Tax Planning through savings and investments
Different Income-tax Sections For Tax Savings
Most people are generally aware of the income tax section 80C. However, that’s not all. Several other sections offer options to claim tax benefits.
Before we proceed, keep in mind that from FY 2020-21, an individual can file taxes under two regimes – old and new. Concessions through investment are available only for people using the old regime. In the new regime, deductions and tax exemptions are not allowed.
However, in both tax regimes, a rebate can be availed of if the net taxable income does not exceed ₹5 lakhs during a financial year. This basically means that there will be no tax if the net income is less than ₹5 lakhs.
Deductions allowed under income tax:
This is the most commonly used section where tax can be saved by investing or spending a maximum of ₹1.5 lakhs in a financial year through specified avenues. There are a host of available options to invest in under this section. Some of the most common ones are highlighted in the illustration below:
We have discussed many of them in the later sections of this module.
Section 80 CCD allows further tax deduction by investing in National Pension Scheme or Atal Pension Yojana. National Pension Scheme and Atal Pension Yojana have been discussed in detail in later sections of this module.
Section 80 CCD has 3 subsections that allow a total deduction of ₹200,000 for individuals:
1. Section 80 CCD (1)
As per the provisions of this section, subscribers can claim a deduction for their contributions to the National Pension Scheme. This provision applies to all individuals investing in the scheme including self-employed individuals, government, public and private sector employees. The provisions are also applicable to senior citizens. The maximum deduction allowed under this section is ₹150,000.
There is a limit for the maximum deduction - 10% of the salary in the case of a salaried individual and 20% in the case of a self-employed individual.
2. Section 80 CCD (1b)
This section provides an additional deduction of up to ₹ 50,000, in addition to ₹150,000 of section 80 CCD (1). This additional deduction is available to both salaried and self-employed individuals.
3. Section 80CCD (2)
This deduction is available on the employer’s contribution to an employee’s Tier – I NPS account. Employers can make contributions to the NPS account in addition to EPF and PPF contributions. The contribution made by the employer can be equal to or higher than the employee’s contribution. However, a maximum of 10% contribution of the basic salary plus dearness allowance (if applicable) is allowed under this section.
It is important to mention here that effective FY 2020-21, the employer’s contribution of more than ₹7.5 lakhs into retirement funds, EPF, NPS, superannuation funds will be taxable in the hands of the employee. The interest earned on such a contribution will also be taxed in the hands of the employee.
Section 80D allows a deduction for premium paid on a health insurance policy for self, spouse and dependent children. But the maximum cap under this section is ₹ 25,000 of premium paid. Additionally, one can avail another ₹ 25,000 for the premium paid for health insurance of parents. If your parents are senior citizens, then this maximum amount will go up to ₹ 50,000.
Therefore, if your parents are senior citizens, you can avail of a deduction on up to ₹75,000 of premium paid. If both the taxpayer and the parents are senior citizens, then this amount will go up to ₹100,000.
Please note that if your senior citizen parents are not covered under any health insurance policy, then the medical expenditure incurred on them is also deductible under section 80D. The maximum amount under such deduction is ₹50,000.
Section 80DD & Section 80DDB
In addition to Section 80D, Section 80DD and Section 80DDB sections also include medical expenses. However, to avail deduction under these sections, the expenditure has to be made for disabled and/or specified persons.
Section 80DD offers a deduction for medical expenses incurred for dependent disabled persons which may include spouse, children, parents and siblings. The amount of deduction depends on whether the dependent is disabled or severely disabled. It allows a maximum deduction of ₹75,000 if the dependent is 40% disabled. Disability of 80% or more, is considered a severe disability and a maximum deduction of ₹1.25 lakhs is allowed.
Section 80DDB allows a deduction for medical expenses incurred for treatment of specified illnesses such as cancer, chronic kidney disease, etc. It can be claimed on self or dependant. A maximum deduction of ₹40,000 is allowed for individuals below 60 years of age. For individuals above 60 years of age, the maximum deduction allowed is up to ₹1 lakh.
