Saving tax through deductions

It’s the time of year when people scramble to finalise their tax-saving declarations and investments. But there’s no need to jump into whatever investments are immediately available even at this point, a systematic approach is best. And it can be wise to first assess the expenses one has already incurred to see if they allow for tax-savings.Expenses with benefitsMany common expenses fall under different sections of the Income Tax Act and allow for tax-savings. These include tuition fees, leave, travel and house rent allowances, home loan payments, dependant expenses, as well as life and health insurance premiums. Those aside, investments in provident funds, certain fixed deposits and mutual funds, unit-linked insurance plans and pension systems also allow for tax-saving.Education: Expenses incurred for education for dependants can be claimed under Section 80(C), up to a limit of Rs 1.5 lakh. Only tuition fees paid to government-recognised universities, colleges, schools or other institutions, for a full-time course, can be claimed. Related expenses, like transportation, food and others, are not covered. Those who have taken education loans for themselves, their spouses or their children can claim deductions on the interest paid under Section 80(E), with no limit on the amount of interest that can be claimed as deduction for the first eight years of the loan..preferred-source-banner{ margin-top: 10px; margin-bottom:10px;} House rent: Skyrocketing real estate prices might have kept dream homes out of reach for many Indians, but renting does have a silver lining the tax savings permitted on house rent allowances. Taxpayers can claim the lowest of the following for deductions the actual house rent allowance; 40 per cent of basic salary (50 per cent in metros); or rent paid less 10 per cent of basic pay.Home loans: For home loans, taxpayers can claim up to Rs 1.5 lakh of the principal amount repaid, under Section 80(C). It is also important to note that both HRA and home loan deductions can be claimed, as long as the requirements for both are fulfilled.Investing in a home is a better option while tax planning, as the government has made efforts to offer higher tax deductions [in this category], especially for affordable housing. We have observed, though, that people are not taking the benefit of investing in home loans, where deductions are available on both interest and the principal amount. Also, the appreciation of a property amounts to negligible tax as inflation goes in favour of investors they can re-invest the resale amount to claim tax deduction, explains Sudhir Kaushik, co-founder of taxspanner.com.Leave travel: This allows taxpayers to claim travel expenses for their family including two children (post-1998), siblings and parents as an exemption. However, only air, rail or bus fares can be claimed, and for the shortest possible route. This can only be claimed for two journeys in a block of four calendar years. The current block is 2018-2021. You can claim two journeys in the same year, or even choose to carry forward the LTA exemption into the first year of the succeeding block.Medical expenses: Expenses on certain medical treatments for yourself, your spouse or your dependants can be claimed as deductions, up to Rs 40,000-Rs 80,000 (based on the age of the dependant), under Section 80(DDB). If the person being treated is over 40 per cent disabled, then expenses up to Rs 75,000 can be claimed, with Rs 1.25 lakh allowed for those with disabilities over 80 per cent.Insurance: Both life and health insurance premiums paid during the year can be claimed as deductions against taxes. Upto Rs 1.5 lakh can be claimed against life insurance premiums under Section 80(C), while health insurance premiums up to Rs 25,000 (or Rs 50,000 for senior citizens) can be claimed under Section 80(D). Those paying health insurance premiums for dependant parents can claim between Rs 75,000 to Rs 1 lakh based on the age. Note that these include charges paid for health checkups up to Rs 5,000. Senior citizens above 80 years can claim medical expenses upto Rs 50,000.INVESTMENTSYou can also save on taxes by investing in medium-term and long-term fixed income products. With a five-year lock-in period, you can invest in the senior citizen savings scheme, the national savings certificate and tax-saver fixed deposits for the debt part of your investment portfolio. Senior citizens can also claim exemption from paying TDS if their total annual income is below Rs 5 lakh; in case of higher income, TDS is exempted only if the interest earned on fixed deposit is Rs 50,000 or less. For a long-term fixed-income investment with tax saving, one could choose the public provident fund or the Sukanya Samriddhi Yojana (if one meets the applicability critera). You could also choose to give your portfolio an edge with equity exposure while saving taxes. There are, broadly speaking, three investment options equity linked savings schemes (ELSS), offered by mutual funds; unit-linked insurance plans (ULIPs) from life insurers and the National Pension System (NPS) by the Pension Fund Regulatory Authority.ELSS: These schemes have the shortest lock-in period three years among all tax-saving instruments. It is also important to note that allocating investments to equity has also proved to be a wealth-builder in the long run.Though the systematic investment plan (SIP) route is the best way to invest in a regular mutual fund, in this case, the strategy should be altered. Kartik Jhaveri, director of wealth management at Transcend Consulting (India), suggests that investments in tax-saving mutual funds should be done in one go, or at best in two tranches. Since each investment will have to be locked for three years, investing in ELSS funds through SIPs means your investment will take longer to get freed up.NPS: The National Pension System is a long-term tax-saving tool for both the employed and the self-employed. Here, Rs 50,000 of additional deduction for investments is allowed over and above those permitted under Section 80(C). One can invest up to a maximum of 75 per cent in equity, with that percentage reducing as the age increases. People aren’t [investing in] the NPS due to low awareness. One could opt for this tax-saving investment route, as fund management charges are low, suggests Kaushik.ULIPs: When it comes to ULIPs, only those who are willing to consider a longer time horizon 10 years or more and are willing to invest a bulky sum at one go, or pay premium each year, should opt for them as a pie of your investments is doled out as commissions during the initial five years.Also, remember not to panic if you have failed to declare any of your investment details to your employer. If you have made investments in tax-saving instruments in a given financial year, you will be able to claim tax deductions that year. If additional tax has been deducted, that can be reclaimed as a refund, says Ajay Sehgal, director at Allegiance Financial.Published By: Iram Ara IbrahimPublished On: Jan 3, 2020--- ENDS ---

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Saving tax through deductions

Both investments and expenses could be eligible for tax deductions. A look at the options available.

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