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. and upto Rs. 20,000 under section 80CCF. 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 dependant, paying rent to parents, owning a house in another city, and so on. Here is a small list you could explore.
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 21 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 organisation stipulates. However, avoid claiming tax benefits on rent payments made to the spouse as the arrangement can be characterised 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 acharitable 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 recognised 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 organisations. 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 letout, 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.
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 dependant 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 organisation can seek tax relief and not the employee.
Have an ill dependant to look after? Pay lower taxes
The income tax department understands that chronic illness of a dependant 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 dependant is a senior citizen) per year, under Section 80DDB. Dependants 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 dependant on the taxpayer, and should not have filed for such a deduction separately.
In case any of your dependants 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).
Dependants 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 organisation.
With most companies closing investment declaration by December end, you still have more than Seven 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.