Have you done your tax-saving right?
Calculating your tax liability correctly and using the tax breaks offered under Section 80C are few points to check during your tax-saving exercise.
Now, while doing this you have to make sure that you have done it properly, especially if you are doing it at the last minute. To help you, here are five questions you should answer to check if you are on the right track. If you are not, remember that you still have a couple of months left to take corrective measures.
1. Have you calculated your tax liability correctly?
All of us want to save tax by making 'good' investments. However, before you decide where to invest, it is good know what your taxable income is and how much tax you are liable to pay. Your gross total income and taxable income need not necessarily be the same. As per income tax laws, your gross total income is the sum of income received from the following five heads:
(i) Salary income
(ii) Income from house property
(iii) Profits and gains of business or profession
(iv) Capital gains
(v) Income from other sources
Now, to arrive at your taxable income, you should subtract the deductions you are eligible for from your gross total income. For instance, your contribution the Employees' Provident Fund (EPF), Voluntary Provident Fund from your salary would automatically become eligible for deduction from your gross total income (mainly your salary) before tax payable on it is calculated.
After calculating your total taxable income, apply the tax rates relevant for the financial year for which the income has been calculated to compute your tax liability.
"In a bid to just save tax, people end up making unwanted investments that could be financially damaging. You should get the ball rolling in April instead of waiting till the last month to save tax. Exhausting the deductions on different expenditures and investments like home loan, house rent, medical insurance, NPS and so on, should be the first thing to start off with. Besides, the basic principles of tax-planning remain same throughout the year," says Surya Bhatia, a Delhi-based financial planner.
So, before rushing to make tax saving investments it is important to know your tax liability. The next question is where to invest?
2. Have you fully used the tax breaks offered under Section 80C?
Investments up to Rs 1.5 lakh in avenues specified under section 80C of the Income Tax Act is deductible from your gross total income and thereby reduces your tax payable. The Public Provident Fund (PPF), equity-linked savings schemes (ELSS), Sukanya Samridhi Yojana, tax-saving bank fixed deposits (FDs) are some of the popular investments in the 80C basket. Each instrument has unique features, and its suitability will vary from individual to individual and their risk profiles.
Also Read: Comparison of 10 tax-saving investments under section 80C
There are also various expenditures like tuition fee, home loan principal repayment which qualify for deduction under section 80C.
"Section 80C offers a variety of tax breaks. If you haven't exhausted the 80C limit completely, ELSS and PPF are the options you should look at. Those who have a high risk appetite can look at ELSS while those who are averse to risk can invest in PPF. Investors who have never invested in equity, can start with allocating small amounts to ELSS. Like this you can develop an understanding and get comfortable with this rewarding-yet risky asset class," says Vikas Gupta CEO & Chief investment Strategist OmniScience Capital, an investment management firm.
Things to know about section 80C of the Income Tax Act
What is section 80C?
Corroborating his views Deepali Sen, Founder, Srujan Financial Advisers says, "One should try and avoid last minute tax-planning, however, if you haven't exhausted investments under 80C limit completely, you could look at ELSS funds. You should look at 2-3 well- managed mutual funds to diversify instead of putting your money in just one fund and opt for the growth option. The ideal way is to spread out your investments in these funds over 12 months, i.e., the systematic investment plan (SIP) route. Since these funds are volatile and mirror market movement, making investments over a time allows averaging benefits. Besides, since we are just a few days away from the start of the next FY, one can consider investing in ELSS from the beginning for optimum tax-planning."
So, compute your investments and expenditures which qualify for tax benefit under this section. If the total falls short of the current limit of Rs 1.5 lakh allowed per fiscal, then you should look at investing the balance amount in the investment avenues specified under section 80C.
Also Read: Investments under section 80C to save tax
3. Have you invested the minimum amount in these instruments yet?
For those who already have investments in PPF, National Pension System (NPS), and Sukanya Samridhi Yojana, then the March 31 deadline is not just about tax-saving for you. This is because you to need to invest at least a minimum amount every financial year to keep these accounts active.
It is important to keep them active as they would otherwise become inactive and you would have to face the inconvenience and penalty (where applicable) of reactivation as and when you want to again deposit in these accounts or withdraw. Therefore, make sure you deposit the required minimum amount in these schemes by March 31.
However, ideally you should not just invest the bare minimum amount in these avenues just to keep them active. Remember why you had started investing in them in the first place, i.e., the goals they are linked to. And putting in the minimum amount won't help in meeting long-term goals. Therefore, invest the required amount accordingly to make sure your financial goals are met and that too on time.
4. Are you buying traditional insurance plans just to 'save' tax?
The primary purpose of insurance is not investment but fortification that protects your financial interests from unforeseen perils. Yes, the premiums paid do come with tax benefits, but traditional policies yield barely 4-5% returns, which is much lower than the 7% to 8% return that some of the fixed-income schemes such as PPF, VPF and NSCs are currently offering you.
As far as unit-linked insurance plans(Ulips) are concerned, they may give you higher returns compared to traditional policies and fixed income instruments, but the insurance cover it comes with is normally insufficient as compared to the cover required, according to Dhirendra Kumar, CEO, Value Research, as explained in one of his articles on the subject. ( Click here to read the complete article).
This may kill the whole purpose of buying an insurance product.
This why you should not 'invest' in a life insurance product, instead you should 'buy' a term plan with adequate cover to take care of your family in case something untoward happens to you. It is advisable to keep your insurance and investments separate since both serve different purposes. Insurance is for unforeseen perils, while investments are to meet your prospective financial goals. Consider investing in equity, mutual funds and fixed income instruments for your financial goals.
Speaking about the mistakes, taxpayers commit while tax-saving, Gupta says, "Common mistakes that typical investors make while tax planning is to confuse investing with tax-planning. Saving tax is not the goal. The goal is always to increase post-tax purchasing power through investing. Sometimes a good investment is available in a wrapper which is tax-efficient; then it makes sense to go for that investment via that wrapper. However, many times investors get sucked into insurance plans or some other tax-advantaged wrapper because it will be tax efficient. In this case, you might save tax and lose returns if you have allocated to the wrong investment."
"Another mistake investors make is to do this in March at the last hour. It is good to start thinking in April for next year's tax planning. Don't invest into something just because you will get a dividend immediately. Again, that is not the purpose of long-term investing," Gupta adds.
5. Have you submitted tax-saving proofs to your employer?
Salaries are normally subject to TDS as per the Income Tax Act. Since the beginning of a financial year, the accounts department of your company starts calculating taxes on your salary based on your estimated taxable income. So, if during the financial year, you have made any tax-saving investments or have any expenditures which qualify for deduction from gross total income as per the Income Tax Act, then you need to furnish the documentary evidence of such investments / expenditures to your employer. This is necessary so that your employer deducts TDS only on your estimated income minus deductions, i.e., gives you the benefit of the tax saving done by you by deducting less tax at source.
If you fail to furnish the required documents, TDS on full salary is deducted. But all is not lost, you are still eligible to get a refund by disclosing the investments, expenses and other deductions while you are filing your income tax return (ITR) for the given FY.
5 taxable allowances for employees
1. Dearness Allowance (DA)
However, not all deductions can be claimed at the time of filing the ITR. For instance, income tax exemptions in respect of leave travel allowance and medical reimbursements cannot be claimed while filing your return. You have to claim these via your employer.
If you did your tax-planning in the last minute and have missed out of any of the points mentioned above, you still have a couple of months left to set things right. And since these basics remain the same throughout the year, may be you shouldn't wait till the end of the next fiscal and start in April itself.
Also Read: All about tax-saving for FY19