For most of the people ‘tax savings’ brings to mind life insurance, PPF, NSC, and equity-linked savings scheme, among others, that qualify for tax deduction under Section 80 C of the Income-Tax Act. An individual can claim tax deductions of up to Rs 1 lakh under 80C. However, there are other lesser known avenues that offer additional tax breaks to individuals. They are not widely discussed as they involve special situations in life such as having a special dependent, paying rent to parents, owning a house in another city, and so on. Here is a small list you could explore.
Do you live in your parents’ house? You can pay them rent to claim House Rent Allowance exemption. This is possible only if the property is registered in the name of your parent. The owner will be taxed for the rental income after a 30% deduction. So, if you pay your father a rent of Rs 3 lakh a year (Rs 25,000 a month), he will be taxed for only Rs 2.1 lakh. If your parents are retired and do not derive any significant taxable income, the amount of rent would be tax free in their hands. It is advisable that you enter into an agreement with them and actually make the payment every month, preferably by cheque.
It gets better if the property is jointly owned by both parents. Then you can divide the rent two-ways so that the tax liability gets split between the two parents. If their income exceeds the basic exemption limit, you can help them save tax by investing in their name under Section 80C options such as the Senior Citizens’ Saving Scheme, five-year bank fixed deposits or tax-saving equity mutual funds.
However, this tax-free window will become smaller next year after the proposed Direct Taxes Code (DTC) comes into effect. The DTC has proposed to bring down the 30% standard deduction on rental income to 20%. This would push up the tax liability of the senior citizens who receive rent from property. Also, many of the existing tax saving options will no longer be available under the DTC regime.
Take a look at the example to see the tax implications. Let us assume your monthly basic salary is Rs 40,000 and HRA is Rs 16,000. Your monthly rent is also Rs 16,000. In this case, of the total monthly HRA, Rs 12,000 will be tax exempt. Assuming you are in the 20% tax bracket, your annual tax saving would be Rs 29,664.
Please note that you will have to submit copies of rent receipts or rent agreement, depending on what your organization stipulates. However, avoid claiming tax benefits on rent payments made to the spouse as the arrangement can be characterized as a sham transaction, say experts.
Let us assume your monthly basic salary is Rs 40,000 and HRA is Rs 16,000. Your monthly rent is Rs 16,000 and annual interest payment on your housing loan is Rs 1.45 lakh. In this case, of the total monthly HRA, Rs 12,000 will be tax exempt in your hands. Further, you can claim deduction under section 24(b) of the Income-Tax Act, 1961, on the interest payable on your housing loan.
For claiming HRA exemption, you need to submit copy of the lease agreement or rent receipts. For claiming deduction on housing loan interest, you need to submit a copy of the tax certificate issued by the housing finance company.
Please note Capital Gain on Sale of Shares sold through Stock Exchange can not be set off against other capital gain as profit from sale of shares of listed companies through stock exchange in exempt.
It is important to note that short term losses can be balanced off against both short term as well as long term capital gains. However, long term capital losses can only be balanced off against long term capital gains.
Charitable contributions are deductible up to 10% of your income under Section 80G. Depending upon the institution to which the donation is being made, the deduction can be either 100% or 50% of the amount donated. You must Ensure that you obtain a receipt from the institution and a copy of their income-tax exemption certificate. Instead of giving the money directly to the needy and not getting any deduction, you can make a charitable contribution to an NGO that provides assistance to the needy. The individual is then able to get a tax deduction while still contributing to a noble cause.
The principal repayment of the home loan qualifies for deduction under section 80C; the interest payable on the home loan is allowed as deduction under section 24 of the Act. The deduction in respect of the interest is available in full for properties that are treated as let out, but in case of a property treated as self-occupied, the amount cannot exceed Rs 1.5 lakh per financial year, subject to certain conditions.
