Coming close to the end of the Financial year all of you might be thinking about How to save our Income Tax?
Deductions allowed under the income tax act help you reduce your taxable income. You can avail these deductions only if you have made tax-saving investments or incurred eligible expenses.
Equity Linked Savings Scheme
ELSS is also known as Equity Linked Saving Scheme. ELSS is a mutual fund invested in equity. It can be claimed as deductions under section 80C. However, there is a 3 year lock-in period. If the fund is held for 3 years without withdrawals, then it becomes applicable for a deduction. The interest income received on ELSS is tax-free.
Let us take an example, Mr. Manish has started investing in an ELSS fund, to avail of the tax benefit under section 80C. But in the 2nd year of investing in this fund, he withdrew the whole amount due to an emergency that occurred. Due to this withdrawal made by him, the fund will now be taxable and the benefit that he took under section 80C is now taxable too.
If he had to keep the fund for 3 years without any withdrawal made, then the income received after 3 years would be exempt from tax and he could also avail the benefit under section 80C.
House Rent Allowance
House Rent Allowance is otherwise known as HRA. It is an allowance given by the employer, to those employees who stay on rent. It forms a part of the salary break up. It has a three-step calculation, which we will see later. Many people still do not know how to claim HRA. You can also claim HRA by paying rent to your parents if you are staying with them.
Let us take an example:
Mr. Vishal is staying on rent and paying ₹15000 per month. His employer gives him an HRA of ₹14000 per month. His basic salary is ₹30000 per month. Find out how much HRA, he can claim.
He can claim the minimum of the 3 steps given below:
- HRA = (₹14000*12) = ₹1,68,000
- Actual rent paid – 10% of basic = (₹180000 – ₹36000) = ₹1,44,000
- 50% of Basic = ₹180,000
Therefore the amount that he can claim as exemption is ₹144000.
Tuition Fees or Child’s education fees
A person’s child’s school fees also qualify as a deduction under section 80C. To claim this deduction, the receipts of the school fees are required. You can claim this amount only for your child. Many people do not know about this tax-saving tool and that it comes under section 80C. The maximum limit under this section is ₹150000. So you can claim upto that amount under this section.
Let us take an example:
Ms. Shama, has 2 children, Aryan and Zoya. They are twins aged 12 years old. They go to one of the most expensive schools in their area. The school fees itself come upto ₹180000 annually. Ms Shama claims this amount under section 80C but only upto the maximum limit of ₹150000.
This deduction is allowed under section 80E. When you take an educational loan, the interest that you pay on this loan qualifies for deduction under this section. This is applicable only on education loans, taken for higher studies, this means that any course done after your Senior Secondary Examination or it’s equivalent, will only be considered. Vocational courses are also considered. Only an individual taxpayer can claim this amount, a HUF or any other taxpayer cannot claim the same. The loan can be taken in your spouse, child’s or any student that you are a legal guardian for.
Let us take an example: Mr. Anil, who has completed his graduation, wants to pursue his further education in the finance industry abroad which is ₹30 lakhs for 2 years, so he takes an education loan for the same. The interest rate for such loan is 9.5%. So the whole interest amount that he has to pay towards the loan is completely exempt from tax.
Principal Amount on Housing Loan
The repayment of the housing loan taken by an individual or a HUF can be claimed under section 80C. The maximum limit is ₹150000. This limit is the total of all the tax-saving tools that are available under section 80C (i.e. ULIP, NSC, 5-year Fixed Deposit, PPF, etc). The tax benefit of the home loan can be availed only once the construction of the house is complete. The registration and stamp duty fees can also be claimed under section 80C, even if a person has not taken a loan. If the assess transfers the house property, which he has claimed the tax deduction on, before the completion of 5 years from the end of the financial year in which he has obtained possession, then such deduction will not be allowed. All the deductions claimed earlier will now be taxable as income.
For example: If Mr. Akil has taken a home loan of ₹60,00,000 and is paying an annual EMI of ₹5,00,000. Out of this EMI, ₹200,000 comprises the principal amount and ₹300,000 is the interest amount. So Akil will get only ₹150000 as a deduction under section 80C since that’s the maximum limit.
Interest Income on Loan
The tax deduction on interest income on housing loan, is allowed under section 24. As per this section, the income from house property received will be deducted from the interest amount paid on the loan, if the loan was taken for the purpose of purchase, construction, repair, renewal, reconstruction of a residential house property.
