Taxes are an essential part of every working individual’s life. Many professionals are likely to pay taxes on time, especially when they have their finances sorted, as per Income Tax Act, 1961. While most people can file ITR on their own, some of you might still be unclear on planning your taxes, which is why you must be afraid that you might end up making mistakes.
Before you begin your tax planning on the wrong foot, let’s look at these top five mistakes about taxes that you can avoid easily:
- Starting Tax Planning Quite Late
A sound financial plan is incomplete without tax planning. So, it will be best if you start planning your taxes as you plan your short-term and long-term financial objectives. By this, we mean that you should begin filing your tax as early as possible instead of waiting until the very end of the financial year.
Starting early on tax will allow to you plan your finances ahead in the year. In addition to this, you will have enough time to list down all the deductions that you can claim during the said financial year. This way, you will be able to eliminate the pressure of tax planning at the very last minute, which, in turn, might result in no errors.
- Failing To Keep Track Of All The Expenses
Expenses tend to vary from person to person. For every individual, the daily expenses can range from groceries to rent and utility payments. The costs that you (the investor) incur on your day-to-day basis can allow you to save taxes.
Expenses, such as school fees, registration fees of the property, medical expenses, etc. have the potential to reduce your tax liability at the end of every financial year. So, it is essential to keep a tab on these expenses throughout the year. This way, you will be able to save more money on tax over time.
- Investing Only For Tax-Saving Benefits
In the market, there are several investment instruments, such as Equity Linked Savings Scheme (ELSS), Unit Linked Insurance Plan (ULIP), Public Provident Fund (PPF), and so on, that provide tax-saving benefits. While we understand that tax saving is one of the beneficial reasons to invest in such options, your investment decision should not solely be based on it.
One of the common mistakes most investors make is to invest solely for tax saving. When you do so, you fail to analyse other essential factors, such as returns, risks, lock-in period, etc. There is more to investment than just the tax benefits. Rather than only looking at it from a tax-saving perspective, it is best to conduct in-depth research on different investment options in the market and invest in a tool that aligns with your future financial goals.
- Avoiding Risks And Liquidity
Planning your taxes at the last minute may not let you make the best use of your money. Generally, you might end up investing in a convenient option and not a plan that best suits your future financial goals. If you are a risk-averse investor, you might choose traditional investment tools, such as PPFs or fixed deposits due to its convenience and stability.
It is essential to make investments that reduce your tax liability as well as allow you to build your wealth over time. One such type of an investment instrument is ELSS mutual fund. It is an excellent combination of tax-saving benefits, better returns, and offers great flexibility to the investors. When you invest in ELSS funds, you can liquidate your assets after three years in the case of any financial emergency.
- Claiming Wrong Deductions
Depending on the investments and other financial liabilities, each individual may be eligible for several deductions under different sections of the Income Tax Act. Also, the tax rules are different for self-employed individuals and salaried employees.
For business owners who dedicatedly work from their home can claim a specific percentage of the house dedicated to the business activity as a tax deduction. Anything claimed beyond can be suspicious. So, it is essential to check the rules before claiming it.
In a nutshell, it is of utmost importance to understand all the investments and expenses that you might be eligible for when filing your ITR. Along with this, make it a point to start your tax planning early in the given financial year. This way, you can save yourself from the last-minute hassle and plan your taxes in a structured manner.