However, you cannot claim interest deduction when the flat is under construction. The interest paid during the pre-construction period can be claimed as deduction in five equal installments starting from the financial year in which the construction is completed. Where the property is jointly owned, with the share of each owner being definite, the net taxable annual value of the property is apportioned to each of the joint owners in the ratio of their share in the property. And, as the shares are definite, each holder is eligible to claim a separate deduction in case the property is jointly owned.
The educational loan can be taken for any course pursued by the individual or the spouse or children of the individual post the senior secondary course or its equivalent. This deduction is also available for supporting the education of a relative provided the individual is his/her legal guardian. It is allowed for a maximum of eight years starting from the year in which the interest is first repaid.
Have an ill dependent to look after? Pay lower taxes
The income tax department understands that chronic illness of a dependent can empty your life savings, and paying full taxes in such cases is burdensome for any taxpayer. Hence, it allows a deduction of Rs 40,000 (Rs 60,000 if the dependent is a senior citizen) per year, under Section 80DDB. Dependents include siblings, children, parents and spouses.
This deduction is available for specific diseases, which include many neurological diseases like dystonia musculorum deformans, aphasia and Parkinson’s disease, hemiballismus, ataxia, motor neuron disease, chorea, haematological disorders, chronic kidney failure, and a few more.
In order to claim this deduction, it is important that the patient should be dependent on the taxpayer, and should not have filed for such a deduction separately.
Deduction for medical expenses incurred on disability of Special dependents - section 80DD
In case any of your dependents suffer from a physical or mental disability, you can claim a deduction under section 80DD for an amount of Rs 50,000 (if the disability is less than 80%) or Rs 1 lakh (if the disability is 80% or more).
Dependents for this purpose can include spouse, children, parents, brothers and sisters, or any of them. To be eligible to claim the deduction, you must obtain a certificate in Form 10IA from a doctor with the prescribed qualification and working in a government hospital.
You will have to submit the copy of the certificate in Form 10IA to the payroll department of your organization.
Scope of Deduction – Deduction can be claimed for dependent parents, spouse, children and siblings. Dependents must not have claimed any deduction for their disability.
Deductions are permissible in either of the following cases.
a) Costs incurred for medical treatment, training or rehabilitation of a disabled dependent, including amount spent for nursing.
b) Amount paid towards an insurance scheme for the maintenance of your disabled dependent in case of your untimely death.
Meaning of Disability- Disability means a person suffering from 40% or more of any of the below disabilities. A severe disability condition is 80% or more of the disabilities.
a) Blindness and Vision problems
b) Leprosy-cured
c) Hearing impairment
d) Locomotor disability
e) Mental retardation or illness
Please Note -
a) Individuals would need to produce a copy of the disability certificate as issued by the central or state government medical board to claim deduction.
b) Insurance policy obtained must be in your name and should be a policy for life. It could pay either an annuity or a lump sum amount for the benefit of the dependent on your death.
c) If the disabled dependent predeceases you, the policy amount is returned to you, and treated as income for the year in which you receive it, thus fully taxable in your hands.
Medical expenses for specified diseases like AIDS, Cancer (Section 80 DDB )
The actual expenditure incurred on treatment of specified disease such as AIDS, cancer, neurological diseases, etc., is deductable to the extent of 40,000 or the actual expense whichever is lower. The limit is increased to 60,000 in case of expense incurred for a senior citizen.
Scope of Deduction – Deduction is applicable for treatment of self, spouse, children, siblings, and parents, wholly dependent on you.
Diseases covered
a) Neurological Diseases (where the disability level has been certified as 40% or more).
b) Parkinson’s Disease
c) Malignant Cancers
d) Acquired Immune Deficiency Syndrome (AIDS)
e) Chronic Renal failure
f) Hemophilia
g) Thalassaemia
Point to Note-
1. If you are already receiving any reimbursement for the treatment from your insurance company or employer, deductions cannot be claimed. If you are receiving partial reimbursement, the balance amount can be used for a deduction.
2. A certificate would be required from a specialist working in a government hospital, as proof for the specified ailment.
