5 Common tax saving mistakes to avoid

Very few taxpayers know how to invest in order to get maximum tax benefits; others come to know when their employer asks for investment details towards the end of the financial year.

Everyone wants to minimize their tax outgo by investing in tax saving deductions. But, in a hurry to comply with the mandatory tax declaration submission with employer, employees generally make lot of investment mistakes to save tax.

In this article, we have listed most common tax saving mistakes that one can avoid while preparing to save taxes.

Mistake 1: Investing entire eligible amount in endowment insurance plans

Endowment plans are life insurance policies that not only cover policy holder’s life in case of an unfortunate event, but also offer a lump sum maturity benefit at the end of the term. It’s also known as investment-cum-insurance policy.

When you invest in an endowment plan, the insurance agent gets approximately 30%-35% commission on first year premium and thereafter approximately 5% on subsequent premium amount.

So most likely, you will be offered these plans from an insurance agent. After taking out the commission part, your balance amount will be considered for investments.

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.

It’s a very good tax saving plan for individuals. But, many taxpayers end up investing the entire eligible amount of Rs 1, 50, 000 (i.e. present limit under section 80C for assessment year 2019-2020 is Rs 1, 50, 000) in endowment plan without considering other eligible deductions.

Endowment plans are giving less investment return as part of the premium amount used for insuring policy holder’s life. By putting more than the required amount is like blocking your hard earned money for less return.

To get tax benefits under section 80C, you are first required to know how much you already have invested or spent to get eligible under this section. For instance, amount paid towards school tuition fees for children, investment in EPF and/or Public Provident Fund, Term plans, principal payments to housing loan are also eligible for tax 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 part of your investments in a very good term plans as endowment insurance plans have less return compare to other traditional investment plans.

Mistake 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.

If you are looking for a long term investment plan 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 or ELSS.

Investments to PPF scheme are eligible for tax deduction and at the same time interest earned are also exempted. ELSS funds will give you higher return in long term in comparison to traditional investment plans. If you are a high risk taker, then we suggest you to invest at least certain portion of your portfolio in ELSS to earn high returns over the long term.

Mistake 3: Ignoring tax exempted expenses

When it comes to tax deduction, people generally think about section 80C investments such as insurance, EPF, PPF and fixed deposits.

They are unaware about certain other deductions like payment towards tuition fee, health insurance premium, repayment of home loan, education loan and house rent etc qualify for tax deduction. Being unaware about these tax exempted expenses, taxpayers end up not declaring it in tax declaration to employer due to which employer deduct more taxes.

Most unknown tax exemption expense is house rent, generally a substantial portion of employee’s salary or self-employed person’s expenses.

Employees living in a rented accommodation can claim benefit of HRA exemption based on the city and other factors required to calculate 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 parent.

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 employed person or don’t get house rent allowance from employer, then you can claim deduction up to Rs. 2000 per month under section 80GG.

We suggest you to be informed about all the expenses that qualify as tax deduction for you.

In case you missed to include tax exempted expenses while giving declaration to employer then you can include it in your IT return while filing with government to get refund.

Mistake 4: Not disclosing 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 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 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 5: Investing towards the end of the financial year

Timing is the most important factor for saving tax. Typically, most taxpayers think of their investments in the last quarter of the financial year or before submitting their actual tax declaration to employer.

Due to shortage of time and lack of investment knowledge, these tax payers end up investing in wrong investment plans or products for lesser return. Some individuals even end up claiming lesser tax deduction due to lack of funds at the end of the year to take full benefit of section 80C.

To avoid these mistakes, we suggest you to plan and start investing at the beginning of the financial year. Align you investment goals to long term objectives like child’s education, wedding and your own retirement etc.

is a fellow member of the Institute of Chartered Accountants of India. He lives in Bhubaneswar, India. He writes about personal finance, income tax, goods and services tax (GST), company law and other topics on finance. Follow him on facebook or instagram or twitter.