It goes without saying that saving money is as important as earning money. One way to save money is by taking advantage of tax-saving deductions to minimize your tax outgo as much as you can. But that's easier said than done. Saving taxes is tough and we tend to make it tougher by committing common mistakes.
Here are five common tax-saving mistakes that we can easily avoid.
Rushing to save taxes in the last quarter
Typically, most taxpayers think of their tax-saving investments only in the last quarter of the financial year. This is a folly because rushed investment decisions can lead to investments in the wrong products. Tax-saving investments made at the last moment won't allow you to benefit from them entirely.
What to do: Start investing in tax-saving avenues at the beginning of a financial year. Plan your investments out in different options like ELSS funds, PPF, fixed deposits, etc to get the long-term wealth creation benefits of a diversified portfolio. The more time and thought you give to your tax-saving investments, the more you will be able to benefit from them.
Not fulfilling the 80C limit
An individual or HUF can save taxes up to Rs 1.5 lakh under Section 80C of the Income Tax Act. Unfortunately, not everyone is able to meet this limit. Often, taxpayers end up paying more taxes than they need to because they're unable to take advantage of the Section 80 deductions.
What to do: Even though you may not need to invest the entire Rs 1.5 lakh to save taxes, you should make sure you invest as much as you can. Plan your tax-saving investments in such a way that you're able to take the benefit of the deductions made available.
Ignoring basic expenses that are exempt
A lot of tax payers are not aware that they can avail tax deductions on a number of expenses like children's tuition fees, life insurance premium, medical insurance, etc.They make these expenses but don't claim deductions on them and end up paying more taxes than they should.
What to do: Learn about all the expenses that are eligible for tax deductions under Section 80. This is money that you have already spent, it is almost a crime on yourself to pay that amount of taxes as well. Get a CA to help you out if need be, but make sure you claim the deductions you can.
Not investing in ELSS
The equity-related risks that ELSS funds come with often turn investors away from them. Taxpayers are not prepared to take market-related risks and opt to invest in fixed income investments like PPF and FDs. But this is a mistake because only equity can generate inflation-beating returns.
What to do: Allocate a part of your tax-saving portfolio to ELSS funds. You may not want to have higher exposure to ELSS funds, but a certain portion in it is essential to make sure your tax-saving portfolio earns high returns over the long-term.
Not setting investment goals
More often than not, tax saving investments are something that you do and forget about. In many cases, they are done at the last minute when the financial year is drawing to a close and then not given a thought for another year. This doesn't allow you to get the benefit of wealth creation out of them.
What to do: Plan your tax-saving portfolio and align them with your long-term goals like a child's education or wedding or your own retirement. Doing this will allow you to get the dual benefit of these investments–saving taxes and meeting long-term objectives.
These are the five common tax-saving mistakes that are repeated too often by taxpayers. Make sure you avoid them this year to give yourself the best possible chance of making optimum use of the income tax deductions available to you.
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4. BNP Paribas Long Term Equity Fund
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