Deduction for rent paid if you are not availing HRA
You can claim a deduction for rent paid to the extent of 2,000 per month even if you don’t receive HRA from your employer or you are self-employed. This deduction, available under Section 80GG, is subject to some conditions.
To Claim the deduction Neither the taxpayer nor the spouse should own a house at the place of employment. They cannot be self employed, which includes businessmen or professionals. Lastly, the tax payer should not self-occupy his/her house at any other place.
With most companies closing investment declaration by December end, you still have more than five month to widen your tax relief. Think, execute and file your investment declaration and seek optimal tax benefits. These deductions, along with the common ones like medical benefits, HRA, home loan EMIs, etc. can help you save a considerable amount of tax every year.
(Article was Last Published on 05.05.2012 and republished today with adding some new tips and by updating existing tips on 04.07.2012)
Paying rent to your parents
Do you live in your parents’ house? You can pay them rent to claim House Rent Allowance exemption. This is possible only if the property is registered in the name of your parent. The owner will be taxed for the rental income after a 30% deduction. So, if you pay your father a rent of Rs 3 lakh a year (Rs 25,000 a month), he will be taxed for only Rs 2.1 lakh. If your parents are retired and do not derive any significant taxable income, the amount of rent would be tax free in their hands. It is advisable that you enter into an agreement with them and actually make the payment every month, preferably by cheque.
It gets better if the property is jointly owned by both parents. Then you can divide the rent two-ways so that the tax liability gets split between the two parents. If their income exceeds the basic exemption limit, you can help them save tax by investing in their name under Section 80C options such as the Senior Citizens’ Saving Scheme, five-year bank fixed deposits or tax-saving equity mutual funds.
However, this tax-free window will become smaller next year after the proposed Direct Taxes Code (DTC) comes into effect. The DTC has proposed to bring down the 30% standard deduction on rental income to 20%. This would push up the tax liability of the senior citizens who receive rent from property. Also, many of the existing tax saving options will no longer be available under the DTC regime.
Take a look at the example to see the tax implications. Let us assume your monthly basic salary is Rs 40,000 and HRA is Rs 16,000. Your monthly rent is also Rs 16,000. In this case, of the total monthly HRA, Rs 12,000 will be tax exempt. Assuming you are in the 20% tax bracket, your annual tax saving would be Rs 29,664.
Please note that you will have to submit copies of rent receipts or rent agreement, depending on what your organization stipulates. However, avoid claiming tax benefits on rent payments made to the spouse as the arrangement can be characterized as a sham transaction, say experts.
Renting and Home loan in two different locations
Individuals today are constantly on the move for better job prospects. This could result in a person living in a rented place in the city he is working while repaying the loan for a home bought in his native city or any other city. In such a scenario, the rent that an individual pays is eligible for HRA exemption. Further, a deduction can be claimed on the interest paid for the housing loan used to purchase the property at the native place/any other city.Let us assume your monthly basic salary is Rs 40,000 and HRA is Rs 16,000. Your monthly rent is Rs 16,000 and annual interest payment on your housing loan is Rs 1.45 lakh. In this case, of the total monthly HRA, Rs 12,000 will be tax exempt in your hands. Further, you can claim deduction under section 24(b) of the Income-Tax Act, 1961, on the interest payable on your housing loan.
For claiming HRA exemption, you need to submit copy of the lease agreement or rent receipts. For claiming deduction on housing loan interest, you need to submit a copy of the tax certificate issued by the housing finance company.
Set off of Capital Loss Against Capital Gain
While most of us know that we need to pay taxes on short term or long term capital gains, not many are aware of the fact that capital losses, if any, can be balanced off against gains. So, for instance, if you have made a long-term capital gain of Rs 15 lakh by selling off your property and long-term capital loss of Rs 3 lakh by selling stocks which are either not listed or are sold off market , the total taxable amount would Rs 12 lakh.Please note Capital Gain on Sale of Shares sold through Stock Exchange can not be set off against other capital gain as profit from sale of shares of listed companies through stock exchange in exempt.
