5 Common Tax-Saving Mistakes and How to Avoid them

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Prosperity is the fruit of labor and it begins with saving money. It is very important to take effort to save money. After all, it is your hard-earned money and the steps you take to save it, determines you overall wealth portfolio. 

One technique to saving money is utilizing tax-saving deductions to reduce your tax burden as much as you can. Did you know that prudent investments in PPF, health insurance and more, can actually save you tax money? Most of us are not aware of this. 

When your employer asks for investment details towards the end of financial year, it is a wake-up call for many and in order to comply with the mandatory tax declaration submission, you tend to make many mistakes in a hurry. 

People are prone to making pricey mistakes financially while investing to save tax or declaring such expenses for which they can claim tax deductions. In this article, we will discuss the common tax-saving mistakes and how to keep away from them. 

5 Common Tax-Saving Mistakes 

1.  Delaying tax-saving investments and hurrying to save taxes in the last quarter 

They key to building a good investment portfolio, lies in making systematic investments over the year. People who are unaware of tax deductions tend to hurry and take a call in making tax-saving investments in the last minute. 

Little do they know that rushed investments can lead to erroneous decisions. Also making tax-saving investments at the last moment will not allow you to reap its full benefits. A large one time investment can make your monthly budget go haywire. 

What to Do: Timing is very important when it comes to tax-saving investments. Start investing in tax-saving schemes at the beginning of the financial year and create a diversified investment portfolio. Take the effort to give a deep thought regarding your investments, in order to make the most of it. 

2.  Ignoring expenses that are tax-exempt 

Being ignorant is the biggest folly of all. Most of the people are not even aware that the expenses they make towards health insurance premium, children’s tuition fees, house loan payment, house rent etc. qualify as valid tax deductions. Hence, they don’t declare such expenses and end up paying more taxes. 

One of the common unknown allowance is that of the House Rent Allowance (HRA). Typically most of the employees get HRA from employers and if you fail to get this allowance, you can claim deduction up to Rs.2000 per month in your income tax returns. 

Moreover, when it comes to tax-saving investments, people tend to limit their declarations to Section 80C alone. They are unaware of other tax deductions of medical expenses, interest on housing and educational loans, expenses toward social donations and more. 

What to Do: Be informed about all expenses that qualify as tax deductions. The money that you have already spent, should not go waste by paying more taxes on top of it. Ensure to claim the deductions you can and don’t just focus on Section 80C tax benefits. There are several other tax-saving avenues. 

3.  Investing in Tax-Inefficient Schemes 

A common tax-saving strategy that is preferred by most is investing in long term fixed deposits (FD) or acquiring national saving certificates (NSC). You can make a one-time claim on the investment you make, however the interest you earn on both Fds and NSCs are taxable. This makes such products tax-inefficient. 

Distinguish tax-saving schemes like PPF and other pension schemes, from usual investments of fixed deposits or recurring deposits and make the most out of them. Investments made in PPF (public provident fund) are eligible for tax deduction and at the same time the interest earned out of them are tax-free. Look for such effective tax-saving schemes. 

Also, your investment portfolio should have the right mix of equity and debt investment funds. You can opt for tax-saving mutual funds with exposure to equities or stock market and also invest in debt funds with endowment plans, PPF, etc. Allocate funds accordingly and build the right portfolio to save more. 

What to Do: Allocate part of your portfolio to Equity investment schemes in order to save tax and earn high returns in the long run. Consider your financial goals, risk appetite and age and invest in effective tax-saving schemes. 

4.  Investing too much in Endowment Insurance Plans 

Endowment insurance plans are life insurance schemes that are good for tax-saving and essential investment. However, investing a big chunk of your hard-earned money on Endowment plans alone will not fetch you great returns. 

When you walk into a bank or ask your insurance agent for tax-saving schemes, they always recommend endowment life insurance plans. Since they earn the highest commission usually at the rate of 35% of the first-year premium and 5% on subsequent premiums, they tend to convince and sell it to you. 

These plans are very long term usually in the range of 10-20 years, in which you need to keep investing. If you redeem in between, then you will not even get your initial investment back. Many taxpayers make the mistake of investing almost the entire eligible amount of Section 80 C in endowment plans and fail to look at other effective tax-saving schemes. 

What to Do: Invest in term plans, which also qualify for tax deduction under Section 80 C as opposed to endowment insurance plans. Do not invest a major chunk of tax-deduction money on endowment plans and consider other options as well. 

5.  Not fulfilling the Section 80C Limit 

Under section 80, an individual taxpayer is eligible for tax deductions up to Rs. 1,50,000. However, not everyone is aware and able to meet the limit. Often, they end up shelling out more income taxes that they need to, because they are unable to utilize the limit of Section 80C. 

Also be aware of the rules well. Tax benefits always come with underlying terms and conditions that you need to know prior to investing. For example, the entire life insurance premium is not tax deductible and applies only up to 10% of the sum assured amount. There is a common misconception among investors, that the entire premium is eligible for tax deduction. This makes them rush into such products in order to save taxes. So, always know the rules well and then make correct decisions. 

What to Do: It is not mandatory to invest the entire Rs. 1.5 Lakhs to save taxes. Invest as much as you can and plan you tax-saving investments to reap the full benefits of the available tax deductions under Section 80C. Awareness of the underlying rules will definitely help you plan your finances better. 

The Following are the Eligible Tax Deductions Under Section 80C: 

Type of Investment

Description

Rate of Interest

Risk Profile

Lock in Period

ELSS

Equity Linked Saving Scheme are tax-saving mutual funds, with exposure to stock markets

12-15% expected

Stock market risk

3 years

PPF

Public provident fund are government backed funds that are safe

8.1%

Risk-free

15 years

NPS

National pension scheme is a long term government backed scheme with a combination of debt and equity funds

8-10% expected

Stock market risk

Till Retirement

NSC

National savings certificate are government bonds that can be bought from designated post offices and come with taxable interest

8.1%

Risk-free

5 Years

FD

Fixed deposits with a tenure above 5 years and more, offer 100% capital protection, but with taxable interest

7-9% expected

Risk-free

5 Years

ULIP

Unit link insurance plans come with mix of insurance and equities units

8-10% expected

Stock market risk

5 Years

Sukanya Samriddhi

Government aided scheme aimed specifically for the girl child

8.6%

Risk-free

21 years

SCSS

Senior citizen savings scheme for persons aged above 60 years

8.6%

Risk-free

5 years

 

Other Payments Eligible for Tax Saving Deductions Under Section 80 C 

  • Life insurance premium – Annual premium paid for endowment plans and term plans in the name of the taxpayer, spouse or children. It is valid only if premium is less than 10% of the sum assured
  • Children Tuition Fees – Tuition fees paid for education of two children is eligible for tax deduction up to Rs. 1,50,000 for full time courses.
  • Repayment of Home Loan – Repayment of the principal of loan taken to buy or construct residential property is eligible for tax deductions
  • Contribution to LIC annuity plans and five year deposit schemes in post office 

The above are the five common tax saving mistakes that are repeated by taxpayers. Ensure that you avoid them and give it the best shot to make optimum utilization of income tax deductions. Lessen the onus of your tax liability and earn great savings by making wise investment choices. 

Consider all the valid sections under which you are eligible to save tax and plan early to avoid last minute surprises. At the same time,  tax consideration should not be the sole criterion to make your investment decisions. Ensure that the investment decisions meet your financial goals and find the right mix of tax-saving investments. 

A little bit of information and discipline is what it takes to avoid these mistakes while investing to save tax.

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