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Planning For Your Taxes? Avoid These 3 Mistakes - Outside View by PersonalFN
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Planning For Your Taxes? Avoid These 3 Mistakes
Mar 6, 2017

Have you planned for your taxes?

No? Do you still think there is a lot of time in hand?

Yes? Think again...

It's March already, and you just have a less than a month to plan your taxes and submit the proofs to your Human Resource Department. Have you figured out how are you going to plan your taxes?

Of course, you have. After all you have been planning for your taxes through the year to use the entire benefit available under Section 80C and 80D, isn't it?

That is a good start...

But aren't there tons of financial products available under these sections? Which one are you going to choose?

Are you going to purchase yet another insurance policy to help you save taxes? Or are you going to invest in a 5-year fixed deposit?

Moreover...

Have you looked beyond Section 80C and 80D to save your taxes?

Don't be shocked! Yes, there are options that can further reduce your taxes.

During this last month, keeping a cool mind can be a bit challenging. With the year-end pressure, there is a possibility that you may make unwise decisions while planning for your taxes.

So, in today's article we have listed three such common mistakes to avoid while planning for your taxes.

  1. Not looking beyond Section 80C and Section 80D: This is the most common mistake done by tax payers. If you believe that you can plan taxes only under the purview of these sections, then think again.

    The Income Tax Act, 1961 permits you to claim deductions on interest on the loan that you have borrowed for your child's higher education, or the amount spent on the treatment of a dependant, or the rent that you pay on your residential premises, etc.

    Some sections you can use to plan your taxes are as follows:

    Tax Planning Sections beyond Sec. 80C and 80D
    Section Who can claim Nature of deduction Reason
    80CCG Specified retail individuals (New retail investors) 50% of the amount invested (maximum deduction Rs 25,000) Rajiv Gandhi Equity Savings Scheme (RGESS) is available for current Assessment Year 2017-18 only. It has been repealed from the A.Y. 2018-19.
    80DD Resident Individual / HUF Rs 75,000 (Rs 1,25,000 in case of severe disability) Any expenditure incurred for the medical treatment (including nursing), training and rehabilitation of a dependant, being a person with disability.
    80DDB Resident Individual / HUF Maximum deduction of Rs 40,000 (Rs 60,000 in case of senior citizen and Rs 80,000 in case of very senior citizen) Expenses actually paid for medical treatment of specified diseases and ailments subject to certain conditions.
    80E Individual No limit on interest on loan (maximum period : 8 years) Amount paid out of income chargeable to tax by way of payment of interest on loan taken from financial institution/approved charitable institution for pursuing higher education.
    80G All Assesses 50% of the net qualifying amount or 100% of qualifying donations, as the case may be Donations to specified institutions.
    80GG Individual Rent paid in excess of 10% of total income for furnished/unfurnished residential accommodation (subject to maximum of Rs. 5,000 p.m. or 25% of total income, whichever is less) Individuals not receiving any house rent allowance (HRA).
    80GGC All Assesses (other than local authority and artificial juridical person wholly or partly funded by Government) Sum contributed to any political party/electoral trust Deduction will not be allowed if sum is contributed in cash.
    Note: The table is for illustration purpose only.
    (Source: Income Tax India)

    So when you are planning for your taxes, take a look at the above Sections too and see if you can claim a deduction under any of them.

    Moving on...The second mistake to avoid is...

  2. Buying a lot of insurance plans: Have you ever walked into a bank during the tax saving season?

    If yes, you would have noticed bank representatives (relationship manger) recommending that you purchase a traditional life insurance plan.

    Even when you inquire about other tax saving instruments, the representatives will try to convince you to buy a traditional life insurance plan only.

    They package it as the only financial instrument that save taxes, have an insurance cover, and earn returns on investment; all at the same time!

    But there is a catch...

    These traditional life insurance products generate high commissions for the bank and help the representative to achieve his yearend income targets; often at your cost.

    What you fail to realise is insurance premiums on traditional life insurance plans are largely allocated towards mortality charges and distributor commissions; this affects returns. Traditional life insurance plans offer paltry returns in the range of 4% to 6% even after 10 to 20 years of investment.

    Moreover, you may be unable to recover your principal investment too if you pay insurance premiums for only five years and then redeem the investment!

    Although an optimal insurance is needed to protect against life's uncertainties, it isn't an investment product as most agents and bank representatives would like you to believe.

    So stay away from these "well meaning" advisors as much as you can and purchase insurance to indemnify your loved ones from bereavement.

    The third common mistake to avoid is...

  3. Investing in tax inefficient schemes: Investing in a 5-year fixed deposit or a National Savings Scheme (NSC) is an inefficient way to tax planning.

    Why?

    Well, the interest you earn on these fixed deposits and NSCs is taxable, unlike Public Provident Fund (PPF) or Employees Provident Fund (EPF) and Equity Linked Savings Scheme (ELSS) etc. who enjoy the Exempt-Exempt-Exempt (E-E-E) status.

    But shouldn't you have a mix of equity and debt in your portfolio?

    Yes, you should! But too much of debt can affect the overall returns on your portfolio.

    What you need is a balanced debt-equity ratio that is in sync with your financial goals.

    To start off, you can use the following thumb rule:

    Proportion of Equity in one's portfolio = 100 - Your Age

    As per the above thumb rule, the proportion of debt in your portfolio should be equal to your age. So by this rule, asset allocation for various age groups would be as under:

    Proportion of Equity and Debt
    Age Proportion of equity in the portfolio Proportion of debt in the portfolio
    30 70 30
    40 60 40
    50 50 50
    60 40 60
    70 30 70
    This table is for illustration purpose only.
    (Source: PersonalFN Research)

    The rationale behind this rule is: the older you get, less time you have to recover if the stock market tumbles and your risk appetite recedes as well.

    As you enter retirement, taking all your money out of equities could slow down the growth of your portfolio too much, preventing you from keeping pace with inflation and possibly deplete your retirement savings.

    Although this isn't the optimal approach to structure one's asset allocation, it could be a good starting point for beginners in the investment arena.

Now that you know the common mistakes that an individual makes during this time of the year, how do you avoid them?

Simple: by seeking the help of a Certified Financial Guardian (CFG).

A CFG is an ethical professional financial advisor with years of experience in the personal finance space.

And we have listed them on a common platform for your benefit!

To get listed on www.certifiedfinancialguardian.com these CFGs have gone through an intensive program emphasising not only on the different areas of personal finance, but also on the importance and essence of developing a financial planning advisory based on the principles of ethics and integrity.

We invite you to connect with them to sync your financial goals with an efficient tax planning strategy.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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