It is important to note that short term losses can be balanced off against both short term as well as long term capital gains. However, long term capital losses can only be balanced off against long term capital gains.
Charity to noble causes count
Charitable contributions are deductible up to 10% of your income under Section 80G. Depending upon the institution to which the donation is being made, the deduction can be either 100% or 50% of the amount donated. You must Ensure that you obtain a receipt from the institution and a copy of their income-tax exemption certificate. Instead of giving the money directly to the needy and not getting any deduction, you can make a charitable contribution to an NGO that provides assistance to the needy. The individual is then able to get a tax deduction while still contributing to a noble cause.
Contributions to a political party
If you have contributed any amount to a recognized political party, you are eligible to claim a tax deduction ranging from 50 percent to 100 percent of the amount under Section 80GGC for individuals and Section GGB for corporate organizations. One can contribute up to 10 percent of one’s gross total income to a political party.Home loan and joint home loan
The principal repayment of the home loan qualifies for deduction under section 80C; the interest payable on the home loan is allowed as deduction under section 24 of the Act. The deduction in respect of the interest is available in full for properties that are treated as let out, but in case of a property treated as self-occupied, the amount cannot exceed Rs 1.5 lakh per financial year, subject to certain conditions.
However, you cannot claim interest deduction when the flat is under construction. The interest paid during the pre-construction period can be claimed as deduction in five equal installments starting from the financial year in which the construction is completed. Where the property is jointly owned, with the share of each owner being definite, the net taxable annual value of the property is apportioned to each of the joint owners in the ratio of their share in the property. And, as the shares are definite, each holder is eligible to claim a separate deduction in case the property is jointly owned.
Educational expenses of Children
It is well-known that the deduction under section 80C is available to an individual in respect of the tuition fees of his/her children with an overall limit of Rs 1 lakh. The deduction, however, is not available for capitation fees/donation collected by the school or college. There is another section in the Act (section 80E) which provides for deduction in respect of interest on loan taken for higher education.The educational loan can be taken for any course pursued by the individual or the spouse or children of the individual post the senior secondary course or its equivalent. This deduction is also available for supporting the education of a relative provided the individual is his/her legal guardian. It is allowed for a maximum of eight years starting from the year in which the interest is first repaid.
Health Insurance
A deduction of up to Rs 15,000 can be claimed in respect of the health insurance premium which one pays for covering oneself and or the wife and dependent children. You can claim an exemption of Rs 15,000 on premium payments made for parents and a higher deduction of up to Rs 20,000 if one of your parents is a senior citizen. However, in case of company insurance, only the organization can seek tax relief and not the employee.Have an ill dependent to look after? Pay lower taxes
The income tax department understands that chronic illness of a dependent can empty your life savings, and paying full taxes in such cases is burdensome for any taxpayer. Hence, it allows a deduction of Rs 40,000 (Rs 60,000 if the dependent is a senior citizen) per year, under Section 80DDB. Dependents include siblings, children, parents and spouses.
This deduction is available for specific diseases, which include many neurological diseases like dystonia musculorum deformans, aphasia and Parkinson’s disease, hemiballismus, ataxia, motor neuron disease, chorea, haematological disorders, chronic kidney failure, and a few more.
In order to claim this deduction, it is important that the patient should be dependent on the taxpayer, and should not have filed for such a deduction separately.
Deduction for medical expenses incurred on disability of Special dependents - section 80DD
In case any of your dependents suffer from a physical or mental disability, you can claim a deduction under section 80DD for an amount of Rs 50,000 (if the disability is less than 80%) or Rs 1 lakh (if the disability is 80% or more).
Dependents for this purpose can include spouse, children, parents, brothers and sisters, or any of them. To be eligible to claim the deduction, you must obtain a certificate in Form 10IA from a doctor with the prescribed qualification and working in a government hospital.
You will have to submit the copy of the certificate in Form 10IA to the payroll department of your organization.
Scope of Deduction – Deduction can be claimed for dependent parents, spouse, children and siblings. Dependents must not have claimed any deduction for their disability.
