hurry to exhaust their Section 80C limit, taxpayers don’t even look at the basic features of an insurance plan, leave alone its fine print. A taxpayer may be sweettalked into buying a ULIP or an insurance policy even though he doesn’t need one.
Not knowing tax rules:
Even if you miss the deadline set by your employer and tax gets deducted, all is not lost. You can invest the balance over the next month (31 March is the last date) in any option that suits you and claim a refund from the Income Tax Department. All you will lose is two months’ liquidity. If you file your tax online and provide your bank details, the excess tax deducted will be refunded to you within 1-2 months of filing your tax return. This is better than rushing into an investment option that will prove unsuitable to your needs.
Not taking tax changes into account:
Income tax laws are amended regularly, with every budget adding or withdrawing some benefits. The taxpayers who concentrate their investment planning into 2-3 weeks of the year often miss these changes and blindly follow the previous year’s investment pattern. For instance, the Direct Tax Code proposes that insurance policies with a risk cover of less than 20 times the annual premium will not be eligible for tax deduction but people continue to buy endowment plans and ULIPs. They might be forced to continue without tax benefits once the DTC comes into effect in 2012.