Tax

The Mad Tax Rush

Mad-Tax-Rush

Come December,and our Tax worry starts multiplying, not because you didn’t plan it, but due to the chatter outside.

HR/ CA asking for “Tax investment proofs” submission, colleagues/ peers giving their super-human stories on “Best investments”, and banks/ individual insurance agents offering “Mouth-watering” deals.

I’ve been writing blogs on Tax savings instruments since last few years, and my experience with family, friends &Moneyfrog customers, more-or-less remains same, i.e. despite of planning or knowing about Tax saving instruments, we make mistakes.

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#*X – The most dreaded three letter word

Tax

I know what you are thinking. STOP. I am talking about TAX 😉

It is, as a matter of fact, the most dreaded word currently, since demonetisation. But from our parlance, where most of us fall under the mass-market or mass-affluent or even higher category, why worry?

We should only look at, how much more can one save, against annual earnings. Here again, it’s so simple that we run to CA’s or Tax consultants to understand same & decide.

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Ask what else (ELSS) – for tax savings schemes (80CC)

AskWhatELSS

One can look at “else” or “ELSS”, for various tax saving schemes.

Where ELSS stands for “Equity Linked Savings Scheme”. These are Mutual fund schemes, which qualifies towards 80CC tax saving investment and offers one of the best returns & liquidity in the market, compared to any other schemes available.

Whichever way one wants to look at, i.e. First, “what else” or options one has on tax saving schemes? and Second, “what ELSS”, or how good they are?

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How freelancers can save taxes? or Freelancers’ Guide to save taxes

Tax saving guide freelancer

It’s tax season, and as the salaried hurry to meet the deadlines to submit proof of investments and claim benefits, for freelancers, the scenario is quite different.

Unlike salaried individuals, they don’t have employers to lay down rules and roll out facilities for them.

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Common Mistakes You Should Avoid While Investing to Save Tax

tax-return-mistakes-to-avoid

A young married couple walks into the local branch of a private bank on a cloudy, cold weekday of January. Both of them are getting late for office, but have enough time to start a tax-saving fixed deposit (FD).

The bank executive, instead, sells them a ‘better’ product, whose gains are non-taxable, unlike FDs.

The product that he offers is a tax-saving plan that also gives them life cover, guaranteed returns and bonus. And guess what, they can withdraw the money after five years, when they will receive the premium along with added bonus. They think it’s a good deal and write the cheque.

This story is repeated so many times every year between January and March. The ending, too, is always the same-people making costly financial mistakes while investing to save tax or declaring expenses against which they can claim tax deduction. We discuss a few such mistakes.

DELAYING TAX-SAVING INVESTMENTS:

The most vulnerable are those who consider tax saving as once-in-a-year ritual to be repeated at the end of every financial year.

The first casualty is the monthly budget, which may go haywire because of a large one-time investment. Therefore, the mantra is to plan early and invest in a staggered manner.

You can start systematic investment in a tax-saving fund or put a small amount every month in Pubic Provident Fund (PPF) or National Pension System (NPS). Both PPF and NPS allow 12 transactions a year.

INVESTING IN ENDOWMENT INSURANCE PLANS:

This usually happens when you walk into a bank and seek the advice of its executives. Banks usually prefer to sell a product that gets them the highest commission, which is invariably an endowment insurance plan. So, while they receive 30-35% of the first-year premium as commission and 5% in the subsequent years, the investor earns 6-7% a year if he pays premium for the full term.

Most people do not realise that an endowment plan is a long-term product with a maturity period of 10-20 years. If you pay premium for only five years and then redeem the investment, it’s likely that you will get less than even your principal. They also do not realise that a part of the endowment plan premium goes towards mortality charges and distributor commission.

All you need is a simple investment plan such as a tax-saving mutual fund or PPF, both of which give tax free returns. For insurance, buy a term plan. The premium is eligible for tax deductible.

HAVING TOO MUCH MONEY IN FDs AND NSCs:

Another common tax-saving strategy involves starting a five year FD or purchasing national saving certificates (NSC). The interest earned on both is taxed, which makes these products less attractive. Interest earned on both FDs and NSCs is taxed as per the person’s income tax slab. Besides, the interest rate on tax-savings FDs is lower than what normal FDs pay.

“FDs and NSCs give post-tax returns that are less than the inflation rate,” says Tanwir Alam, CEO and founder of one of the financial planning company.

TAX-SAVING OUT OF SYNC WITH OVERALL PORTFOLIO:

The tax-saving investment is a subset of your overall portfolio. The two should not be viewed separately.

“Not choosing tax-saving options keeping in mind the overall portfolio is wrong. It causes imbalance,” says certified financial planner Pankaj Mathpal.

For example, if your overall portfolio is equity heavy, you may want to save tax using fixed income products such as PPF.

But most investors usually have a debt-heavy portfolio due to employee provident fund, fixed deposits, endowment plans, etc. So, they can look at tax-saving mutual funds, which have 100% exposure to equity, or NPS, where equity exposure is up to 50%.

You must figure out the ideal equity-debt ratio for your portfolio and allocate funds accordingly. The equity-debt ratio of your portfolio will depend upon your age, risk appetite and financial goals.

NOT LOOKING BEYOND SECTION 80 C:

People often do not know that they can save tax over and above the Section 80C limit of Rs 1 lakh. Interest on housing and education loans, health insurance premium, medical expenses, etc, are also eligible for income tax deduction. Apart from these, donations to political parties and for scientific research, rural development and government relief works are also deductible.

“While making donations under Sec 80 G make sure you are doing it to institutions approved under Section 80G of the Income Tax Act,” says Kapil Narang, chief operating officer of one of the financial advisory company.

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January 15th, Deadline by HR

Tax Saving

This is a usual scenario with all corporate employees in India, where in Dec one gets a mail from HR to submit tax saving proofs to avail tax saving benefits, given by the Tax department under various heads, key being 80C, 80D & section 24.

Confused, where to go, contradicting advice, & above all big Gyan by all on do’s & don’ts. Today I thought of writing something different, a guide to make you plan & execute same, which will not take more than 10 minutes of your time & easy to use.

I have divided this feature into three parts, where part one covers 80C, to avail exception for 1.5lacs, part two will cover 80D, to covers 0.35lacs & part three covers section 24, towards 2lacs.

In short, your investments amounting to 3.85lacs will attract no tax… if you plan well.

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