Many Indians are still struggling with basic knowledge of investments when it comes to saving taxes. Most employees are carrying PAN card as salary will not be credited by employer to their bank account without a permanent account number.
Very few of them know that they are liable to tax and require filing of income tax return at the end of the financial year. Others come to know this when employer asks for investment details towards the end of financial year.
In a hurry these employees makes lot of investment mistake to save tax and to comply with the mandatory tax declaration submission with employer.
Below we have listed 5 most common mistakes that individuals make while preparing to save tax.
Mistake No 1 – Investing entire eligible amount of section 80C in endowment insurance plans
Life insurance is a good tax saving and a required product for investors. But putting more than the required amount is like blocking your hard earned money for less return.
When you invest in an endowment plan, the insurance agent gets 30%-35% commission on first year premium and thereafter 5% on subsequent premium amount. So most likely, you will be offered these plans from an insurance agent.
These endowment insurance plans are generally for 10-20 years in which you have to keep investing for getting return at the end of the term. If you redeem in between then most likely you will not be getting even the premium amount that you have invested in it.
Many taxpayers end up investing the entire eligible amount of Rs 1,00, 000 (present limit for assessment year 2015-2016 is Rs 1,50, 000) in endowment plan without considering other eligible deductions.
For instance, school tuition fees paid for children, investment in EPF and/or PPF, principal payments to housing loan are also eligible for deduction under section 80C of income tax act 1961.
If you already have investments in any of these eligible investments as specified under section 80C of Income tax Act 1961 then we suggest you to invest in term plans if required as endowment insurance plans have less return compare to other traditional investment plans.
Term plans are also eligible for tax deduction under section 80C of income tax act.
Mistake No 2 – Investing in tax inefficient plans
Investing in national saving certificates and/or fixed deposits to get section 80C tax deduction is one of the most common mistakes which individuals make to save tax.
Investing in fixed deposit and national saving certificate gives you onetime tax deduction for the year of investment. Thereafter, interests from both investments are taxed based on the tax slab applicable to individual.
If you are looking for a long term investment plants then instead of putting your money in fixed deposit or NSC or recurring deposit schemes, we suggest you to go for public provident fund scheme. Investments to PPF scheme are eligible for tax deduction and at the same time interest earned are also exempted.
Mistake No 3 – Not utilizing house rent allowance benefits
HRA or house rent allowance is generally a substantial portion of employee’s salary. Employees living in a rented accommodation can claim benefit of HRA exemption based on the city and other factors required to calculated eligible limits.
If employee is living in his or her own accommodation then HRA exemption will not be available.
However, employees living in parent’s house can pay rent to parents to claim HRA exemption. If your parents are not taxable then up to their basic exemption limit, rent received by them will not be taxable and at the same time you also can claim HRA exemptions. This strategy can also be used if you are in higher tax bracket and your parent’s income is below basic exemption limit or in lower tax bracket.
If you are paying rent to your parents for living in their house then he or she can also claim 30% tax deduction on the whole year rental income. If the net amount after deduction is less than the basic exemption limit then he or she will not be liable to pay tax. To claim such benefit house property must be registered in the name of your father.
If house property is jointly owned by parents then you can split the rent so that net tax liability for your parents gets divided.
If you are self employer person or don’t get HRA from employer then still deduction is available for the rent that you paid for your living in a rented accommodation. Under section 80GG, you can claim deduction up to Rs. 2000 per month.
Mistake No 4 – Not claiming loss from house property
You will have loss from house property when rental income is less than allowed deductions. If during the financial year, employees or an individual has incurred loss from house property then that can be set off against that year’s salary income or any other income of individual.
For instance, in case of self occupied house property, if after taking out interest paid on housing loan from NIL rental income is a loss then that can be set off.
Many individuals are not aware of this tax provision and end up paying more tax. To claim loss from house property, one has to submit a declaration to employer stating the amount of loss in addition to a certificate from bank showing principal and interest amount.
Mistake No 5 – Investing towards the end of the financial year
Timing is the most important factor for saving tax. Generally individual tax payers wait for the end of the financial year or before submitting their self declaration of investments to employer for investments. Due to short time available they end up investing in wrong investment plans or products for lesser return.
Some individuals even do not have much money at the end of the year to claim full deduction of Rs. 150000 under section 80C. Due to this they also end up claiming lesser tax deduction compare to their eligibility.
To avoid this type of mistakes, we suggest you to plan for it before time. After filing income tax return for earlier years, you can start planning in August month for the current year. For first time tax payers, best time to start is from the date of joining or taking a PAN card.