India’s dynamic financial sector gives hundreds of tax-saving solutions to Indians every week. One is sure to feel overwhelmed. Some of these solutions are not viable in practice even though they might sound great in theory.
As with any financial decision, it is important to be realistic when it comes to saving on taxes.
Further, taxes are an essential part of any democracy. The federal and state governments depend on taxes and the citizens depend on their government for things like law and order, job opportunities, good conditions for business growth, etc. Individuals, therefore, must pay their fair share of taxes to get these benefits. Taxes also enable governments to help the needy sections of society, provide subsidized healthcare and education, and stay prepared for natural disasters.
In India, there are millions of new taxpayers every year. These people need to familiarize themselves with the rules, timelines, and slabs of the Income Tax Department. Even for veteran taxpayers, things can get tricky with the tax regulations changing with every year’s budget.
Keep in mind the following common mistakes that people make when trying to get tax savings, with tips on how to avoid the mistakes and follow better practices.
- Only thinking of savings: Putting your entire focus towards saving taxes can distract you from other financial goals. Financial products can be used to create wealth as well. In the frenzy to save taxes, people forget about other long-term goals. There are various life-stages that one must be prepared for: higher-education for your kids, retirement, your kids’ wedding, etc. Therefore, funding a retirement fund, providing your family with comprehensive insurance cover, and investing in wealth-creating financial products must also be prioritized along with saving taxes.
- Being too risk-averse: There is such a thing as too much risk. One always hears stories of people who lose all their savings by trading recklessly on the stock market. But there is also such a thing as too little risk. It might seem safe to just keep your money in your pocket – that way you certainly won’t lose it. But inflation will ensure that you gradually lose money over time. Therefore, you must invest your money to make more. The returns in the equity market are higher than the returns received elsewhere – therefore do keep your options open. The natural risk of the stock market can be decreased with sensible trading.
- Trying to kill two birds with one stone: Plans that offer insurance and investment options may lock-in your money for too long. These plans are called Unit Linked Insurance Plans(ULIPs) – and the usual lock-in period is between 3 to 5 years. Only after the lock-in period can you make partial withdrawals. Therefore if a better investment opportunity presents itself, then you can not capitalize on it because your money is inaccessible. In comparison, by investing in the intraday market or fast-moving commodities like oil on the commodity market, you can keep your money liquid. So – make sure you understand the pros, and the cons, of investing through your insurance plan. For most people, it pays more over the long-term to keep their investment strategies separate from their insurance plans.
- Keeping it off for the end: Saving taxes must be a long-term strategy and not just a short-term decision. Cramming in two many decisions towards the end of the financial year will give you sub-par savings. Therefore, you should set a tax savingstarget at the start of the year and then attempt to hit it. A systematic process will ensure that you do not miss tax deductions or tax exemptions. A list of all expenses on which you can get deductions – or which are exempt from taxes – will be helpful in hitting your savings target.
In the latest 2020 budget, the government has provided a new, alternative taxation system. This new system has lowered tax rates and removed exemptions and deductions. Through the new, lowered tax rates, people by default are saving the money that they were earlier saving through exemptions and deductions. Under the new system, they also save the time and effort previously used in finding relevant exemptions.
People can still file returns under the old system with its higher tax rates and tax deductions.
The new system, however, allows people to use their freed up time and energy in growing their wealth, and not merely saving it. Angel Broking’s deeply intuitive app enables you to trade in various markets including the equities market, the commodity market, and the currency market. Download the app today, and start trading. Find not just a new source of income – but a community of trustworthy brokers and like-minded peers.