After movies, cricket and politics, tax savings is possibly the most popular topic in India. For a variety of reasons, Indians have been fascinated by the fact that they can save tax outgo by doing something. As an expert said, tax saving bias should be added to the list of biases that investors have.
While there is a lot of information on what to do to save taxes, a lot of people do it the wrong way. This short article gives a list of things that you should not do.
Don’t put tax savings first
Most of the tax savings options require you to spend or invest money. The biggest mistake that people do is to make an investment just because it saves tax. This should not be the primary purpose at all. The mistake becomes bigger when people commit to a product that requires payments for many years – say an unsuitable endowment insurance policy – just to maximize tax savings for one year. Exaggerating a bit, buying a product just because it has tax deductions is the same as buying an unnecessary item just it because it has a 30% discount.
Don’t look to use up all of 80(c)
Tax deductions under Section 80(c) have a limit of Rs 1.5 lacs, as of 2018. Young earners often make the mistake of looking to use up all of this limit. By doing so, they may add one or two unsuitable products. Through the years, it is quite easy to use up the 1.5 lac limit for essential, necessary expenses.
- For many people, the EPF deductions could grow year on year.
- Most earners would need to add term insurances as they become parents and this premia would increase.
- A lot of people don’t know that school fees can also be included under 80(c). This itself would be a large amount for people with school going children
So it is perfectly fine if you don’t use up the 80(c) limit in the initial years; after a few years you would easily meet the limit.
Don’t take a home loan just because of Sec 24
Under Sec 24, interest towards home loan has tax deductions. This has a limit of Rs 2 lacs. Like many other tax deductions, you have to first spend the money on interest payment, and then deduct it from taxable income. Of course, mMany people do buy homes with loans. You should do it too if it makes sense to you. Just don’t do it because the interest has tax deductions.
Don’t forget the ‘good behaviour’ rewards
There are lots of sections – 80(E), 80(G), 80(D), etc – that look to compensate you a bit for making expenses towards causes deemed good – Charitable donations, Higher education, Health insurance, etc. For most people these expenses lead to a better quality of life. When you incur theses expenses, make sure that you avail of the appropriate tax deductions.
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Can you work out a plan/ show a datasheet to optimize tax outgo during early retirement with possibly no salary income? What’s the maximum withdrawals that one could do from each category or in total with as little tax impact as one can.
I am still not sure how this pans out or just out of mind, but I am curious the impact it will have on bucket strategy with yearly withdrawals.