A quick guide on how to save tax in a financial year
February, 23rd 2021
Tax payers are generally aware of the common tax-saving deductions (like section 80C of the Income-tax Act, 1961) that can be availed during a financial year. However, there are other deductions available under different sections of the Income-tax Act that can help an individual bring down their tax liability further.
Do keep in mind that from FY 2020-21, an individual can continue with the old tax regime by availing of existing deductions and tax exemptions. He/she also has the option to pay tax under the new, concessional tax regime which disallows most of the existing deductions and tax exemptions.
In both the tax regimes, a rebate is available if your net taxable income does not exceed Rs 5 lakh during a financial year. Effectively, this would mean that there will be no tax liability if your net taxable income does not exceed Rs 5 lakh.
Here is a quick look at how you can save tax by using various deductions allowed under the Income-tax Act.
It is the most commonly used section where an individual can save tax by investing or spending maximum of Rs 1.5 lakh in a financial year in/on specified avenues. Some of the commonly used investment/expenditure avenues under Section 80C are: Employees' Provident Fund (EPF), Public Provident Fund (PPF), Equity-linked savings scheme (ELSS) mutual funds, National Pension System (NPS), repayment of principal amount of home loan, children's school fees ..
Section 80CCD (1b)
You can further save tax by investing additional Rs 50,000 in NPS. Do keep in mind that this deduction is available over and above the tax benefit available under section 80C. Thus, you can save tax by investing up to Rs 2 lakh in a financial year -Rs 1.5 lakh under section 80C and Rs 50,000 under Section 80CCD(1b).
Section 80CCD (2)
This deduction is available on the employer's contribution to an employee's Tier-I NPS account. A maximum contribution of 10% of the basic salary plus dearness allowance (if applicable) is allowed under this section. Do keep in mind that effective from FY 2020-21, employer's contribution to retirement funds - EPF, superannuation funds, NPS - of more than Rs 7.5 lakh in a financial year will be taxable in the hands of the employee. Further, any interest earned on such contributions will also be taxable in the hands of the employee.
Thus, while availing the tax benefit under this section, do ensure that employer's contribution to your NPS account as well as EPF contribution does not exceed Rs 7.5 lakh in a financial year.
Also, do note that this is the only deduction available under both the old and new tax regime.
Premium paid for the health insurance policy of self, spouse and dependent children can be claimed as deduction under section 80D of the Income-tax act up to Rs 25,000. In addition to that, premium paid for the health insurance of parents can offer additional tax break up to Rs 25,000. If your parents are senior citizens (age 60 years and above), then this tax break would go up to a maximum of Rs 50,000. Therefore, health insurance premium paid for self (including spouse and dependent children) and senior citizen parents can help you save tax up to Rs 75,000 in a financial year. If both the taxpayer and parents' are senior citizens then, the maximum deduction of Rs 1 lakh can be claimed in a financial year.
If your senior citizen parents are not covered under any health insurance policy, then the medical expenditure incurred for them can be claimed as deduction under section 80D. The maximum amount that can be claimed as deduction under section 80D for medical bills in this manner is currently Rs 50,000.
Section 80DD and Section 80DDB
Apart from section 80D, there are two other sections that can help you save tax in case of medical expenses incurred for disabled and/or specified persons. Section 80DD offers a tax break on the medical expenses incurred for a dependent disabled person. Dependent here includes spouse, children, parents, brothers and sisters of the individual.
The deduction allowed depends on whether the dependent is disabled or severely disabled. If the dependent is at least 40% disabled, then the maximum deduction that can be claimed is Rs 75,000. On the other hand, if the disability is 80% or more, then it is considered as severe disability and the maximum deduction that can be claimed is Rs 1.25 lakh.
Section 80DDB offers a deduction for the medical expenses incurred for the treatment of specified illnesses such as cancers, chronic kidney diseases etc. This deduction can be claimed for the expenses incurred on self or the dependent. For individuals below 60 years of age, whether self or dependent, the maximum deduction allowed is Rs 40,000. For senior citizens aged 60 years and above, the maximum deduction that can be claimed is Rs 1 lakh. The list of diseases for which deduction can be claimed under this section is specified in the Income tax Act.
If you are an individual with disability of 40% and above, then you can claim a tax break under section 80U. However, deductions under sections 80U and 80DD cannot be claimed simultaneously. Deduction under section 80U is claimed by the disabled individual whereas deduction under section 80DD is claimed by the dependant who has incurred expenses for the treatment of the disabled individual. The deduction amount under Section 80U for disability and severe disability is the same as mentioned for section 80DD.
Apart from the tax benefit available on home loan principal repayment under section 80C, one can also claim tax benefit on a maximum of Rs 2 lakh on the interest paid on the loan during a financial year. This benefit is available only for loan taken for self-occupied property. If you are paying interest on home loan for an under-construction property, this benefit will be available after the possession of the house, provided it happens within fiveyears. The interest paid during the construction period can be accumulated and claimed in five equal instalments after getting possession of the house.
If you have taken a home loan to buy a house under the affordable housing segment during FY 2020-21, then you are eligible to claim additional tax break on interest paid up to a maximum of Rs 1.5 lakh. This deduction is available over and above section 24 (mentioned above) where you get a tax benefit of up to Rs 2 lakh. However, there are certain conditions that you must satisfy before claiming tax benefit under Section 80EEA.
Contributing to charity can also help you save tax. If you donate to specified government notified funds under section 80G you can claim up to 100% of the donation as a deduction from your gross total income thereby reducing your taxable income and consequently the tax payable.
Interest earned on balances in savings accounts held with banks or post offices is taxable under "Income from other sources". However, interest earned from these sources up to Rs 10,000 in a financial year can be claimed as a deduction from gross total income under section 80TTA. However, senior citizens cannot claim this deduction as they are eligible to claim deduction under section 80TTB.
Senior citizens (those aged 60 years and above) can claim a maximum deduction of Rs 50,000 from gross total income under this section. The deduction can be claimed on the interest earned from specified sources such as savings account, fixed deposits, senior citizen savings account etc.
Interest paid on education loan will also get you a tax break. Only individuals can claim this deduction. HUFs are not entitled to this deduction. There is no limit on the maximum amount that one can claim as a deduction from gross total income under this section in a financial year. However, the benefit is available for a maximum of 8 years from the start date of loan repayment.