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Common Errors You Should Avoid While Investing To Save Tax

Aug 20, 2018 | 2 years ago | Read Time: 2 minutes | By iKnowledge Team


Tax Calculators

When the end of the financial year approaches, everyone rushes to buy tax saving investment plans in a desperate bid to save taxes. Although investing in tax saving instruments is a great idea, people end up taking some reckless decisions in a hurry to save taxes. Many people, still struggle with basic knowledge of investments when it comes to saving taxes. They often fail to remember that taxes are an incidental benefit and not a primary benefit of investing. This results in bad investment decisions that may eventually lead to hefty losses. Therefore, to help you avoid such costly financial mistakes, here are the few common mistakes you should avoid while investing to save on taxes:-

  1. Last minute investments: – Many people look upon tax saving as a ritual to be undertaken at the end of the financial year. In the haste to save taxes at the last moment, you will most likely end up with an investment plan which may not suit your financial needs. The mantra of safe tax saving investment, is to plan early in a systematic manner. For this purpose, you can start a tax-saving fund or keep aside a small amount every month in Pubic Provident Fund (PPF) or National Pension System (NPS).
  1. Investing the entire tax eligible amount in endowment plans: – Many insurance agents often recommend endowment plans for tax saving purpose, but only because they receive a high commission on it. What people don’t realise is that an endowment plan is a long-term product with a maturity period of 10-20 years. If you choose to redeem the plan early, you won’t even get the premium amount that you invested in it. Majority of the taxpayers end up investing their entire tax eligible amount of Rs 1, 50, 000 in endowment plans without thinking about other eligible deductions. Endowments plans such as Aegon iReturn are best for tax saving.
  1. Investing too much in FDs and NSC: – This is one of the most common mistakes committed by taxpayers. People are not aware of the fact that FDs and NSCs generally give post-tax returns that are lesser than the inflation rates. Moreover, the interest earned on both of these financial scheme is taxable. Which makes these investment tools a rather unattractive tax saving option.
  1. Limiting investments to only Section 80C:- The provisions under 80 C is are quite limited. People are not aware of the tax saving options beyond the Section 80C limit of Rs 1 lakh. Interest paid on housing & education loans, medical expenses, health insurance premium, etc. qualify for income tax deduction. Aside from these, donations towards social causes such as rural development, scientific research, and government relief are also eligible for income tax deduction. However, only the donations made to institutions which are approved under Section 80G of the Income Tax Act are eligible for tax deduction.

Want to know your taxes? Access our easy to use tax calculator, and plan your finances.

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