Income Tax Planning for FY22: Here are things to consider when planning income tax
New Delhi: Managing taxes can be a tedious task for many. Filing an income tax return – listing an Assesse’s income over a period of time, such as a fiscal year – is both mandatory and important for a working person. A properly submitted income tax return – also known as ITR – enables the tax office to determine how much input tax you have already paid (through deduction or withholding tax) and how much you are entitled to as the remaining amount.
The first quarter of fiscal 2021-22 is over, and if you haven’t done your income tax planning, it’s not too late as there are eight and a half months left for it. Here are some common tax-saving mistakes people are likely to make when making last-minute tax-saving decisions.
1. Less chances of making a wrong move
If you quickly decide on the wrong investment, you may end up with lower returns and freeze your money for longer. For example, if you are looking to build a large corpus for your retirement, then investing in a 5 year FD or NSC tax-saving bank is not going to serve your purpose. Likewise, an investment in Ulip with a target of around five years may not lead to the desired result. However, if you start planning your tax saving investments from now on, there is less chance of taking a wrong step.
2. Do not link investments to goals
Anyone who rushes to invest in tax-saving instruments typically forgets to link these investments to their goals, which will cost them a lot in the future. When investing in tax saving assets such as PPF, EPF, Ulips, Life Insurance, ELSS that are long term in nature, it is important to tie these investments to a specific long term future goal and not out of the investment halfway before the desired goal is achieved . Even if you are investing in ELSS, which has the shortest lock-in period, you need to link it to a specific goal and can extend it until you get the amount you want for your goal. You can also consider topping up your ELSS investment with an additional amount if the markets see significant corrections.
3. No consideration of new tax regulations
From the 2020-21 budget year taxpayers have an alternative option when filing their income tax return. In addition to the old tax system, one can file ITR under the new tax system at reduced rates if they do not wish to make investments under the popular Section 80C of the Income Tax Act. The new regime allows taxpayers to reduce their tax liability without taking advantage of Section 24B and Section 80C by paying taxes at lower rates. Therefore, as a taxpayer, one has to calculate the tax liability according to both tax regimes before a tax planning process.
4. Selection of ELSS funds based on recent performance
Many taxpayers choose ELSS funds that come with Section 80C tax benefits based on just 1 year and 2 years of performance. It should be noted that a given MF scheme may not remain the top performing scheme forever. Every year a different MF system tops the table of returns. So one should avoid the mistake of selecting the top performers of the current year, but rather other factors such as returns over a period of 10 years, risk-adjusted return, maximum portfolio drawdown, etc.
5. Ignoring Section 80D and Other Benefits
In addition to the tax saving options under Section 80C and Section 24B, there are certain other ways to save taxes. Your health insurance premiums and the interest payment on an education loan can also help you save on taxes. Second, the repayment of the principal for a home loan is also tax deductible under Section 80C. You should take advantage of these tax provisions when planning your tax-saving investments.