Untaxing your money

'Investing more than required in tax-saving instruments is not bad but could have earned better returns elsewhere.'

Income tax matters touch every individual’s life. But you need to be extra cautious with them. The tiniest of negligence can lead to a lot of trouble later on. Avoid the following mistakes to be free of hassles.

Ignoring small amounts of income: The most common mistake people make in income tax matters is ignoring small income receipts. No matter how tiny the income, you are required to pay tax on the amount. Most salaried believe that their tax responsibility ends with the tax deducted at source from their salary. But this is true only when all the taxable income is considered and tax deducted or paid on it.

For example, almost everyone overlooks income from savings bank account while computing tax liability. Earlier there was a deduction for interest income from specific sources under Section 80L but that has been abolished.

Arnav PandyaUnder the law now, every rupee of interest earned from various taxable sources including interest on savings bank account is taxable. The amount may be Rs 100 or Rs 3,500 but as long as you maintain some balance in your savings bank account you will definitely earn interest and must include it in your tax computations.

Making tax-saving investments more than the stipulated benefit: Investing more than required in taxsaving instruments is not bad but these additional amounts should be in tune with your financial goals. Most middle and high income-group taxpayers overdo it during last-minute shopping for tax savers. Though there is hardly any loss, the same could have earned better returns if invested elsewhere.

Say a person puts Rs 50,000 in Public Provident Fund, Rs 20,000 in National Savings Certificates and buys equity-linked savings schemes for another Rs 30,000. This exhausts the Rs 1 lakh limit under Section 80C of the Income Tax Act. But if the person is salaried, then his regular contribution to provident fund raises the total. Also, he may be paying premium for a life insurance policy or an EMI on a home loan, both of which are included under Section 80C.

Looking at taxation benefits but not financial goals: Investing for saving tax is not an end in itself but an integral part of financial planning. Apparently, it helps solve your immediate taxation worries but can have a disastrous impact on your long-term financial goals Suppose you have invested only Rs 79,000 of the permitted deduction of Rs 1 lakh. With the last date of the financial year approaching you take the easy way out and buy a unit-linked life insurance policy (Ulip) with a premium of Rs 21,000 without evaluating its suitability to your portfolio. Also, paying premiums of this policy might restrict your choices in the coming years.

Not maintaining adequate records: It is a common perception that record keeping is only for businessmen. This is not true. Salaried, self-employed or entrepreneurs—all taxpayers must maintain income records wherever possible. This is especially handy in substantiating your claims if the tax authorities ask for clarifications For instance, even a salaried individual should record details of share and mutual fund transactions. Not only does this help calculate capital gains or loss, they can also act as back-up if the tax authorities challenge your submissions.

By Arnav Pandya, Certified Financial Planner