Who doesn’t like to get tax benefits? However, most of us end up taking hasty financial decisions in a bid to save taxes without proper cost-benefit analysis. This can actually become counter-productive as one tends to skip the details and ends up paying more taxes than expected or ends up losing money by investing in a bad product. So here is a handy guide about the things you need to keep in mind to avail tax benefits:
• Calculate tax liabilities properly
Before you take the plunge and invest your hard-earned money, start with some basic questions such as – what is your taxable income and how much tax do you have to pay? Don’t forget that as per the income tax laws, there is a difference between your taxable income and the gross total income. You can determine the taxable income by reducing the deductions from your gross total income. Thereafter, you can apply the relevant tax rates to arrive at your tax liability. Resist the temptation of making unwanted investments just in a bid to save taxes. Instead, spend time to compute the tax liability.
• Invest minimum amounts required for certain instruments
Certain investments such as Public Provident Fund or Sukanya Samriddhi Yojana require a minimum investment amount to keep the account active. Unless the minimum amount is deposited in these accounts by March 31 every year, you will not be able to avail of the tax benefits. So make sure that you are aware of the minimum investment amounts to keep the accounts functional.
• Provide tax proofs to employer
Come April and people are running amok in the accounts department. Many people make the mistake of gathering their tax proofs at the last minute to submit to their employer. However, this chaotic situation can result in not submitting all the proofs and missing out on tax benefits. So always start early. As per the current income tax laws for FY 2019-20, income tax is not payable if the taxable income is less than INR 5 lakhs. Ensure that you submit tax-saving proofs well within time so that excess TDS is not deducted. This allows the accounts department to compute your tax liability accurately on the basis of the actual quantum of investments by you. Most of the companies would require these documents to be submitted by March 10, 2020. Check with the accounts department what documents you will need to submit. Make sure that the necessary documents such as those related to investments under Section 80C, home loans, lease and rent agreement along with rent slips, etc. are provided to allow the accounts department to calculate the correct tax liability. If you have availed a home loan, request the bank or the financial institution to issue a certificate that sets out the principal amount payable as well as the EMIs. Similarly, for your insurance policies, ask the insurer to provide you with a statement detailing out the policy that you can provide as proof under Section 80D.
• Don’t wait till the last minute for making investments
Your investment planning cannot begin in March to save on taxes in April. Start your planning as early as possible. Chalk out your investment goals and identify your risk appetite before you start the investments. Avoid making rushed investments as you may end up making a bad choice or face technical glitches that don’t allow the investment to be successful. Investing early also provides you sufficient time to take risks and improves your spending habits. If you are just starting out your investment journey, consider investing in mutual funds. These are great tax saving options and also help you to build a sufficient corpus with small amounts. The right investment advisor such as Moneyfront can provide the right guidance for investing in direct mutual fund plans. A direct mutual fund does not involve the payment of commissions or fees, unlike regular mutual plans. This allows you to maximize your returns.
• Don’t invest in products blindly to save taxes
While most of us try to invest in order to save taxes, sometimes we invest blindly without taking into consideration the actual tax implications. Identify your current tax liability and pick your investments carefully to reduce the liability. For example, if you have school-going children, you can avail of the deductions under Section 80C. So it would be advisable to save taxes through this avenue rather than investing in some other financial instruments. If you are not sure about your decisions, don’t hesitate to seek the help of professionals.