Mistakes Taxpayers Make While Claiming Deductions Under Section 80
Saving on taxes is something that we all wish to do, and the Income Tax Act, 1961 provides certain ways to reduce your overall tax liability. The most preferred provision is Section 80 listed under Chapter VI A of the Income Tax Act. However, the failure to properly understand and report the available deductions can impact how much you can save.
For example, you may miss out on deducting interest on your education loan from your taxable income because you are not aware of how to claim Section 80E deductions correctly. Let’s look at some of the common mistakes so you can avoid them and pay less in taxes overall.
Common Mistakes In Claiming Deductions Under Section 80C
Not Keeping Proper Records
Many taxpayers fail to maintain proper documentation for the deductions they claim. This includes receipts, bills, invoices, bank statements, and certificates. Without these, it can be difficult to substantiate claims if questioned by the Income Tax Department. This can lead to disallowance of deductions during audits and potentially result in penalties.
Claiming Within Lock-In Periods
Certain deductions, like those under Section 80C, have lock-in periods. For example, Equity Linked Savings Schemes (ELSS) have a lock-in period of 3 years and Public Provident Fund (PPF) has a lock-in period of 15 years. Not paying attention to these periods and claiming deductions will lead to it being disallowed by the authorities.
Mistaken Calculations
Simple errors in calculating the eligible deduction or entering the wrong numbers while filing can lead to issues. This includes not accounting for the maximum limits under each section and double-counting deductions.
For example, considering and combining your investments in all the instruments under 80C. You cannot claim a deduction of more than ₹1.5 lakh under Section 80C. Doing so can draw undesired attention from tax officials.
Mixing personal and business expenses
Some taxpayers mistakenly claim personal expenses as business deductions, which is not allowed. It's important to clearly distinguish between personal and business expenses. This can raise red flags during an audit and may result in penalties or disallowed deductions.
Leaving Rightful Deductions Unclaimed
Many taxpayers miss out on claiming deductions they are eligible for, such as those under Section 80D for health insurance premiums or Section 80G for donations to certain funds. Missing out on these deductions may be due to either a lack of relevant information or plain oversight. This results in higher tax liabilities than necessary.
Missing Forms From Submission
There are certain deductions which need additional forms to be submitted. If you claim the deduction without adding these forms to the filing, the deduction will be disallowed. For example, Form 10BA needs to be added to the filing to claim house rent allowance as an exemption under Section 80GG.
Not Verifying Eligibility for Deductions
It's crucial to verify eligibility for deductions before claiming them. For example, while it may seem so due to its popularity, not all investments or expenses qualify for deductions under Section 80C.
Another example is that while almost all proceeds from life insurance payouts are tax-free, the same does not apply to proceeds from retirement plans, which are also a type of life insurance.
Not Being Aware of the Rules for Different Deductions
Different types of deductions have specific rules and limitations. For example, charitable contributions, medical expenses, and mortgage interest have their own unique criteria which need to be met.
For example, the monthly pension received after retirement is treated as a regular income, just like a salary, so claiming a deduction on a pension can cause issues during filing. Another good example is the Section 80D deduction eligibility errors caused due to the different age brackets of your dependents.
Tips to Avoid Tax Mistakes and Maximise Deductions
Understanding how to avoid common tax mistakes and maximising your deductions can save you time, money, and unnecessary issues. From missed deductions to filing errors, even small missteps can lead to costly consequences. Here’s how you can overcome these errors.
Proper Documentation
Keeping detailed records is essential for substantiating deductions. Create a handy system of storing detailed records of all your investments, including receipts, policy documents, and transaction statements. This will help you avoid tax deduction errors and be crucial during tax audits.
Keep Yourself Informed
Tax laws change frequently, especially every time the annual budget is presented by the government. Staying informed about these changes can help you maximise your deductions. Subscribe to tax-related newsletters or follow trusted sources for updates on tax laws.
Double-Check Your Filing
Reviewing tax returns before submission can help you catch errors and ensure all eligible deductions are claimed. Take the time to go through your tax return thoroughly or get it reviewed by someone else who has done it before. It would be of great help if you are ready with your filing a while before the deadline, so you have enough time to check it again.
Plan Your Investment Strategy in Advance
Start planning your investments early in the financial year to ensure you maximise the benefits and avoid last-minute rush.
Use a Tax Filing Platform or Consulting A Professional
Some tax platforms or software can help minimise errors, so investing in reliable tax software or using a well-known and verified platform can help you. These platforms are designed now to spot common errors and increase accuracy.
If you're unsure about the deductions you can claim or how to report them correctly, consider consulting a tax professional. They can provide personalised advice and help you avoid common mistakes.
By being aware of these common mistakes and following these additional tips, you can make the most of the deductions available, avoid tax mistakes and ensure compliance.
Key Takeaways:
Frequently Asked Questions
1. What are the common errors in claiming Section 80 deductions?
Here are some common mistakes that one can make during claiming their deduction under Section 80.
2. How do I claim Section 80E deductions for education loans?
The deduction under Section 80E can be claimed from the year you begin loan repayment and is available for a maximum of eight years or until the interest is fully repaid, whichever comes first.
3. What are the eligibility criteria for Section 80D deductions?
To be eligible for a deduction under Section 80E, the loan must be for higher education and taken out by an individual for themselves, their spouse, their children, or a student for whom they are the legal guardian. Only the taxpayer who has applied for the loan can claim a deduction. Companies and Hindu Undivided Families (HUF) are not eligible.
4. Can I claim Section 80G donations without a receipt?
Unfortunately, you can not claim Section 80G deductions if you don’t have the donation receipt.
5. What happens if I exceed the limit for Section 80C deductions?
If you exceed the limit, you won’t be eligible for the deduction.
6. How do I avoid rejection of my Section 80 claims?
Having cohesive knowledge is essential; this is why going to an expert or hiring a professional would be the smartest choice.
7. What documents are required for claiming Section 80 deductions?
Here are the lists of documents that you must have while claiming your deduction:
Under Section 80C
Under Section 80CCC
Under Section 80CCD
Under Section 80CCG
Under Section 80EE