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Tuesday 12 February 2013

Tax Saving mistakes which can be avoided

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Basic tax knowledge and a little planning can help you avoid these costly mistakes, writes Manshu Verma


1 Not including all eligible deductions
Many taxpayers don't know about all the possible options under Section 80C. Besides the investments, there are several expenses that are also eligible for deduction, such as school fees of children, housing loan repayment and stamp duty and registration charges paid for a house. In fact, you could have already exhausted your 1 lakh limit and don't need to make any further taxsaving investments.


2 Not availing of other tax deductions
Most taxpayers do not look beyond Sections 80C and 80D when they are calculating their tax liability. If you or a dependant suffer from any of the 8-10 specified diseases or physical disability, you can claim a deduction of up to 60,000 under Sections 80U, 80DD and 80DDB. Your donations to specified charities are also eligible for deduction under Section 80G, while education loan interest is fully tax deductible under Section 80E.

 

3 Buying insurance to save tax
This is the most common tax folly that Indians make. Life insurance is absolutely necessary and should be taken by everybody. However, the objective should be protecting your family's financial future, not save a few thousand rupees in tax. See tax saving only as a discount on the premium, not as the purpose of buying insurance. When you buy life insurance, you enter a long-term recurring commitment. Getting out of it is a costly affair because you end up paying surrender charges. If you choose a traditional insurance plan, the high premium could prevent you from investing for other financial goals.


4 Not taking taxability into account
Each tax-saving investment gets a different tax treatment. The interest earned on the PPF is tax-free, but income from fixed deposits, NSCs and Senior Citizens' Saving Scheme is fully taxable. This is why the 8.8% offered by the PPF is a better option than the 9% offered by a fixed deposit. Insurance policies offer taxfree income, but the pension received from an annuity plan is taxable. Keep in mind the taxability of income when you invest in a tax-saving option.


5 Investing lump sum in equity
This happens if you compress the entire year's tax planning into the last few days of the financial year. If you invest a large sum in an ELSS fund at one go, you are taking a big risk. Similarly, investing a lump sum in the equity option of a Ulip may be a bad idea. Equity investments should be staggered across the year so that you are not caught on the wrong foot.


6 Ignoring the lock-in period
All Section 80C investments come with a lock-in period, ranging from three years for ELSS and extending till retirement for the NPS. Be sure to match the lock-in period with your requirement before you make the investment. Also, research before you invest. The PPF, for instance, has a 15-year lock-in term, but this progressively comes down over the years. In the 14th year, the lock-in period is only one year. Besides, you can make partial withdrawals after five years.

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