For many taxpayers, tax planning is a nightmare, considering the involvement of complex procedures a taxpayer has to go through. There are multiple ways of claiming a tax deduction under various sections of the income tax. Tax saving is a comprehensive process, but if dealt with in advance can reduce your tax saving mistakes and tax liability along with parking your hard earned money in some good investments.
there are some common mistakes which most of the taxpayers commit which could have an overall impact on their wealth portfolio.
1. Last Minute Tax Planning
There are many taxpayers who do not plan tax savings or Tax Saving Mistakes in advance and invest in any readily available tax saving instrument in a rush when the financial year is about to end. Such haste and short timing decision results in the selection of an inefficient tax saving investment which will put a financial burden to arrange funds. Ideally, tax saving is an important part of financial planning which must be done at the beginning of the financial year. Investment linked with your financial objectives, offering tax benefits are the ideal ones. Tax planning done in advance gives you flexibility and also better options to select appropriate tax saving products.
2. Not Maximizing 80C Tax Deduction Limit
Section 80C under the Income Tax Act, 1961 allows an individual taxpayer to claim a tax deduction up to Rs 1.5 Lakh. There are wide options of investments where you can park your money up to the maximum limit of Rs 1.5 Lakh. Investments under Section 80C plays a critical part in the overall tax planning of the tax payer. Not utilizing the maximum limit under section 80C is a major blunder. There is a plethora of investment options available under this section to suit the taxpayers investment goals. To list a few are PPF, FD, premium for life insurance, NSC, ELSS, etc. The EPF deducted by the employer can also be shown under the section 80C deduction. If you are still unable to reach the maximum limit via investments specified under Section 80C, there are some expenses also which could help you to gain the tax benefits under section 80C.
3. Avoiding Expenses which Offer Tax Exemptions
This is also a part of common tax saving mistakes which most taxpayers commit. There are certain expenses which will result in the outflow of your money during the financial year, which could help you gain tax benefits at the time of filing your income tax. Expenses such as health insurance premium, children’s tuition fees, house loan payment, house rent etc. qualify as valid tax deductions.
Premiums paid towards your life insurance policy is tax deductible under Section 80C. Similarly, the expense that you have incurred to pay your health insurance premium is also tax deductible under section 80D. Likewise, paying your kids’ school fees as tuition fees (excluding development fee of donation amount) is an expense, is eligible which will help you save tax under section 80C. Its important to note premiums paid in cash does not allow you tax deductions.
There are other expenses as well apart from expenses under section 80C which usually most taxpayers miss to avail tax deductions such as tax deductions of medical expenses, interest on housing and educational loans, expenses toward social donations, etc.
4. Not Choosing the Right Investment Mix
Various kinds of investments will help the taxpayer to accomplish different financial goals. Equity linked investments are for the taxpayers who have a high risk apetite as such investments are market linked and are more risky. not to choose right investment can be the big tax saving mistakes, such On the other hand, debt instruments or government bonds and yields are the investments which offer safer returns and are ideal for a taxpayer who has a low risk bearing apetite. Also, it is essential to analyze the lock in period of the investments as some have a longer lock-in period while some have a shorter lock in. If you foresee a fund requirement in the near future, choosing investments with a longer lock in period may not be a suitable proposition. Also, it is important to have a mix of debt plus equity oriented investments to have a balanced portfolio offering optimum returns.
5. Investing in Tax Inefficient Schemes
As mentioned earlier, there are bundle of investment options available under Section 80C which could help the taxpayer to reduce his tax liability. But blindly investing in any of the investment types may not fetch you the required results. Like there are some investment options such as long term fixed deposit or NSC where the interest earned accounts into your taxable income, making these investments lesser tax efficient tools as compared to other investments.
In a nutshell, some prudent planning can help you in saving you tax. Avoid these above mentioned common mistakes which could put a dent on your tax savings. With some research or with the help of financial planning done in advance helps you to avoid these mistakes while investing to save tax.