Are you doing these Tax Planning Mistakes as well?
Are you doing these Tax Planning Mistakes as well?
Common Mistakes to Avoid for future tax planning for working class
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I am planning to opt for new tax regime can I stop my contribution to PPF and Mediclaim? 🤔
This was the question one of my friend asked me during the tax planning session.
What will be your answer? if you say yes then please follow along.
Tax planning plays a crucial role in overall financial planning. Unfortunately, many taxpayers fall into common pitfalls that can impact their tax liability and hinder their financial goals.
From last-minute tax-saving investments to neglecting changes in tax laws, avoiding these errors is essential. In this article, we see five common tax-planning mistakes you should also do.
Mistake 1: Missing out on Tax Deductions and Exemptions:
If you opt for new regime there is no need to apply for deduction. but you can chose it only if you are earning around 7.5 lakhs.
Until government makes the new regime as mandatory use the old regime for full extent and use your deductions wisely.
One of the biggest errors in tax planning is not taking advantage of available tax deductions and exemptions.
For example, under Section 80C of the Income Tax Act, individuals can claim deductions of up to ₹1.5 lakh on investments in instruments like PPF, ELSS, NSC, and more. Similarly, under Section 80D, deductions of up to ₹25,000 can be claimed on health insurance premiums.
It's crucial to understand these deductions and exemptions, utilize them effectively, and reduce your taxable income.
Meet Gates 😜, a salaried professional with a taxable income of ₹8 lakh per year. In the past, Sarah neglected to explore available tax deductions and exemptions. After learning about Section 80C, he realized he could claim deductions of up to ₹1.5 lakh. He promptly invested ₹1 lakh in an ELSS fund and contributed ₹50,000 to her PPF account. By taking advantage of these deductions, Gates effectively reduced her taxable income to ₹6.5 lakh, resulting in significant tax savings.
Mistake 2: Solely Investing for Tax Savings
So Even if Govt make the new regime as mandatory don’t invest only because you get deductions.
While investing in tax-saving instruments is important, solely focusing on tax savings can be a mistake.
Consider other factors such as investment risk, returns, liquidity, and alignment with your financial goals. For instance, ELSS can be a good tax-saving option, but it's essential to assess the stock market's volatility and the scheme's past performance before making a decision.
Strive for a balanced approach that aligns with both tax savings and your long-term financial objectives.
Elon, a young professional, was solely focused on reducing his tax liability. He invested heavily in tax-saving instruments(buying twitter 🤣) without considering his long-term financial goals.
As a result, he missed out on opportunities to allocate funds towards retirement planning and other milestones. Realizing his oversight, Elon adjusted his approach. He diversified his investments, allocating a portion to tax-saving instruments while also considering long-term objectives.
Mistake 3: Neglecting Long-Term Goals:
Decide wisely and stay long..
Another common tax-planning mistake is overlooking long-term financial goals. Many taxpayers concentrate solely on short-term tax-saving options and fail to consider objectives like retirement planning and children's education.
Diversify your investments to create a portfolio that not only saves taxes but also helps you achieve long-term financial milestones.
Explore options such as mutual funds, stocks, real estate, and more, depending on your goals and risk appetite.
Mistake 4: Inadequate Documentation:
Maintaining proper documentation is crucial for effective tax planning.
Unfortunately, many taxpayers neglect this aspect, leading to errors in tax filings and potential notices from the income tax department.
It's essential to keep records of income, expenses, and investments for at least seven years.
This includes salary slips, Form 16, bank statements, investment receipts, and other relevant documents. Organized documentation ensures accurate tax filings and hassle-free compliance.
Gautam (Adani)🤦♂️, a freelancer, failed to maintain proper documentation of her income, expenses, and investments.
During a tax audit, she struggled to provide supporting documents, resulting in penalties and unnecessary stress.
Learning from her experience, Gautam implemented an organized system to keep track of all financial records. He diligently maintained receipts, invoices, and bank statements, ensuring he had a comprehensive record for tax filings.
Mistake 5: Failing to Review Strategies Regularly:
Tax laws and regulations are subject to change, making it imperative to review tax-planning strategies regularly.
Stay updated with the latest tax regulations and make adjustments accordingly. Health insurance, term insurance, and ELSS are three popular options for tax savings. Additionally, government-backed schemes like PPF, SSY, and SCSS offer tax benefits.
However, evaluate your financial goals and expected returns before making investment decisions. Adapting your tax-planning strategies to evolving regulations maximizes their effectiveness.
Tax planning is a critical aspect of financial planning. By avoiding common tax-planning mistakes, you can reduce your tax liability and achieve your financial goals effectively.
Ensure you capitalize on available deductions and exemptions, diversify investments for long-term objectives, maintain proper documentation, and regularly review your tax-planning strategies.
Stay informed about changes in tax laws and seek professional guidance when needed.
With a proactive approach to tax planning, you can navigate the complexities and optimize your financial outcomes.
Play safe and long and learn from your past mistakes till then…..