The last quarter of the financial year is here and you may be looking at investing to reduce your tax liability. It is vital to maximize tax incentives offered by the regulatory authorities. However, in the last-minute rush, it is important that you pay attention and avoid mistakes.
Here are five slip-ups you must evade when you are looking for ways to reduce your tax liability.
- Overlook tax incentives available with allowances
As a salaried employee, there are certain allowances you may oversee while doing your tax planning. Various allowances from your salary are exempt and you must look for these to ensure you maximize your benefits. Some of these allowances include house rent allowance (HRA), food coupons, medical reimbursements, and transport allowance. These exempt allowances play an important role in determining your tax slab as they reduce your taxable income. Most companies provide such tax-saving options for salaried employees. Additionally, companies may allow reimbursement of certain expenses, such as magazines and periodicals, and telephone bills subject to some limits. Submit the bills on time to get them reimbursed and reduce your tax liability.
- Fail to avail of home loan tax benefits
You may be aware of the tax benefits available on the principal repayment of your home loan. This amount may be deducted from your income under section 80C of the Income Tax (IT) Act. However, section 80EE provides an additional tax benefit for home loans granted between April 1, 2013, and March 31, 2014, subject to certain conditions. It is recommended you check this additional home loan tax benefit to reduce your liability. Also, per section 24 of the IT Act, interest paid on the home loan may be reduced from your taxable income, which makes it an excellent tax-saving option for salaried individuals.
- Buy multiple life insurance plans
If you rely on life insurance premium for tax planning, reconsider your decision. As your income increases each year, you realize you need to increase your investments to reduce your tax liability. You may continue buying new life insurance plans as your investment needs rise. However, you may end up buying policies that do not match your requirements. Furthermore, when you buy multiple life insurance plans, it is not an economical option. It is recommended you purchase a term plan that provides adequate cover in case of an untoward incident.
- Avoid health coverage
You may buy several life insurance plans, but fail to acquire health coverage. This may be because you are covered under the group health insurance policy offered by your employer. However, such coverage is often insufficient and also gets discontinued when you quit or change your job. Therefore, it is important to avail of a separate health coverage policy. In addition to the premium being tax deductible, health insurance ensures you and your family do not face financial difficulties in case of a serious illness. A premium of up to INR 25000 for self, spouse, and children is eligible for tax deduction under section 80D of the IT Act. Therefore, including health insurance as a tax-saving investment is advisable.
- Have no investments in tax-saving products
Even after taking advantage of all the exemptions, if you do not invest in tax-saving schemes, you might find your tax liability going up. Any investment made in products, such as public provident fund (PPF), equity-linked saving schemes (ELSS), national saving certificate (NSC), national pension system (NPS), and the like are eligible for tax deduction under section 80C of the IT Act. In addition to helping you reduce your tax liability, the effective rate of returns on these tax-saving schemes is higher when you consider tax benefits. Therefore, investing in these products is beneficial in capital appreciation while delivering superior returns over the longer period.
From the above, you understand that there are several options that help you reduce your tax liability. In addition, these investments may be used for wealth creation and for achieving different financial goals. However, it is crucial to make the right tax-saving investments to maximize your benefits.
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