The month of March marks the end of the financial year and is the time when taxpayers needs to evaluate their tax liability taking into account eligible deductions, based on their income for that financial year (FY). Not availing certain eligible deductions can result in higher tax outflow.
It is to be noted that from FY 2020-21, a taxpayer can choose to pay tax under the new, concessional tax regime. In case the taxpayer opts for the new tax regime, he/she will have to forego most tax deductions and exemptions. In some cases, the taxpayer may want to opt for the existing tax regime but due to liquidity issues, especially considering the Covid-19 pandemic situation, may not be able to make further tax-saving investments. Such taxpayers need not get disheartened as certain expenditures are also eligible for tax deduction.
The deductions a tax payer is eligible for are to be claimed from gross total income thereby reducing the taxable income and consequently the tax payable.Here is a look at expenses/deductions which can be used to reduce tax payable under the old tax regime.
1. Leave Travel AllowanceSection 10(5) of the Income tax Act grants deduction towards the leave travel allowance (LTA) based on provision of proof of travel and related expenditure, which are subject to certain conditions. This deduction can be availed only for a maximum two journeys within India in a block of four calendar years (2018-2021).
However, in FY 2020-21 many taxpayers were not able to undertake actual journeys due to pandemic-related travel restrictions. Taking this into consideration, the government has launched the 'LTC Cash Voucher' scheme.Under the scheme, an employee can avail exemption for cash allowance received in lieu of LTC subject to certain conditions which are required to be fulfilled by the taxpayer.
Considering that that eligible category of goods and services is vast, the benefit of such scheme can be easily availed by salaried taxpayers. However, it is pertinent to note that employees who have already availed the LTC exemption twice for their current block 2018 -21, are not eligible to avail this scheme. Additionally, in the private sector, only those employees who have LTA as part of their salary structure can avail of the scheme if their company offers the scheme to them.
2. Deduction of interest incomeTaxpayers deriving interest income from savings account held in a bank or post office are eligible to claim deduction under section 80TTA of the Income-tax Act. The amount of deduction will be the lower of, interest derived or Rs 10,000. For resident senior citizens, this limit is Rs 50,000 under section 80TTB. Senior citizens can also avail the deduction under section 80TTB on interest income derived from fixed deposits, Senior Citizen Savings Scheme etc.
3. Children's tuition fees, education and hostel allowance and tuition feesAny allowance (up to specified limits) for education of children as well as hostel expenditure (generally referred to as Children Education Allowance & Hostel Allowance) granted to an employee by his/her employer is allowed as an exemption under section 10(14). The exemption for children's education allowance and hostel expenditure allowance is restricted to Rs 1,200 and Rs 3,600 annually, respectively, up to a maximum of two children.
Also, under section 80C, tuition fees paid to any recognized university, college, school or other educational institution situated in India, for the purpose of full-time education of any two children is eligible for deduction. Any individual taxpayer (salaried and non-salaried) can avail of this deduction, if tuition fee as described above is paid for his/her children. However, the amount allowable as tuition fees would not include payment in the nature of development fees or donation or capitation fees or payment of similar nature. Further, the deduction is not available if payment is made to a foreign educational institution.
It is also pertinent to note that children education allowance is different from tuition fees. Children's education allowance is available as a deduction only if it forms part of the salary component and the taxpayer has actually incurred expenses towards education of his children. The amount of allowances deductible is Rs 1,200 annually per child, up to two children. However, in case of tuition fees, it is allowable on the basis of actual expenditure incurred for education of children to an to an extent of Rs 1.5 lakh under section 80C, even though the same may not form part of the salary component of taxpayer.
4. Deduction of interest on education loan
Section 80E provides for deduction of interest paid on education loan availed from a financial institution or approved charitable institution. The deduction can be claimed from gross total income of the taxpayer thereby reducing the taxable income. The deduction is available for a period of 8 consecutive years beginning from the year in which the taxpayer starts paying the interest. The loan should have been taken for the purpose of higher education, i.e., any course after passing Senior Secondary Examination or its equivalent, in India or abroad. The education loan can be taken for the education of the taxpayer, spouse, children or student for whom the taxpayer is a legal guardian.
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