If you have been a regular follower of this blog, you will agree that, articles on Tax related matters probably outnumber all other categories by a long way. Every year around New Years’ Time there are more articles on Tax Planning because the financial year ends in March and everyone is scrambling through to save as much tax as possible. So, in keeping with the tradition, let’s talk about some of the common tax planning mistakes we do almost every year…
Before we Begin: This article is not one of those that talks about the mistakes people do while Calculating & Filing their Taxes. Those were covered in one of my prior articles titled "Are You an Innocent Tax Evader?"
What is Tax Planning?
Every year around Jan, Feb time period, everyone is trying to save as much tax as possible but have you ever thought about this – Can we really Plan to Save Taxes Properly? Tax Planning is an often overlooked subject because most people think it is synonymous with Tax Saving.
Are you one of them?
Yes, the outcome of Tax Planning is a “Plan” that helps with the Tax Saving. However, proper Tax Planning can also help you Plan for your future financial goals. If you scroll up and see the title of one of my books, it’s about Indian Income Tax and Retiring as a Crorepati. The Book utilizes just the Section 80C Benefits and talks about a Plan to put those Savings into good use thereby saving up a corpus of over 1 crore by the time you Retire. Sounds Exciting doesn’t it?
This is exactly what I mean by Tax Planning. If you properly plan your taxes, you can not only save a lot of tax but also accumulate a sizeable corpus.
Now that you know what Tax Planning is, let’s dive into the Most Common Tax Planning Mistakes..
Mistake No. 1: No Tax Planning
Ok, this one is a No Brainer. Not doing any form of Tax Planning is probably the biggest and most common mistake most of us do. As explained in my book, utilizing your Section 80C benefits and saving 1.5 lakhs diligently each year can help you retire with a big fat corpus. If you don’t plan your taxes properly, you will probably end up with a meager corpus or worse nothing at all.
Mistake No. 2: Last Minute Hurried Tax Planning
Holistic Tax Planning takes into account many factors like your age, your family commitments, your insurance requirements etc. and is not something that can be arrived at in just a few days. Ranking a close Second in the mistakes list is the last minute tax planning which basically is a hurried up effort in trying to do something in the name of tax planning. Though we call it Last Minute Tax Planning, the eventual outcome is more along the lines of last minute tax saving because unless you spend time and plan properly, the end result isn’t going to be what you want it to be…
Mistake No. 3: Buying Insurance just to Save Tax
If you take out the no tax planning and last minute tax planning, the single biggest mistake everyone and I mean EVERYONE does is Buying Insurance Policies just to Save Tax.
Yes, Insurance Policies offer tax benefits but that isn’t the only reason you get one. People invariably overlook the need for insurance, what product suits them etc. and just buy Insurance because their Insurance Agent tells them it’s a good idea to Save Tax. To make matters worse, most of the time, these agents sell us ULIPs that are either too costly or poor performers which end up eroding our investment. In case of Traditional Endowment Insurance, you at least get your money back with a little bit of growth however in case of ULIPs I actually haven’t spoken to someone who has actually made sizeable profits after staying invested for 5 or even 10 years.
Remember - When you think about insuring yourself, it should purely mean protecting your life against any unforeseen events; and hence my Recommendation would be pure term insurance plans, which gives due importance to your human life value.
Also remember that, ULIPs are investment-cum-insurance plans where there is always a risk of losing your capital and all those fancy workups shown by the Agent are just selling gimmicks. In 99.9% cases the investor into the ULIP is left regretting his/her decision.
Mistake No. 4: Not Utilizing All Possible Tax Saving Avenues
When you say Tax Savings, most people by default go to Section 80C and overlook almost everything else. There are numerous other sections under which the Government allows its citizens to offset some % of their income to reduce their tax liability. I have explained each and every one of them in my book which would be very useful for you in your Tax Planning Exercise. If you are interested in reading a preview of the book, drop me a note @ firstname.lastname@example.org. There is a special offer going on where you can buy the book for just Rs. 149 (Usual price Rs. 299) only for a limited period.
Some Last Words
Tax Planning is not an exercise where you just huddle up with your friends near the water cooler and decide where you invest 1 or 2 lakhs to save some tax at the end of the year. It requires a lot of meticulous planning and can have significant impact on your Retirement Corpus as well as your future financial situation. After all, it’s your hard earned money and as I have said it many times before, if you don’t care about it, nobody else will.
To save you time and effort, I have spent a lot of time researching on how to utilize your tax saving investments to form a portfolio that could potentially help you retire with 1 crore or more.
Think Wisely and Plan your Taxes Properly..
Happy Tax Saving!!!