Disadvantages of Last-Minute Tax Saving

Published On: 24-Mar-2020

We are already into the last month of the financial year 2019-20, and it is that time of the year when everyone starts thinking about filing taxes. Income tax laws provide for certain tax benefits under different provisions, including Section 80C (tax-saving investments and payments), Section 80D (payment towards medical insurance premium), Section 80G (donations to eligible charitable funds and trusts) etc. of the Indian Income Tax Act. 

If you have not invested yet for availing tax benefit under Section 80C of Income Tax Act, you must take immediate steps. Waiting for your tax-saving investments till the end of the financial year is only the fruit of your procrastination, and it may affect your finances. 

Let us discuss the dis-advantages of last-minute tax savings:

Cash Flow Strains due to Lumpsum Burden at Year-End

This is one of the most significant disadvantages of deferring your tax savings to the last minute. When you make your tax-saving investments around the year-end, you strain yourself financially due to large payments during a short time. 

For example, if you wish to avail full tax benefit of Rs. 1.50 lakhs available under Section 80C of Indian Income Tax Act and no investment has been made till now, a lump sum outflow of Rs. 1.50 lakhs, over and above your regular expenses during the last month of financial year may cause a severe cash crunch. Instead, you may choose to invest in a staggered manner over the year. For example, you may opt to register for a periodic SIP (Systematic Investment Plan) for making investments in ELSS funds.

Timing Concerns

When you have little time in hand to make tax savings, the timing concerns may also arise, especially in terms of investments that offer market-linked returns to the investors. For example, the National Pension Scheme (NPS), ELSS etc. The markets may be riding at higher valuations near the year-end and making lump sum investments may leave you a lower margin of safety, and thereby lower the ultimate returns. 

Instead, staggering the investments over the year may help you eliminate the timing bias and average out the cost of investments over the period. Similarly, other investments like 5-year tax-saving deposits etc. might also be offering lower interest rates at year-end. Still, you do not enjoy the liberty of time to wait for higher interest rates.

Probable Lack of Proper Analysis due to Compulsion of Investing in Short Time

Section 80C provides for a bouquet of tax-saving payments and investments, including contribution to Employee Provident Fund (EPF), Public Provident Fund (PPF), ELSS, 5-year tax-saving bank deposit, National Savings Certificates (NSCs), payment of Life Insurance Premium, etc. Around the year-end, you may already be running against time to finish the tax-saving investments, and you may not be able to analyse all the available options. 

Loss of Tax Benefit

A potential disadvantage of making last-minute tax savings is the loss of tax benefit, as one may be able to avail of the tax benefit in full due to strains on the cash flows near the year-end. As such, one may choose to forego the tax benefit then investing in any of the eligible investment options, as the requisite funds may not be available comfortably to the taxpayers. 

As such, you must always make sure that you plan your taxes well ahead of time, instead of exerting mental and financial pressures on yourself at year-end. Happy Tax Saving!

Disclaimer: The tax benefits as mentioned in the article are for illustrative purposes only and are mentioned as applicable for the financial year 2019-20. The investors must also note that the benefits of Section 80C, Section 80D, and Section 80G are not available from the financial year 2020-21 onwards for the taxpayers who opt for the new reduced tax rates, as per Union Budget 2020 presented by the Govt. on 1st Feb. 2020. Contact your tax advisor for more details.