Tax is the most stable source of revenue for a country that contributes to its development. It also plays a key role in promoting democracy by making the government accountable to its citizens. As responsible citizen, one should timely pay his share of taxes that are due. To lessen the tax burden for its citizens, the Government each year, introduces legitimate ways to save on tax. There are several exemptions, deductions and rebates provided under Income Tax Act. Knowing these directions in advance may help you in efficient tax planning and reducing your tax load. It is important to realize that tax planning is a year-round activity and there are two different ways to save tax: one, through investment and second, through disclosing your expenses.
In my previous article on “Tax Calculation and Efficient Tax saving tools”, I highlighted various Investments that are eligible for deduction under Income Tax Act. It is important to know that there are also some “expenses” that are allowed as exemption or deduction for tax calculation purpose. It is important to check these expenses before you invest to save tax. Identifying your tax saver expenses helps you to know the need to invest more for tax savings. Some of the popular expenses that help in tax saving are as under:
Children Tuition Fees: Section 80C
Tuition fees paid by the parents to fund their child’s education in any school, university, college or any other education institution within India can be deducted under Sec 80C, up to Rs.1 lakh in a year. The amount of deduction is restricted to two dependent children and should pertain only to actual tuition fees paid. However, both husband and wife have a separate limit of two children. So each parent can claim for two children each. The deduction is available for full time courses and not for private tuitions or coaching classes.
Housing Loan (Principal and Interest Payment): Section 24, 80C and 80EE
The principal and interest component of your Home Loan EMI are eligible for a deduction under section 80 C and section 24 of Income Tax Act. You can claim deduction of up to Rs. 1.5 lacs on principal repayment and up to Rs. 2 lacs on interest repayment in a year. Please note that the benefit of tax under section 80C is reversed if the taxpayer sells the house within 5 years from the purchase of that property.
If you are a first time home buyer and bought a house costing not more than Rs. 40 lacs and availed a Home loan of maximum Rs. 25 lacs from a Bank/ NBFC, in that case, you are eligible for additional deduction for the HL interest of up to Rs. 1 lac under section 80EE. This is applicable for A.Y. 2014-15 and 2015-16 only.
Medical Insurance: Section 80D
Premium paid under the Health insurance Policy is exempted from Income Tax under section 80D of the Income Tax Act up to Rs.15,000 for individual (less than 60 years of age) covering his family and dependent Children. In case the tax payer also covers his parents under medical insurance, then he is eligible for a deduction of another Rs.15,000 under section 80D. In case the age of either of parents to be covered is above 65 years, the deduction available is Rs.20,000 under section 80D of income tax act. The deduction can be claimed irrespective of parents being dependent on you or not. A deduction of Rs.5,000 can also be claimed for preventive health check-up for self, spouse, children and parents under the overall limit of Rs.15,000 under this section.
Education Loan: Section 80E
The cost of education for self, spouse or children is a huge outflow, and needs to be well planned. Most of you may opt to take a loan to fund your child’s higher studies. While this results in a repayment burden, you can gain partially, as entire interest portion on education loan is fully tax deductible under Section 80E of the Income Tax Act. The loan must be taken for pursuing a full-time course only. The deduction, however, is applicable for the year you start paying your interest and seven more years immediately after the initial year. Also, please note that no deduction is allowed on principal paid for the education loan.
Treatment of Disabilities: Section 80DD and 80DDB
The Income Tax Act allows the taxpayer to claim a deduction from his income, for an amount incurred towards treatment of specific disabilities and illnesses of any of his dependent under two sections. Sec 80DD of the Act states that expenses incurred towards medical treatment of a dependent suffering from a disability are eligible for deduction. The limit of deduction under this section is Rs. 50,000 for a normal disability (impairment of at least 40%) and Rs. 1 lakh for severe disability (impairment of 80% or above). Sec 80DDB of the Act allows expenses incurred towards treatment of specified illnesses for dependent to be deducted from income. The deduction amount is up to Rs.60,000 for senior citizens and up to Rs. 40,000 for non-senior citizens.
Donations: Section 80G
Any donations made to certain funds and approved charitable trusts/ institutions/ organizations are eligible for deduction under section 80G of income tax act. Some donations are 100% tax exempt while others are restricted to 50% of the donated amount. Although, the rules are different for various organizations, but for most donations, the maximum exemption limit is restricted to 10% of gross annual income of the taxpayer.
Life Insurance Premium: Section 80C
Although many people consider life insurance as an investment tool for tax saving purpose. But, many Financial Experts emphasis Life Insurance to be treated as a financial tool purely to cover your life and not as an investment vehicle. Term Insurance plans have become more popular in last few years. Like Home and Auto Insurance, your life insurance should also be considered as an expense for a cover. It should not be mixed with any other investment plans. Any premium paid for life insurance plans gets exemption under section 80C of income tax act.
House Rent: Section 80GG
If you stay in a rented house and do not receive HRA (House Rent Allowance) as a component in your salary, then you can claim a deduction for same under this section. However, you cannot avail any such benefit if you, your spouse and/or your child owns any residential accommodation in India or abroad.
The lower of following three can be claimed as HRA deduction:
25% of the total income; or
Rs 2000 per month; or
Excess of rent paid over 10% of total income
Stamp Duty and registration charges: Section 80C
The stamp duty and registration charges paid while buying a new house are eligible for exemption under section 80C of income tax act. The maximum deduction, however is restricted to Rs.1 lakh and the taxpayer should be one of the owners of the property. Moreover, the assessee should pay these charges from his/her own funds.
Maximum deduction allowed under section 80C is Rs.1.5 lacs, it is important to check these expenses before you invest your funds for tax saving purpose. Identifying your tax saver expenses helps you to know the need to invest more for tax savings.