Below is a list of some of the diseases mentioned above. The entire list can be found in the income tax act.
- Malignant Cancer
- Chronic Renal failure
- Neurological diseases, with disability levels of 40% and more and covers Chorea, Motor Neuron Disease, Dementia, Ataxia, Aphasia, Parkinson's Disease Dystonia Musculorum Deformans, and Hemiballismus
- AIDS- Acquired Immuno-Deficiency Syndrome
- Hematological disorders like Hemophilia or Thalassaemia
To avail of the tax benefit, the assessee has to provide proof of the need for medical treatment and proof that treatment has been undertaken.
Individuals with a disability of 40% and above can claim tax benefits under this section. The maximum amount of deduction is the same as that under section 80DD.
Please note: You can claim deduction only under one of the schemes between 80U and 80DD. They cannot be claimed simultaneously. Under 80U, the deduction is claimed by the disabled individual, whereas under section 80DD, deductions are claimed for the dependent for whom the expenses are incurred.
We mentioned that under section 80C, one can avail deduction on home loan principal repayment.
Under section 24, one can avail benefit on the interest paid on a home loan during a financial year. The maximum amount that can be claimed is ₹2 lakhs.
This deduction is allowed only for a loan taken on a self-occupied property. In case you are paying a home loan for an under-construction property, this benefit is available after the possession of the house, provided it happens within 5 years. The interest paid during the construction period can be accumulated and claimed after the possession of the house in five equal installments.
Individuals who have bought a house under the affordable housing segment can claim an additional tax benefit on interest up to a maximum of ₹1.5 lakhs. This is over and above the deduction available under section 24 mentioned above. However, certain conditions have to be satisfied before claiming tax benefits under Section 80EEA.
Some of these conditions are:
- This scheme is only applicable for first time home buyers. The individual should not own any other property.
- The home loan should be taken by the individual from a financial institution or a housing company for buying a residential house property.
- The individual should not be eligible to claim tax deduction under Section 80EE.
- The stamp duty value of the purchased property should be ₹ 45 lakhs or less.
- The maximum amount of deduction permitted under this section is ₹ 1.5 lakhs in an assessment year.
Under this section, individuals contributing to any charity can claim tax benefits. This is applicable only for donations to specified government notified funds. Up to 100% of the donation amount can be deducted from your gross total income, thus reducing your total taxable income.
Section 80 TTA
We all earn interest on balances kept in savings accounts and post offices, right? This interest income has to be shown under the head “Income from other sources” while filing the income tax. However, up to ₹10,000 of income filed under this held can be claimed as a deduction from the gross total income under section 80TTA.
Please note: Senior citizens cannot claim deduction under this section. However, theyare eligible for deduction under section 80TTB.
Section 80 TTB
This section is meant for senior citizens (aged 60 years and above). They can claim a total maximum deduction of ₹ 50,000 from the gross total income. The deduction can be claimed on income earned from specified sources such as savings accounts, fixed deposits, senior citizen savings accounts and others.
Individuals paying interest on education loans can claim deduction under this section. There is no maximum limit on the amount that can be claimed. The interest is deducted from the gross total income of the individual in a financial year.
1. Section 80E is applicable only for individuals, and not for HUFs.
2. The benefit can be claimed for a maximum of 8 years from the starting date of the loan repayment.
Apart from these deductions, an individual is also eligible for exemptions under the Old Tax regime.
Please note that there is a slight difference between deductions and exemptions. A deduction is a subtraction, or an amount that can be used to reduce taxable income. Exemption means exclusion, which means that if certain income is exempt from tax, it does not contribute to a person's total income.
Here is a list of deductions & exemptions under the Old tax regime:
This brings us to the end of all the sections under which a person can claim tax benefits.