Tax planning is a technique using which one minimizes the tax outgo by maximizing all the legal avenues given in the Income tax Act. Tax laws requires that the employer deducts tax while paying the salary and remits to the Government as Tax Deducted at Source (TDS).
The employees are required to furnish the investment proofs, expenditure proofs to their employers during the month of December every year. The employers, in turn, use these proofs to compute the tax liability of the employee and arrive at the TDS to be deducted in the remaining months of the financial year.
If you are in the process of arranging the investment proofs and find that you are short of some investments to maximize your tax outgo. You invariably resort to making investments like LIP, Medical insurance, ELSS investments on short notice. Let us see why you shouldn’t rush and invest in these just for the sake of saving taxes..
1. Life insurance policy: When you rush, you tend to invest in a life insurance policy without assessing the basic things like required insurance cover, type of policy, understating the product etc. You end up saving taxes on the basis of the premium paid, no doubt. But, the cost of investing in a wrong insurance product for years together will fairly exceed the so – called tax benefits. It pays you well in short term by way of tax benefits, but pays your agent even better.
2. Medical insurance policy: Though this investment is not so popular tax saving option like a life insurance policy, there is a growing trend where employees invest in a medical insurance (Mediclaim) product to avail both the tax benefit and the medical cover. Like in life insurance policies, when you rush and invest in a Mediclaim policy, there is a high possibility that you do so without assessing the risk cover, understanding the product, researching the market etc.
3. ELSS investments: Equity linked savings scheme (ELSS) is one of the best products available to help you invest and at the same time, help you avail the tax benefits. ELSS are schemes run by mutual fund companies where your investment will be invested in the equity market through the scheme and will be locked for 3 years. There are hundreds of ELSS schemes available in our country and when you rush to invest just for the sake of tax deduction, it is highly likely that you tend to forego the basic due diligence like fund assessment, its suitability to your financial plan, its performance vis-à-vis its peers etc. There is also a high likelihood of investing in the ELSS scheme when the markets are at a high – thereby impacting the returns.
In summary, there is nothing wrong in any of the products mentioned above but it is wise to plan them ahead instead of rushing the investments just for giving investment proofs and saving taxes.
Note: The investments mentioned above fall under Sec 80C of the Income Tax Act 1961 and is applicable only for the assessees who chose to file their income tax returns under the Old tax regime.