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Wednesday, March 20, 2013

Rushing to save tax? Look beyond insurance at other options too

MUMBAI: You hardly have two weeks to finalise your tax saving plan before the deadline on March 31. If financial advisors are to be believed, many individuals think of tax planning only in the last two weeks of the month of March. They also quickly add that these individuals often fall for unscrupulous tactics of their insurance agents or personal bankers. It is only much later that they realise the folly of buying wrong products.

"Many people look at such
investments merely as tax-saving tools. Also, as they have very little time to evaluate the product features, they are bound to make mistakes. The right approach is to make investments that are suitable for you, after you evaluate them from a return on investment perspective, including the potential tax benefits," says Amarpal Chadha, tax partner with consultancy major Ernst & Young.

In other words, the obsession with preventing the tax dent on your
savings could, in fact, cause long-term harm to your finances. If you are in this group, here are some tips that may help to avoid some common mistakes this year.

Ignoring Eligible Tax Breaks

Thanks to extensive campaigns and incessant calls from distributors, most tax payers are aware of the tax deduction of up to. 1 lakh that they can claim under Section 80C.

Most individual focus entirely on this deduction and overlook other investments or expenses that qualify for tax breaks. For example, many people don't include Employees Provident Fund (EPF) contribution or tuition fees paid for their children in their tax planning.

Take a look at your salary statement and tax statement given by your company before finalising your tax plan this year. In fact, according to experts, many individuals may not be required to make any large additional investment if they take into account their EPF contribution and
life insurance premiums. Remind yourself that the Income Tax Act provides several other avenues to save taxes.

For instance, if you are paid house rent allowance (HRA), but do not pay rent as you live with your parents, you can still claim the deduction. You can enter into an agreement with your parents and pay the rent. However, remember, the amount will be treated as their income. Moreover, you can also avail of deduction up to. 15,000 (. 20,000 in case of senior citizens) under Section 80D if you are paying your parents' health insurance premium.

You can even claim
tax breaks on your expenses on preventive health check-up for yourself and family. Although it is a part of section 80D, this deduction deserves a special mention as it was introduced only this year. If you have receipts of any preventive health check-up expenses undergone this year, make sure you preserve them.

This year onwards, such check-ups will earn you deductions of up to. 5,000. "Since this is a new tax-saving avenue, introduced in last year's Budget, many people may not be aware of this deduction," says Vineet Agarwal, director, KPMG. Make sure you are not one of them.

The Lure Of Countless Insurance Policies

If you look at the portfolio of most individuals who subscribe to last minute tax planning, you would really think that buying life insurance policies is their favourite pass time. In fact, many of these individuals fall for the sales pitch of "tax saving plus insurance cover plus return".

Remember, buying a life insurance policy is not a one-time affair, unless it is a single premium policy. It may help you save taxes this year, but you will have to shell out the premium every year for the next 10-20 years. If you fail to pay the premiums on time, your policy will lapse depriving your family of the life cover.

Besides, it is a long-term product which will yield decent returns only after, say, 10 years. Therefore, if you surrender it after the mandatory lock-in period of five years, you may not get a satisfactory corpus. If you have dependants, go for a term policy. It will provide a large sum assured at a very reasonable cost, in addition to tax benefits.

However, in case you are convinced about the insurance-cum-investment policies, buy them only if you are confident of paying premiums every year.

Failing To Maximise Returns

Public provident fund
(PPF) --- one of the favourites with tax-payers --- is widely accepted as an ideal retirement planning tool for conservative individuals. After all, it fetches a tax-free return of 8.8% today.

However, many make the mistake of investing money into
PPF at the last minute. If you do so, you lose the opportunity of maximising the return. If you want to maximise returns from PPF, ensure that you invest before the 5th of every month to earn interest for that month.

If you are putting a lump sum amount in tax saving mutual fund schemes, or ELSS, this year, you could remember this principle next year. If you open a systematic investment plan in an ELSS in the beginning of the month, you will benefit from averaging of your purchase cost and it will help you maximise your returns.

Tips For Tax-Saving This Year

Assess Your Requirement

Don't be in a hurry to exhaust the Rs 1-lakh limit under 80C. First take stock of your PF contribution, tuition fee paid for your children and your
home loan principal repayment

Look Beyond 80c

Focus on other tax-saving avenues, too. For instance, interest paid on education loans is allowed as deduction under 80E and 80D extends tax breaks on health insurance premium paid and expenses incurred on preventive health check-ups

Don't Buy A Life Policy Only To Save Tax

Go for it only if you genuinely need it and are convinced about its utility value. You should be confident of your ability to pay premiums every year for at least 10 years.

Ascertain Their Suitability

Ensure that such investments can help achieve your financial goals. For instance, don't invest in an insurance-cum-investment life insurance policy or PPF if you are likely to need the money within two to three years. 
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