Kuldip Kumar & Chader Talreja
We are in the last quarter of the current financial year and this is when most taxpayers start focusing on their tax-saving investments, as they are required to submit the proof of such investments to their employers to avoid excess withholding of taxes from their pay. While tax saving is not the only consideration for investments, it is an important consideration nonetheless. Timely investments are also necessary for the improvement of the returns on the investments made. It is also important to select the appropriate mode of investment so that one’s own financial goals are met, and any future monetary requirements are covered. The Income-tax Act, 1961, contains provisions for several tax exemptions and deductions. This article highlights some important exemptions/deductions and how one can make use of them.
If you are a salaried taxpayer, do not forget to submit the proof of your leave travel allowance (LTA) claim to your employer. LTA exemption is allowed twice in a block of four calendar years for travel undertaken within India for self and family, while on leave. The current running block for LTA exemption claims is 2018–2021.
If you are receiving house rent allowance (HRA) from your employer and paying rent, you can claim exemption for the same. If the rent paid is more than Rs 50,000 a month, don’t forget to deduct taxes at 5 per cent on the rent paid during the year. Such deduction should be made from the rent paid in the last month of the financial year or the last month of the tenancy (if the property is vacated during the year). In case the landlord is a non-resident, you will need to calculate the withholding at normal rates (30 per cent plus applicable surcharge [if any] and education cess). Failure to do so will attract penal consequences. In case you are not getting HRA and paying rent, you can still claim deduction under Section 80GG, up to a maximum of Rs 60,000.
Investments under Section 80C
Section 80C of the Income-tax Act is the most commonly understood section by taxpayers, as it allows for deduction of up to Rs 150,000 for the various investments/expenses incurred. Before you make any investments and declare them under Section 80C, first ascertain the expenditure/investments you have already incurred that will get you tax benefits. For example, you may be contributing to the Employees’ Provident Fund (EPF), paying life insurance premiums, paying for the tuition fee for the full-time education of your children, and repaying your housing loan. All these expenses/investments are eligible for tax deduction. But if the limit of Rs 150,000 is still not reached despite all your expenses/investments, you can choose from the other investment options available to make full use of Section 80C. You may invest in the Public Provident Fund (PPF), purchase National Savings Certificates (NSCs), increase your contribution towards your EPF, begin term deposits of five years with banks or post offices, and invest in schemes such as equity-linked saving schemes and Sukanya Samriddhi Yojana. Your investments must be made in a manner that helps you to reach your financial goals.
National Pension Scheme (NPS)
NPS is an attractive investment option that not only helps in saving taxes, but also ensures a comfortable retirement. Employers can contribute up to 10 per cent of employees’ basic salary towards NPS. The contribution is eligible for deduction under section 80CCD (2). Not only is your own contribution eligible for deduction under section 80C, but there is also additional deduction available of up to Rs 50,000 under section 80CCD (1B).
Employers generally provide health insurance cover for their employees, and occasionally for their families as well. But in case your family or parents are not covered, taking a top-up option will help you insure your family and get you tax benefits. Under Section 80D, tax deduction of up to Rs 25,000 can be claimed for the health insurance of self, spouse and dependent children. An additional deduction of up to Rs 25,000 (Rs 50,000, in the case of senior citizens) can be claimed for parents as well. If you have incurred any medical expenditure for your senior citizen parents and they are not covered under any health insurance scheme, you can claim a deduction of up to Rs 50,000.
Tax break on interest paid on educational loans
If you have taken an educational loan to pursue higher studies (a full-time graduate or postgraduate course) for self, spouse or children, you can claim tax deduction on the interest paid on such loans under Section 80E. The deduction is available for a maximum of eight years, beginning with the first year of payment of interest and seven subsequent years or till the last year the interest is paid – whichever is earlier.
Deduction on interest paid on housing loans
In case you have taken a loan to purchase or construct a house, tax deduction can be availed on the interest paid (of up to Rs 200,000) during the repayment of such a loan, in case the house is self-occupied. If the house is let out, the entire interest on the home loan can be considered as a deduction. If after such deduction, the net income results in a loss, the same can be adjusted against the income from other sources, including salary. However, such set-off is restricted to Rs 200,000 only and the remaining loss can be carried forward for eight years, to be adjusted against future income from the house. First-time home buyers can avail additional deduction of up to Rs 1.5 lakh in a year, under Section 80EEA. This deduction is applicable for housing loans taken for acquisition of residential house property between April 1, 2019 and March 31, 2020, provided the stamp duty value of the residential house property does not exceed Rs 45 lakh.
Donation to charitable organisations
If you have donated to any charitable organisation during the financial year, don’t forget to obtain the receipt for the same. You can claim tax deduction under Section 80G for up to 100 per cent/50 per cent of the amount donated, depending on the approved institution/authority.
Tax deduction on purchase of electrical vehicles
If you bought your first electric vehicle (EV) by taking a loan from a financial institution, the interest to be paid on such a loan is tax-deductible under Section 80EEB up to Rs 150,000, and is subject to fulfilment of certain conditions.
The importance of timing
Taxpayers should plan their investments at the beginning of the financial year, rather than investing during the last few months of the year. The interest earned on many investments such as EPF, PPF or the return from NPS is exempt from tax. If you make early investments, your invested amount starts to earn tax-free returns and also get you tax benefits for the investment made in a particular financial year.(Kumar is Partner & Leader and Talreja is Executive Director – Personal Tax, PwC India. The views expressed in this article are personal)