If it is a self-occupied property, then the maximum deduction available is ₹2 lakhs. Whereas in the case of a let-out property, there is no maximum limit. The whole interest amount can be claimed as a deduction.
Let’s take the above example only: For example, Mr. Akil lives in a house on which he has taken a home loan of ₹6000000/-, and is paying an annual EMI of ₹500000/-. Out of this EMI, Rs. 200000/- comprises the principal amount and Rs. 300000/- is the interest amount. Then from that ₹300000/- of interest, he will get a maximum deduction of only ₹200000/-, since it’s self-occupied. If it had to be let out, then he would have got the whole of ₹300000/- as a deduction.
Interest Income on savings bank account
The interest that is received from the savings bank account qualifies for deduction under section 80TTA. This deduction has a maximum limit of ₹10000/- on the interest amount. If the interest amount is over and above ₹10000/-, then it will be taxable. This deduction is applicable to savings accounts in banks, cooperative banks and post offices. It is applicable to individual taxpayers and HUF only.
For example, Mr. Sunny opened a savings bank account with ₹100000/-, a few years ago and didn’t touch the money in this account. The balance as of today is ₹115000/-. So under section 80TTA, Sunny can claim ₹10000/- as a deduction, but ₹5000/- will be taxable.
Profit from selling shares
If an investor buys shares and holds them for more than a year and then sells it at a profit, it will be considered as a long-term capital gain. This capital gain is exempt from tax. There is no tax applicable in the case of long-term capital gains of shares, in India. However, tax is applicable in the case of short-term capital gains in shares. If the shares are sold at a profit, before the completion of 1 year, it will be considered as short-term capital gain and a flat rate of 15% will be charged as tax.
For example, Mr. Shivam bought 200 shares for ₹250 each and after the completion of one year, he sold it at ₹300. So the profit made is ₹10000/-. The whole amount of ₹10000 will be exempt. If he had to sell the shares before the completion of 1 year, he would have to pay a tax of ₹1500/-.
Leave Travel Allowance (LTA)
LTA can be claimed under section 10(5). This amount is tax-free, subject to certain conditions. It is compensation given by the employer to remunerate the employee due to the tax benefit attached to it. The exemption is applicable to leave taken anywhere in India and is limited to only the travel costs that actually occurred and not the whole cost of the trip. The family includes spouse and children (not more than 2), in the case of parents, brothers and sisters, they should be wholly or mainly dependent on the employee.
For example, if the employer provides ₹20000 as LTA, but the employee’s actual travel expenses come up to only ₹15000, then he can claim only ₹15000 as an exemption.
The deduction that is allowed for mediclaim comes under section 80D. The premium paid towards a mediclaim policy can be claimed as a deduction under this section. A person can take mediclaim policies in the spouse, children and dependent parent’s names and also claim a deduction. The maximum amount one can claim is ₹55000/-. A person can claim ₹25000/- maximum for self, and ₹25000/- for their parents and ₹30000/- in case their parents are senior citizens.
For example: If a person is paying a premium of ₹20000/- towards his mediclaim policy and ₹30000/- for his parents, who are not senior citizens, then the total amount that he can claim will be ₹45000/-, since his parents are not senior citizens, they are allowed only ₹25000/-. If they had to be senior citizens, then the whole of ₹50000/- could be claimed.
5 years Fixed Deposit with banks and post office
If a person has taken a fixed deposit for a term of years or more, then they qualify to claim deduction under section 80C. However, if the fixed deposit is taken for a term, less than 5 years, then they cannot avail the benefit under this section. The maximum amount available for deduction is Rs. 150000/-
Example: Ms. Khushboo, has taken a fixed deposit of ₹500000/- for a term of 10 years. So she is eligible to claim a deduction, under section 80C to the maximum of ₹150000/- only. If she had to take a 2-year deposit, then she wouldn’t be able to take the benefit under section 80C.
Public Provident Fund
Public Provident Fund also known as PPF. This is one more tax-saving tool that qualifies as a deduction under section 80C. This is one of the best tax-saving tools since the income earned is fully exempt from tax. The amount invested can be claimed as a deduction under section 80C. The maximum deduction that can be claimed under section 80C is ₹150000/- and an additional ₹50000/- under NSC.
