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Non Investment considerations in Tax Planning

Tax Planning Strategies

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Tax Planning Strategies article in Advisorkhoj - Non Investment considerations in Tax Planning

In the previous two articles in the tax planning series, we had explored investment options allowed under Section 80C, as permissible deductions from taxable income to determine tax obligation for the taxpayer. In this article we will discuss some other important items eligible for 80C and other sections of Income Tax Act.

First let us review at a high level the key steps in calculating your tax obligation:

Calculating Your Tax

Expenditure items allowed under Section 80C

  1. Home Loan Principal Payment:

    You can claim a deduction of upto Rs 1 lakh on home loan principal payment. You can claim the benefit irrespective of whether you occupy the property or not. One should note that for calculation of principal payment, both principal payment under Equated Monthly Instalments (EMIs) and principal prepayment should be considered. Prepaying principal is always a good idea since it reduces your interest cost. Interest rate on home loan is almost always higher than interest earned on fixed income investments. Also by prepaying the principal, you will debt free in a shorter period of time. Hence principal prepayment should be a priority. There are several considerations for home loan principal payment to qualify under Section 80C. You should consult with your tax consultant or chartered accountant

  2. Tuition Fees for children (maximum two children

    You can claim a deduction of upto Rs 1 lakh towards the school, college and university tuition fees. Fees paid for private tuition or coaching classes are not eligible

Other allowable deductions

  • Interest Paid on Home Loan

    Under Section 24, upto Rs 1.5 lakhs per annum can be claimed as deduction from your taxable income, on account of interest paid on home loan, for a self occupied property. If the property is rented out, then there is no limit and the total interest paid can be claimed as deduction. However the rental income will be added to the gross taxable income (see #4 under gross taxable income in Table 1), for the purpose of tax calculations. To illustrate this with an example, let us assume Mr. Sharma and Mr. Verma have both bought identical apartments on loans. Annual interest on home loan, for both, is Rs 120,000. Mr Sharma occupies the apartment, while Mr Verma has rented it out at Rs 15,000 per month. Mr Sharma pays municipal taxes of Rs 15,000 per annum, while Mr Verma pays municipal taxes of Rs 40,000. Let us now examine the tax consequence for Mr. Sharma and Mr Verma.

    Interest Paid on Home Loan
    Please note that deduction for interest paid on home loan is over and above the deduction claimed for principal payment under 80C provisions.

  • Repayment of Loan taken for higher education:

    Interest paid on educational loan for higher studies qualifies as deduction under Section 80E of the Income Tax Act. The entire amount of interest paid in the year is eligible for deduction. There is no upper limit. However, there is no tax benefit for principal repayment. One should note that this benefit not only extends to the loan taken by the tax assessee, but also towards loans for higher education of spouse and children. Higher education is defined as means any course of study pursued after passing the Senior Secondary Examination or its equivalent from any school, board or university recognized by the Central Government or State Government or local authority or by any other authority authorized by the Central Government or State Government or local authority to do so. The deduction is available for a maximum of 8 years or till the interest is paid, whichever is earlier.

  • Premium paid for Medical Insurance:

    Medical insurance premium for self, spouse, dependent children and parents are eligible for deduction under Section 80D. The maximum allowable deduction is Rs 15,000 for self, spouse and dependent children. The applicable deduction for senior citizens is Rs 20,000. If an individual pays for medical insurance of parents who are senior citizens, then he or she can claim an “additional” maximum deduction of Rs 20,000. However, if the parents are not senior citizens, then a maximum of Rs 15,000 can be claimed as additional deduction. Therefore the total amount of the deduction the individual claim for medical insurance for self, spouse, dependent children and senior citizen parents is Rs 35,000.

  • Treatment and maintenance of handicapped dependents:

    Medical treatment, training and rehabilitation expenses for handicapped dependents are eligible for deduction under Section 80DD. The amount of deduction depends upon the severity of the disability. If severity is 40% (as specified under the Disability Act of 1955), then a flat Rs 50,000 deduction is applicable, irrespective of the expenses incurred. If the severity is 80%, then a flat Rs 100,000 deduction is applicable, irrespective of the expenses incurred.

  • Treatment of specified diseases:

    Medical treatments for specified serious diseases, like cancer, AIDS, Parkinson’s disease, chronic kidney failure etc, either for self or dependents are eligible for deduction under Section 80DDB. For clarification on specified diseases, you should refer to the relevant section (80DDB) of the Income Tax Act or consult your tax consultant. Actual expenses or Rs 40,000, whichever is lower, is eligible for deduction under this section. For senior citizens the upper limit is Rs 60,000.

  • Deduction for person with disability:

    Section 80U of the Income Tax Act provides deductions for taxpayers with specified disabilities, including blindness, hearing impairment, locomotive disability, mental retardation etc. For clarification on specified disabilities, you should refer to Disability Act of 1955 or the relevant section (80U) of the Income Tax Act or consult your tax consultant. The amount of deduction depends upon the severity of the disability. If severity is 40% (as specified under the Disability Act of 1955), then a flat Rs 50,000 deduction is applicable, irrespective of the expenses incurred. If the severity is 80%, then a flat Rs 100,000 deduction is applicable, irrespective of the expenses incurred.

  • Deduction for Charitable Donations:

    Section 80G of the Income Tax Act, allows 50% or 100% of donations, depending on the clauses specified in this section, for deduction from taxable income. For details you should refer to the relevant section of Income Tax Act or consult your tax consultant. Please note that donation made in kind is not eligible for deduction under Section 80G. In order to claim this deduction, the donor needs to furnish stamped receipt issued by the trust, mentioning the name of the donor, name and address of the trust, the amount donated (in figures and words) and the registration number of the trust

  • Rent paid in respect of the property occupied (for residential use):

    For a self employed or salaried individual, who does not receive House Rent Allowance (HRA) from the employer and is staying in a rented accommodation, deduction is allowed under Section 80GG of Income Tax Act. Maximum allowable deduction is the least of the following:-

    1. 25% of total income

    2. Rs 2,000 per month

    3. Rent paid in excess of 10% of total income

    However in order to avail of this benefit, (1) the tax assessee must pay the rent for the house he or she lives in, (2) he or she should not own or occupy any other residential accommodation and (3) his or her spouse or children should not own any residential accommodation in the city where the tax assessee resides

In conclusion, you should carefully evaluate if you are maximising tax savings allowed to you under the various sections specified in the Income Tax Act. Maximising tax savings puts more cash in our hands that we can use to invest in our future. However, we should be careful in interpreting the various provisions under the different sections of the Income Tax Act and in case of any confusion consult a chartered accountant or tax consultant

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Dwaipayan Bose

An alumnus of IIM Ahmedabad, Dwaipayan is a Finance and Consulting professional, with 13 years of management experience, mostly in MNCs like American Express and Ameriprise Financial, both in India and the US. In his last role, he was the Chief Financial Officer of American Express Global Business Services in India. His key interests are building best in class organizations, corporate governance and talent development

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