Below are the Common Tax Planning Mistakes made by Individual while planning to save taxes:
1) Missing on Allowable Tax Concessions
First & foremost mistake made by many salary earner is that they are ignorant or overlook the various allowances that are allowed as exemption from their salary. To name a few:
- R,A. (subject to limits),
- Transport Allowance,
- Medical Allowance
- Mobile Bills, Food Vouchers etc.
These allowance are subject to limits drawn by Tax Laws.
A salaried employee needs to produce the original receipts/bills of expenses the employer in order to get the requisite tax exemption. As these Exemptions are allowed only when supported with actual bills to the affect.
2) Missing on Home Loan Benefits
A very important criterion to be kept in mind while filing tax return is the Tax Benefit on Home Loan. To explain the Tax Benefit on Home Loan, we would be dividing the Repayment of Home Loan into 2 components:-
- Tax benefit on Home Loan (Principal Amount) – Section 80C- The amount paid as Repayment of Principal Amount of Home Loan by an Individual/HUF is allowed as tax deduction under Section 80C of the Income Tax Act. The maximum tax deduction allowed under Section 80C is Rs. 1,50,000.(Increased from 1 Lakh to Rs. 1.5 Lakh in Budget 2014)
- Income Tax Benefit on Interest on Home Loan – Section 24- Tax Benefit on Home Loan for payment of Interest is allowed as a deduction under Section 24 of the Income Tax Act. As per Section 24, the Income from House Property shall be reduced by the amount of Interest paid on Home Loan where the loan has been taken for the purpose of Purchase/ Construction/ Repair/ Renewal/ Reconstruction of a Residential House Property.The maximum tax deduction allowed under Section 24 of a self-occupied property is subject to a maximum limit of Rs. 2 Lakhs (increased in Budget 2014 from 1.5 Lakhs to Rs. 2 Lakhs).
3) Tax Saving Limits not Exhausted Fully
Tax Saving is a regular activity for each personnel. So it’s always better to start investing for tax from the beginning of financial year rather than rushing at the end. One should compute the amount that he would be investing under different instruments eligible for tax savings u/s 80C in order to exhaust the limit of INR 1.5 Lakh. Many people doesn’t utilize this & end up paying higher taxes.
Note: Section 80C is not just your premium on life insurance policies, it accommodates many superior investment options like PPF, ELSS, etc.
4) Not Paying for Medical Insurance
Medical insurance premium is allowed as deduction under Section 80D of the Income Tax Act. This is over and above Section 80C. You can claim premium deduction of Rs 15,000 (for individual, children and spouse) and an additional Rs 20,000 for parents who are senior citizens. That means deductions up to Rs 35,000, or tax savings of Rs 10,500 can be gained through what is an essential cover.
Most Salary earners thinks they are covered appropriately by the Group Mediclaim Policy run by their Employer, therefore they don’t require any personnel health plan.
I would like to mention here that medical covers are supplementary. It means, you can claim from multiple insurers. For example, if you have a Rs 3 lakh cover in your office an you incur Rs 5 lakh for a surgery, you can claim the additional Rs 2 lakh separately, if you had a personnel health policy outside. Moreover, medical cover from employer lapses once you quit the company. The new employer may/ may not not provide you another cover.Point to remember here is, the sooner you take this cover, the lower your premium will be.
5) Failing to Book Losses
It may sound bizarre, but you can gain from your losses. If you have made short term losses on stocks this year, these can be adjusted against any short-term or long-term capital gains from the sale of property, gold or debt funds. Short-term capital loss can be set off against any income under the head ‘Capital Gains’ i.e both short-term as well as long-term. This can be especially useful for someone who has booked profits on debt funds this year. Suppose you sold the units in a debt fund and earned a long-term capital gain of Rs 50,000 after indexation. At 20%, the tax payable on this long-term capital gain is Rs 10,000.
However, if you also lost some money in stocks during the year and made a short term loss of Rs 25,000, you can set this off against the gains from the debt fund. Then the gain from the debt fund will get reduced to only Rs 25,000 and the tax payable will be Rs 5,000. If your losses are higher and cannot be fully adjusted, you can carry them forward for up to eight financial years and adjust them against future capital gains.
However, there are some conditions to be fulfilled. One, you should file your tax return before the 31 July deadline to be eligible for carrying forward the losses. Also, one cannot set off short-term gains from stocks against long term capital losses from other assets. Long-term capital loss can be set off only against long-term capital gains.