As tax costs are eating into the earnings of every household, there is always a search to reduce the tax incidence within the four corners of the law. The Income-tax Act (‘the Act’) provides certain deductions from taxable income, the policies for which are based upon larger socio-economic parameters. With the new tax regime seeking to reduce the tax rates for those who do not claim such deductions, people in the higher tax bracket are often better off claiming the deduction and opting for higher tax rates.
Many deductions are also dependent upon the taxpayer filing his or her tax return within the due date (31st July in many cases). It is therefore imperative to ensure timely filing of tax returns if one seeks to take advantage of these benefits.
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This article summarises the tax benefits that an Individual tax payer (and a Hindu Undivided Family in many cases) can claim against their taxable income. The benefits are subject to certain independent and aggregate limits, and other conditions, which will have to be verified from one’s Chartered Accountant.
A. Schemes to promote Savings
Effecting an insurance contract – Effecting an insurance on the life of self or specified relatives would yield deduction under Section 80C. The deduction is not limited to a term insurance, but would extend to all life insurance contracts, including endowment policies, unit linked insurance policies, etc. Money received on maturity of the insurance policy is separately eligible for exemption u/s 10D of the Act, subject to certain conditions mentioned therein.
Effecting an annuity contract – Though an annuity is also a contract on life of a person, tax treatment of the contracts vary. While sums paid for effecting an annuity contract are eligible for deduction alike life insurance, any money received under an annuity contract is fully taxable.
Contribution to Provident Fund / Superannuation Fund / other Saving Schemes, notified by the Government, and Tax Saver deposits – While investments in most of the schemes are eligible for deduction, with exemption from taxation on redemption as well, a few funds will attract tax on accretion/ redemption.
Purchase of Tax Saver Mutual Funds – Over the last 3 to 4 years, this tax saving scheme has yielded the highest return, despite the tax liability that arises on redemption of the units. The investment however comes with its own risk associated with fluctuation in stock market.
B. Schemes to promote education Any fee paid to school, University, or College, is fully allowed as a deduction. Interest on loan taken to fund the education is also allowed as a deduction. While interest and fee can simultaneously be claimed as tax deductions, no deduction would be allowed for repayment of loans.
C. Scheme to promote housing Repayment of loan taken to purchase a residential house is fully considered as a deduction. Interest on the loan would separately be allowed in computing the income from house property. Considered received on transfer of any long term capital asset, when reinvested in a house is also eligible for tax deduction, subject to certain conditions and limits. In certain other cases, rent paid by an individual is also available as a deduction.
D. Scheme to promote charity Contributions made to charitable institutions, scientific research institutions and institutions working towards rural development are also eligible for tax deduction. The deduction is however subject to the institution being approved for their respective purposes by the Central Government. While the contributions are fully allowed as a deduction in some cases, in other cases, certain proportion of the donation is alone allowed as deduction. No deduction would however be available for donations made in kind.
E. Scheme to promote healthcare Expenses incurred towards medical expenses for senior citizens or persons with disability, or preventive health check-ups, or for effecting medical insurance, are allowed as deduction, under various provisions of the IT Act. The persons towards whom the expenses are to be incurred, the limits upto which deduction would be allowed, etc., are specifically provided for under each of the section. An life insurance policy with a terminal illness rider would not be regarded as a medical insurance policy. While money reimbursed under a medical insurance would not be treated as taxable income, money received under a terminal illness rider may be treated as income.
Which of the deductions to claim and which ones to give up in the wake of reduced tax rates, would depend upon taxable income of each person.
The author is Partner at Lakshmikumaran & Sridharan Attorneys.