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Avoid last-minute tax-saving traps
March, 11th 2014

Financial planners and advisers give plenty of warnings about the pitfalls of last-minute tax planning. Still, it's a reality of life that there are people who will wait for the last week or two of the financial year to rush into some investments or put money into other avenues that allow them to save some taxes.

We are in that last lap now — the financial year will end in another three weeks. And so, here are some tips, warnings and advises about how you can save some taxes, that is if you haven't done that yet. First, let us take two important pieces of advice/ warning from financial advisers and planners: An individual's efforts to plan out how to save taxes on his/her hard-earned money should start at the beginning of the financial year and not when the year is ending. If one can plan tax-saving options when the fiscal is just starting, he/ she can get the whole year to execute the plan and thus lighten the burden on his/ her finances.

Often, it is seen that an individual has to pay higher taxes during the last three months of the fiscal — that is, January-February-March — which ultimately puts pressure on his/her family's budget, forcing the whole family to shift to a financial austerity mode.

There is another aspect closely related to this last minute financial/tax planning exercise: People are usually in a hurry while in this mode, and that's when they make mistakes in their investments and tax planning . Also, there are agents who sell tax-saving products and take advantage of people's situation. They sell wrong investment or insurance products that may not be appropriate for an individual's risk profile and/or long-term financial goals.

For example, after signing up a well known doctor, a Mumbai-based financial planner found out that the doctor and his wife were paying premiums on over 100 life insurance policies. The life insurance agents sold these policies telling them that every year they have to take new policies to save on taxes while the reality was that paying premiums on existing policies would have served the same purpose. Here, the insurance agents took advantage of the ignorance of the doctor and his wife to sell them policies that were not at all required.

There are plenty of examples like these. "While doing last-minute tax planning, people often end up putting money in products that are not of much use to them later," says Hemant Rustagi, CEO, Wiseinvest Advisors. "The ideal way to plan for saving on taxes is to plan at the start of the year. And if you cannot do it on your own, you can always seek professional help," Rustagi adds.

Still, if you have missed the boat, the best possible way out now is to spend some time to plan it. According to Rustagi, the first step for the same is to answer a few easy questions: How much tax are you supposed to pay? How much tax can you save? How much investment are you supposed to make to save the amount of tax that you can save? Will these investments be aligned with your risk profile and long-term financial goals? Correct answers to these questions can help you avoid most of the pitfalls that come with last-minute tax planning.

On the debt side, one of the best tax-saving options is the public provident fund (PPF), while on the equity side it is the equity-linked savings plans (ELSS) floated by the fund houses, says Rustagi . The case study below by Pankaj Mathpal will give you some idea how financial planners approach last minute tax-saving exercises.

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