Let’s take a situation: Mr. Wayne opens a PPF account on 1st April 2014, he contributes the maximum amount allowed in the PPF account which is ₹150000/-. So he can claim this whole amount under section 80C.
Hindu Undivided Family
HUF is one of the biggest tax-saving tools. Apart from salary income, any other income can be transferred to the HUF account, to avail of the tax benefits under section 80C. The tax slabs are the same for a HUF as that of an individual. It is very useful for married couples as well.
Let’s take an example in the case of a husband and wife: If either the husband or wife happens to be holding an ancestral property that accrues rental income, they can transfer this income to the HUF account and it will be taxed as the income of HUF. For example, a person earning a salary of ₹700,000/- p.a. and receiving ₹600,000/- p.a. as rental income from their ancestral house, and if he transfers the rental income amount to the HUF account, instead of adding it to his income, he will have to pay only ₹115,000 as tax. But if he clubs the rental income to his salary, he would have to pay ₹215,000/-.
Dividends on mutual funds
Any dividend received from any mutual fund is tax-free in the hands of the investor. However, the Dividend Distribution Tax is levied by the Indian Government on various companies on the dividend paid by them.
For example, Mr. Yogesh has invested ₹400000/- in an equity mutual fund and is receiving a dividend of ₹40000/-, then the whole amount of ₹40000/- will be exempted from tax in the hands of Yogesh.
Gifts received from blood relations are exempt from tax. However, if you receive gifts at the time of marriage from ANYONE, then too, it is fully exempt. Gifts received from anyone other than blood relations will be exempt up to ₹50000 but if the amount received, is over and above ₹50000 then the whole amount will be taxable.
Let’s take an example: If Mr. Sagar receives a gift of, ₹30000 from friend A and ₹20000 from friend B, then the whole amount of ₹50000 will be exempt from tax. Now suppose Mr. A gave ₹40000/-, then the whole of ₹60000 will be taxable in the hands of Sagar.
Life Insurance Premium
Any life insurance policy that you take and the premium that you pay for it will qualify as a deduction under section 80C. The maximum premium amount that a person can claim as deduction under section 80C is ₹150000/-. Life insurance includes all policies like ULIPs, term insurance, endowment policies, child plans, etc.
For example, Mr. Sanjay has taken a life insurance policy and is paying a premium of ₹100000/-, then he can claim the full amount as deduction under section 80C, But only up to ₹100000 and not more than that.
Donations made can be claimed as a deduction under section 80G. Here we have 2 types of donations. There are certain government trusts like Prime Minister Relief Fund, National Sports Fund, National Cultural Fund, Andhra Pradesh Chief Minister’s Cyclone Relief Fund, and few others, which provide 100% tax benefits if donated to these Trusts. Whereas other governments and private trusts provide only 50% tax benefits if donated to them.
For example: If Mr. A donated ₹200000 towards the Prime Minister Relief Fund, then the whole amount can be claimed as a deduction under section 80G. If he donated the same amount to the Jawaharlal Nehru Memorial Fund (doesn’t qualify under the 100% deduction Trusts), then he would be allowed only ₹100000/- as deduction, under this section.
National Saving Certificate
The amount invested in the NSC can be claimed as a deduction under section 80C. There is a lock-in for 5 years, which means that the person cannot withdraw the money for 5 years. There is no maximum limit that you can invest in this fund. However, the interest is taxable. A person can only claim ₹150000/- as the maximum deduction under section 80C.
Example: If Ms. Chitra invests ₹200000 p.a. in NSC, then she is eligible to the maximum benefit of only ₹150000. It doesn’t matter how much you invest, the maximum amount that anyone can claim under section 80C, combining all the avenues available under this section, should be ₹150000.
Deductions under section 80U for the handicapped
If a person is handicapped partially or fully, they can claim deductions under section 80U. If a person has a dependent, then he can claim the amount under section 80DD. If a person is suffering from any disability not less than 40%, he/she can claim an amount of ₹50,000 and if the person is suffering from permanent disability, then he/she can claim ₹1,00,000. Only a certificate of being handicapped, from a government hospital, is required as proof.
Example: Mr. Vishal is permanently handicapped and his bills come up to ₹150000, then he can claim only an amount of ₹1,00,000 as deduction under section 80G.
Interest Income on a NRI’s account.
