Since we are approaching November, it is natural that you hear about tax saving, Form 12BB, investment proofs, and other things. For those who have no idea about what Form 12BB is, it is a statement of deduction claims of an employee. Many choose to delay the task of the tax-saving investments until the last moment and, then, act on it.
There may be many individuals who have recently got employed and have no idea about how things work with respect to saving taxes and how to make use of the deductions that are available. Though it is necessary to give attention to details and stay all eyes, it is common for anybody to make mistakes when trying to save on taxes at the nth moment.
Here is a list of seven mistakes you must avoid while saving taxes when you are at the edge of a cliff.
- Unaware of Tax Liabilities:
As an earning individual, you must first be aware of your taxable income and tax liability. Check for any updates in the tax slabs and calculate the tax rates applicable to you. If you have not bothered to do this yet, it is high time! You can plan your finances better only when you know how much of your income is taxable and how you can save taxes.
For this, you must zoom into your payslip and find out the salary components that can get you tax deductions. Upon figuring out the amount to invest in tax-saving instruments, you can think of investing the remaining money to grow wealth.
- Investing Without Knowing Returns:
It is advised that you do not pick up an investment product only for the sake of saving taxes without bothering about the returns you get. There are several tax-saving options available in the market and you must understand the annual rate of returns and verify the same with the information available on public platforms before picking one.
At times you may be guaranteed a lump sum, but the rate of returns are not disclosed beforehand. The popular tax-saving products such as PPF contributions earn 7.1% p.a., VPF earns 8.5% p.a., and many ELSS products provide long-term returns of 10%-15% p.a. Compare these rates with the product you have chosen and decide on what suits you the best.
Also Read: How can your employer help you save taxes?
- Missing EPF in Calculations:
According to the latest update, a salaried individual will receive a standard deduction of Rs.50,000 per financial year. Alongside, you can utilise tax deduction on products that qualify under Section 80C up to a limit of Rs.1.5 lakh. Employee Provident Fund (EPF) would have already been deducted by your employer during the year. Therefore, when you are planning to invest in tax-saving instruments, do consider all these deductions and then ideate your financial plan. Do not miss to include the education loan, housing loan, children’s school fees, and more.
- Signing Forms Without Reading:
When you are investing in the last minute, you will be in a hurry to somehow finish the transaction and may end up signing the papers without reading/understanding the terms and conditions properly. In turn, you may not have any idea about the different fees and charges applicable, the rate of interest, maturity returns, risks, and related aspects of the product.
- Choosing a Wrong Instrument:
Some individuals do not research enough to weigh the pros and cons of the investment instruments. They jump to conclusions over others’ advice and choose products that do not suit their financial goals. If you are one such person, you must analyse the loss you may incur if the market goes down. Signing up for some product just to save taxes at the moment may not do you much good. Find out the role of each instrument in the overall picture of your financial plan before your sign up for any.
- Not Considering Liquidity Factor:
When you are evaluating different investment options, you must consider the liquidity factor that suits your way of life. If you think there may be a need for cash in about four years from now, you must choose a product that can be liquidated in another three years. In this case, it is not suitable to invest in a plan that will not let you liquidate funds until 10 years or 15 years.
Alternatively, you can invest in more than one type of investment schemes so that part of your money will be available and avoid cash crunch at times of emergency.
- Making Transactional Errors:
When you are doing transactions at the last minute, there are chances of errors seeping in or of submitting incomplete documentation. For example, you may have missed adding a signature on one paper or submitting the details of an important investment that can result in an unexpectedly huge tax liability. You may have delayed filing ITR until the night of the due date for filing and there is a sudden server issue leading to your submission remaining unprocessed until the clock strikes 12. This means you have not submitted the ITR on time initiating a penalty.
The moral of this article is to give enough time to plan and execute your savings and investments. Also, do the whole income tax returns filing task after keeping all the details ready with you. Filing returns in a hurry can bring in unseen errors making it more expensive for you
For any clarifications/feedback on the topic, please contact the writer at apoorva.n@cleartax.in