Deductions are permissible in either of the following cases.
a) Costs incurred for medical treatment, training or rehabilitation of a disabled dependent, including amount spent for nursing.
b) Amount paid towards an insurance scheme for the maintenance of your disabled dependent in case of your untimely death.
Meaning of Disability- Disability means a person suffering from 40% or more of any of the below disabilities. A severe disability condition is 80% or more of the disabilities.
a) Blindness and Vision problems
b) Leprosy-cured
c) Hearing impairment
d) Locomotor disability
e) Mental retardation or illness
Please Note -
a) Individuals would need to produce a copy of the disability certificate as issued by the central or state government medical board to claim deduction.
b) Insurance policy obtained must be in your name and should be a policy for life. It could pay either an annuity or a lump sum amount for the benefit of the dependent on your death.
c) If the disabled dependent predeceases you, the policy amount is returned to you, and treated as income for the year in which you receive it, thus fully taxable in your hands.
Medical expenses for specified diseases like AIDS, Cancer (Section 80 DDB )
The actual expenditure incurred on treatment of specified disease such as AIDS, cancer, neurological diseases, etc., is deductable to the extent of 40,000 or the actual expense whichever is lower. The limit is increased to 60,000 in case of expense incurred for a senior citizen.
Scope of Deduction – Deduction is applicable for treatment of self, spouse, children, siblings, and parents, wholly dependent on you.
Diseases covered
a) Neurological Diseases (where the disability level has been certified as 40% or more).
b) Parkinson’s Disease
c) Malignant Cancers
d) Acquired Immune Deficiency Syndrome (AIDS)
e) Chronic Renal failure
f) Hemophilia
g) Thalassaemia
Point to Note-
1. If you are already receiving any reimbursement for the treatment from your insurance company or employer, deductions cannot be claimed. If you are receiving partial reimbursement, the balance amount can be used for a deduction.
2. A certificate would be required from a specialist working in a government hospital, as proof for the specified ailment.
Deduction for rent paid if you are not availing HRA
You can claim a deduction for rent paid to the extent of 2,000 per month even if you don’t receive HRA from your employer or you are self-employed. This deduction, available under Section 80GG, is subject to some conditions.
To Claim the deduction Neither the taxpayer nor the spouse should own a house at the place of employment. They cannot be self employed, which includes businessmen or professionals. Lastly, the tax payer should not self-occupy his/her house at any other place.
Amount paid under National Pension System
“The contributions made by an employee to the NPS qualify for a deduction under 80CCD and the upper limit of 1,00,000 under Section 80C of the Act. However, effective April 2011, employer contributions to NPS up to 10% of the employee’s salary would qualify for an additional deduction.Foreign taxes
Many individuals take up overseas assignments and as a result earn income both in India and abroad. In the event they face taxation in both countries, they may avail credit of taxes paid overseas while filing their tax returns in India. The Indian tax laws as well as tax treaties signed by India with other countries prescribe provisions for claiming credit of foreign taxes.Repairs and maintenance of house property
You will never forget to claim deduction of interest on repayment of your home loan, but not many people know that any interest paid on home loan for reconstruction or repair of the “house property” qualifies for deduction of up to 30,000, subject to the overall limit of 1,50,000.Exemption from capital gains
If you have made any capital gains on the sale of residential house property, such capital gains shall be exempt from tax, provided you purchase a new residential house one year before or within two years after the date of transfer; or you incur expenditure on construction of house property within three years from the date of transfer. Alternatively, to avail exemption, a tax payer may also invest the gains in REC / NHAI bonds, subject to specified conditions.With most companies closing investment declaration by December end, you still have more than five month to widen your tax relief. Think, execute and file your investment declaration and seek optimal tax benefits. These deductions, along with the common ones like medical benefits, HRA, home loan EMIs, etc. can help you save a considerable amount of tax every year.
(Article was Last Published on 05.05.2012 and republished today with adding some new tips and by updating existing tips on 04.07.2012)
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