An NRI has the option to open either of the 2 accounts, i.e. NRE (Non – Resident Rupee) and NRO (Non-Resident Ordinary Rupee). The income earned on or transferred to the NRE account is tax-free as this income is earned abroad. On the other hand, the NRO account is opened, if the NRI is earning any income in India, he can deposit it in the NRO account only and not in the NRE account.
Example: Ms. Melanie, is an NRI, she has an NRE as well as an NRO account. She has a flat in Mumbai and is receiving rent of ₹20,000 every month and is depositing it in the NRO account. This rent will be taxable in her hands. But the income she earns abroad is transferred to the NRE account, will be tax-free, as the income is not earned in India.
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Oh. So is it possible to do so? But why?
Your salary is made of many components like basic salary, allowances (taxable and exempt), perquisites etc. While calculating taxable salary, some of these components are taxed as per Income Tax Act, whereas some stand exempt under the law or partial for some of the cases, subject to conditions. We will give you some of those items or parts of the salary structure, which would help you take more salary to your home.
HRA (House Rent Allowance)
You may be happier to go for flat provided by your employer (if you are that lucky!), rather than stay in rented house and pay the rent. However, Income Tax Act has different treatments for the housing alternatives, in case you don’t own your house or you are staying in any other town (where you don’t own your house).
However, there are few points to be noted:
- If you stay in your own house, it is better to have lower HRA in your basic salary structure if it is possible.
- If the house is owned by your parents, grandparents etc., you can still pay them rent, and claim the HRA exemption.
- If it is possible to negotiate, then keep the HRA around at the similar level of rent paid, which will exempt the allowance fully.
Related Article :- Why Tax Planning Is So Important That It Can’t Be Missed
Car purchase or perk
You may be thinking of owning of car and if yes, this pointer is for you. There could be more than one scenarios.
- If your employer lends you loan for car purchase, it can be easily accepted as the EMIs are deducted from the taxable salary and such portion of salary is tax free. However, only hindrance could be that you don’t own the car till all the EMIs are paid off as in the case of external car purchase.
- If you are amongst those very few people, to whom the employer offers car as a perquisite, then you are the luckiest of luckiest. This is because, in such a case, perquisite in the nature of car, is taxed only for Rs.1800- Rs.2400 per month if you are using it for personal purposes as well. Only drawback here could be, that you don’t own the car, but on quitting the job, you can surely buy it at approval of company.
- There could be one more situation where the you own the motor car and expenses will be reimbursed, then also Rs.1800-Rs.2400 per month is taxable as perquisite, if you use it for both professional and personal purpose.
As a salaried individual of a private sector company, you could only rely on EPF as your retirement corpus. However, if you have education loan which has interest rate @ 11-13% then, you may rethink on that loan repayment.
EPF pays interest for almost around 8.5%, so it would be better to pay off the education loan rather than investing in EPF. This will result in 2 benefits.
- Tax benefit under section 80E for repayment of interest on education loan.
Law does not put upper threshold for interest repayment in an year. So, we can draw an inference that if we repay the whole loan in a year, we are able to claim total interest that we paid in the same year under section 80E.
- Prepayment of the education loan by routing EPF investment amount to the same, will result in elimination of almost 2-4% interest payable. Best even because, EMIs are post tax commitments. This makes prepayment of education loan land a double bonanza.
There are many other allowances and perquisites which are worth mentioning here.
- Education or Training
If the employer reimburses the course expenses or training expenses or if he himself provides such course or training, then in such a case, it is exempt perquisite. So, if you want to earn and learn, your employer can sponsor you and that too without any tax consequence.
- Sodexho or Other Meal Coupons
These are part of your salary but are given out before the month starts and you can spend them wherever they are accepted. You are not required to submit proof of spending them over, so rest assured you enjoy them without worrying about tax effect.
Not an allowance, but gratuity is a long term benefit and is payable only if you complete service of 5 years in the same company. Hence, it is better to get rid of this component and adjust it under some other head, if you don’t plan to stick around much in one company for long.
This is for vacation expenditure for 2 journeys in a block of 4 years. Make sure that your salary structure has this component and be sure that you maintain appropriate evidence for claiming the exemption of the same.
While we are striving hard to make money, income tax takes part of it, (for high tax brackets, at almost 30% of the salary). So, if allowed, it is wiser to structure the salary or apply your existing structure in such a way that it will result in minimum tax effect.
Income Tax Filing/Planning Seems Confusing? Minty Ko Puchha kya?