Avoid these mistakes while planning your taxes this year

It's that time of the year again! Time to save as much income tax as possible before the March 31 deadline. It is also the time of year when you are being bombarded by information and advice from all quarters; family, friends, neighbours, colleagues, and the internet. If you don't exercise caution, you might act on unsuitable advice and end up making costly mistakes. First-timers and young earners are especially, prone to acting in haste and making mistakes.

Here are five pitfalls that you need to be aware of before you set your tax saving plan in action this year.

1) Saving tax when you don't need to

While income tax slabs begin from Rs 2,50,000, that is, the first Rs 2,50,000 is not taxable, there is a standard Rs 40,000 exemption for all. Include other components such as House Rent Allowance and Provident Fund, you will find that typically, income over Rs 4,00,000 is actually taxable. Therefore, check if you really need to save tax. If you don't, you should direct your savings towards other long term goals.

2) Misunderstanding section 80C

Rs 1,50,000 is the limit up to which you can save tax under section 80C, and not an amount everyone needs to invest to save tax. The amount you need to invest is determined by your annual income and is not the same for everyone. Keep in mind that even if you need to save Rs 1,50,000, do not resort to taking loans and fall into a debt trap to save tax. Save how much you can and plan better next year.

3) Forgetting your existing commitments, which also save tax

Did you know that your contribution to Employee Provident Fund is a part of the Rs 1,50,000 limit? Or that your existing commitments such as children's tuition fee, home loan interest/principal payment can reduce your tax out go? Interest paid on education loan, too, is exempt from income tax. Make a note of these first and then plan to invest.

4) Relying on life insurance products to save tax

Buy insurance for what it's meant to do - protect your family financially - and not for saving tax. Keep your insurance and tax saving needs separate. If you already have adequate life insurance covers for yourself and your family, then don't buy a different one each year for the purpose of saving tax. This includes life insurance and Unit Linked Insurance Plans.

5) Keeping tax saving separate from your financial goals

Tax-saving investments are long-term investments and should be part of your overall financial game plan. They are a perfect investing vehicle for long-term goals such as retirement, children's education etc.

If you continue to invest for saving tax at the last minute every year, you will be prone to making mistakes, accepting inappropriate advice, making unsuitable investment decisions, acting in haste, and not to mention the stress. Every April, calculate your tax outgo for the year, make note of your existing commitments, calculate the remaining taxable income and how much of it you can save and invest, divide the amount for 12 months if you are using instruments such as tax saver funds, and start a Systematic Investment Plan to automate tax saving for the rest of the year.

The writer is founder and chief operating officer, Scripbox