Last Minute Tax Planning Five Common Mistakes And How To Avoid Them

The current financial year 2022-2023 is going to end very soon. It is that time of the year when people are eager to invest in mutual funds, fixed deposits, public provident funds, etc to save tax. While investing is a good financial habit, doing it at the right time for the right amount is very important. You can invest to save tax but understand a few intricacies that can save you from stress.

Let us see the five common mistakes done with tax planning and how to avoid them. 

Not Considering Your Existing Savings

You can get carried away by the last-minute pressure of tax savings. You may miss out on some of the important details like the savings you have already made for tax purposes. It is advisable to prepare a draft calculation sheet of income tax. Consider all the savings you have made already under the Income Tax Act, 1961 like life insurance payments, mutual funds, provident fund deductions by your employer, and payments like housing loans, tuition fees of your children, etc. This will help in understanding the amount of savings to be made and avoiding repetition.

Borrowing For Investing

Investments are for using your idle money to generate additional income.  The investments should be made after considering the rate of return, period of investment, and liquidity. If you want to borrow loans for making tax-saving investments, it is advisable to rethink. Short term personal loans come with higher interest rates and may not match the returns generated by your investment. And also, the investments should be from the unused disposable income. If you still want to borrow to invest, you can use interest-free loans from your friends and relatives and repay in a short period.

Postponing Too Much

The ideal time to plan for investments to save tax is at the beginning of the financial year, precisely during the first quarter (April to June). Declaring the actual and proposed savings at the beginning of the financial year to your employer can save you from higher tax deductions from the salary. Don't postpone the savings to the fag end of the year as it can be a haphazard venture. You may end up buying products that don't suit your income and lifestyle.

Investment Plans Are Not Just For Tax Savings

The investment market is a huge one with lots of options to choose everyone’s income, expenses, and lifestyle. Any investment plan should be consistent and for the welfare of the family as a whole. There are options like retirement plans, and share trading which may not be allowed as savings for The Income Tax Act but can provide high returns. Hence narrowing your investment plans for saving taxes can be helpful in the short run but not for the years to come. For example, you may be purchasing medical insurance for your family exceeding the income tax limits, but it will be practically required to meet any huge medical expenses.

Failure To Understand The Limits Under The Income Tax Act

There are various statutory limits for amount and period as per The Income Tax Act. Beyond this, any savings will not be considered for tax purposes. For example, section 80CCE imposes an overall limit of Rs 150,000 cumulating Sections 80C, 80CCC, and 80CCD(1). The maximum deduction for health insurance premiums for self and family is Rs 25,000 and for senior citizen parents is Rs 50,000.

Conclusion

The financial year end may tend to give you apprehensions about your investments and tax outflow. With proper planning, assessment, and execution you can save your hard-earned money easily. Compare your previous year's savings and taxation and make a picture of what went right and wrong. Consider using tax and savings calculators available online to make your work easier. Choose wisely and save nicely.

FAQ of Last-Minute Tax Planning :Five Common Mistakes And How To Avoid Them

1:Whether Fixed Deposit for 1 year can be considered for tax savings?

No. Only Tax saver fixed deposit for 5 years is allowed as deduction for tax savings.

2:Whether housing loan principal on 2nd house property can be claimed as deduction?

Yes. You can claim housing loan principal repayment on as many houses as you want subject to a maximum limit of Rs 150,000.

3:How can I claim additional deduction by saving through the National Pension Scheme?

You can opt for Tier I National Pension Scheme which is eligible for deduction under section 80CCD(1B) over and above Rs 150,000.

4:Whether capitation fees paid for my son can be claimed as deduction under Section 80C?

No. Any payment made for the education of your children under the head tuition fees alone is allowed as deduction.

5:What is the deduction allowed for interest income under the Income Tax Act?

You can claim deduction under section 80TTA for interest on savings account to a maximum of Rs 10,000 and if you are a senior citizen deduction is allowed up to Rs 50,000 for interest on deposits.