Last minute scramble?
For most salaried individuals, the December-January period
is usually the time when their employers ask for proofs of investments for the
financial year (FY).
Ideally, you should do your tax planning at the beginning of
the FY and then invest throughout the year. But if you are one of those who are
scrambling to complete your tax planning process and trying to meet the
deadline, here is a list of mistakes you should avoid while taking last-minute
investment decisions.
Products you do not need:
Understand that tax planning is only a small component of
your overall financial portfolio. You need to think through the products that
you are investing for tax benefits while keeping in mind the larger picture of
your overall financial plan. “Some people end up buying investment products at
the last minute and then regret it later. Hence, you need to choose products
that are aligned with your overall financial needs,” said Anil Rego, a
Bengaluru-based financial planner.
Here are some examples. There is no need to pile up
inappropriate life insurance products just because the premiums bring in tax
benefits. The policies should fulfil your insurance needs first.
Similarly, don’t just invest in tax-saving fixed deposits or
any other product just for the short-term requirement of tax benefit. Check
whether the product is eligible at all for tax deduction or not. For instance,
not all mutual fund schemes are eligible for tax deduction under section 80C of
the income-tax Act. If you invest in equity-linked savings schemes (ELSS), only
then you can claim the tax benefit.
Similarly, only investments in term deposits with banks and
post offices with 5 years tenure are eligible for tax deduction.
Wrong mode:
Besides the investment products, you need to pay attention
to the mode of payment for some of the products. In some cases, cash payment
will not be considered for tax deduction. For instance, if you pay premium of
your health insurance policy in cash, then the payment is not eligible for tax
deduction. (Health insurance premium deduction comes under section 80D of the
Act.) Similarly, no tax deduction will be allowed for a donation if payment of
more than Rs10,000 is made by cash. Under section 80G, donations are eligible
for deduction up to 100% or 50%, as per the institution.
Products you are not qualified for:
Before investing in a tax-saving product, ensure that you
are eligible for the related tax exemptions. For instance, benefits of tax
saving under Rajiv Gandhi Equity Savings Scheme (RGESS) are available to you
only if you are a first-time equity investor.
Another example is tax deduction for housing loans. . If you
have bought a house that is under construction, then interest paid on the loan
for the year can only be claimed in 5 equal instalments, immediately from the
year in which you get possession of the property.
Not considering future payments:
There are some products that require regular contributions.
For instance, life insurance policies. Once you opt for them, you need to
adhere to the contribution every year. Another example is Public Provident Fund
(PPF). It has a minimum tenor of 15 years. In case you miss payments, you have
to pay a penalty. Hence, only commit to a product that you know you will be
able to invest in at the stipulated intervals.
Not keeping documents handy:
To claim deduction you need to get all documents of your
investments and expenses. If you have a home loan, ask your bank or housing
finance company for a principal and interest certificate. Similarly, if you
have invested in PPF, ELSS or any other product, keep the documents handy to
provide proof of your tax investments. Otherwise you will have to claim a
refund when your file your income-tax returns.
If you are hard pressed for time, don’t jump into any
product without understanding it. “You still have time to invest since you can
claim a refund in your income tax return,” said Surya Bhatia, a Delhi-based
financial adviser.
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