JOIN USThe final quarter of the financial year is called Tax season. This is the period when professionals make investments to reduce their income tax liability. Saving your income tax is one of the biggest personal finance decisions that each professional has to take. Decisions based on poor tax planning could erode a professionals’ wealth.
Some tax saving mistakes
According to ArthaYantra study, only about 12% of the tax paying professionals had claimed deductions in sections other than Section 80C.
In a rush to reduce the income tax deduction from their salaries, professionals invest large amounts in tax deductible schemes.
This constrains their cash flows, and makes meeting of day-to-day and emergency expenses more difficult.
Professionals invest excessively (more than required) in tax saving schemes to avoid paying taxes. Quite often these schemes yield poor returns.
Professionals invest a large sum of money in a single investment in the final quarter. Professionals invest in a scheme like PPF.
While the Public Provident Fund (PPF) and Voluntary Provident Fund (VPF) amounts are both central government schemes, the returns from EPF are 8% while the returns from VPF is 8.65%. Professionals are therefore better off investing in VPF than a PPF.
Professionals invest in Endowment, Money-back and ULIP insurance schemes to avail tax deduction benefits. Professionals are however better off investing in pure life insurance and an investment scheme to avail the benefits of tax savings, returns on investment and life insurance cover.
Professionals invest in schemes simply to avail tax deductions, however, they do not always consider important criteria of selection that is the returns from these investments.
Tax saving behaviour by age
The study found that professionals of all ages preferred investments in Public Provident Fund (PPF) to save taxes. Among the early-career professionals, the second most preferred tax saving instrument was five year bank Fixed Deposits (FDs).
However, as the age of professional increases the preference for FD is replaced with tax deduction claims through children’s education plans.
Preference for tax saving schemes with better returns on investments such as ELSS was low irrespective of the age.
On average only 2.6% of the professionals, irrespective of age subscribed to an ELSS (Equity Linked Saving Scheme) for tax savings.
Only 12.6% of the professionals made claims under section other than section 80C. Of these, the most preferred deduction was found to be deduction claims under section 80D- Medical Insurance. The claims made under section 80CCD – NPS decreased with age. Younger professionals were more likely to prefer NPS for tax deduction claims than mature professionals.
While there is no ‘one size fits all’ approach to tax planning, there are general guidelines and factors to be considered by professionals while saving for their taxes.
(The writer is Founder and CEO at ArthaYantra)