Last minute scramble? Five mistakes to avoid when choosing tax-saving products
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.
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.