With just two months left in the current financial year, time is running out for tax-payers looking to make investments to save taxes. And, since they are most likely to be taken for a ride by greedy advisors, it is also the time for them to be on guard. Here are some tips to avoid the typical mistakes made while carrying out the tax-planning exercise: Take a Holistic View According to financial advisors, tax planning cannot work in isolation. It has to be in line with your overall financial planning. While making an investment, one should clearly weigh the return, security, liquidity, tenure of investment, tax benefits and risks and take a holistic view. "We always maintain that investors make last minute tax investments into those instruments which are most visible, than what is actually required. For instance, investors end up buying an expensive recurring product like an insurance scheme thinking the premium amount will be eligible for tax deduction every year. But this investment may not be in line with the individual's goal and the financial portfolio," says Swapnil Pawar, chief investment officer at Karvy Private Wealth. Be careful with single-premium life covers They have become a rage of late with a few companies launching single-premium endowment plans. Even if they seem like the right products for you, ensure that the sum assured is at least five times the annual premium. Else, you may end up foregoing certain tax benefits - in terms of exemptions under Section 80 C for premiums paid and under 10 (10D) for maturity proceeds. "For instance, a single-premium policyholder would not be eligible to receive the sum as exempt under Section 10D except where the same is received by the legal heir in case of death of the policy holder. The amount of 20% cannot be calculated after netting off the amount of premium returned by the agent with regards to the policy sold," says Suresh Surana, founder, RSM Astute Consulting Group. "For the purpose of deduction under Section 80C in respect of the premium for such policies, the deduction is limited to 20% of the capital sum assured." Last minute PPF investments are not rewarding Tax-payers tend to invest chunks in PPF in the last two months of the financial year. In such cases investors don't benefit from the annual return of 8%. Ideally, an investor should invest before the 5th of every month in PPF to earn the interest for that month. In case of cheque payments, ensure your cheque gets cleared by this date.
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Joint loans can be doubly beneficial Some couples who take joint home loans make the mistake of assuming that deductions, too, are available collectively and not individually. However, this is an incorrect impression. In fact, the deduction for interest up to 1.5 lakh on such loans can be claimed by each of the joint owners and co-borrowers. Similarly, the deduction in respect of principal repayment can also be claimed by each of the co
Invest property sales proceeds in time A window of two years is available to invest proceeds from property sale, but it is not unconditional. "Under Section 54, capital gains realised from sale of residential house are exempt in case of re-investment in the purchase of residential property one year before transfer or two years after transfer, or construction before three years after transfer (That is, investment has to be made within the specified time limit). If the amount is not utilised till the date of filling of return, then deposit must be made in a nationalised bank under the Capital Gains Account Scheme," says Surana. Look beyond 80 C There are many tax benefits provided in the Act over and above the 1 lakh limit under Section 80C. For instance, house rent allowance (HRA), paying rent to your parents, mediclaim and the latest tax saving instrument being the infrastructure bonds. "To give an impetus to infrastructure spending, the government introduced an additional deduction of up to 20,000 for subscription in specified long-term infrastructure bonds. This deduction was originally meant to apply for subscriptions between April 1, 2010 and March 31, 2011, but has been extended up to March 31, 2012," says Vineet Agarwal, director - tax and regulatory services, KPMG, India. In fact, it makes sense to invest in these bonds in the current interest rate scenario and that too if you are in the highest tax bracket. "Investing in infrastructure bonds will be most useful for those in the highest tax bracket as the tax savings potential is the highest. Even for the 20% tax slab it is fine. For those in 10% tax slab, it is not really that lucrative and not recommended," says Suresh Sadagopan, certified financial planner & founder, Ladder 7 Financial Advisories. While making donations under Section 80G make sure you are doing it to institutions approved under Section 80G of the Income Tax Act- The rate of deduction is either 50% or 100% of the qualified income and depending on the organisation chosen. "Also, ensure that you keep the receipts in records. Otherwise, you may not be able to claim the deduction u/s 80G," says Bimal Gandhi, chairman, Ameriprise India. Don't overlook tax-friendly savings Investors tend to ignore minute tax savings/expenses which are incurred by default. "For instance, employees forget to include their contribution to the Employee Provident Fund (EPF) as a part of the 1 lakh limit under Section 80 C. Similarly, parents forget to include the tuition fees paid for their children's education as a part of the 1 lakh limit. In fact, these components alone take care of the Section 80C limit," says Pawar of Karvy Private Wealth. You may be short of time. But still that does not justify you making irrational financial decisions. Take stock of EPF, school fees and other investments before you make fresh investments. That will help you make an informed decision.
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