Expenses that can lower your taxes
There are many options, like Employees’ Provident Fund, Public Provident Fund, equity-linked savings scheme, life insurance, National Pension System and five-year fixed deposits, that not only help you use the section 80C tax benefits, but are also sound investments.Updated: Feb 01, 2014, 02:33 IST
Merely saving on taxes should not be your sole purpose behind buying a financial product. There are many options that not only help you use the section 80C tax benefits, but are also sound investments and insurance choices that fit in with your overall financial plan. Some such products are Employees’ Provident Fund, Public Provident Fund, equity-linked savings scheme, life insurance, National Pension System and five-year fixed deposits.
Apart from these, there are other ways to reduce your tax outgo in one assessment year; these can be also referred to as non-investment options. These are basically expenses that you incur for your personal needs. Here are five such products: Children’s tuition fee
Under the umbrella limit of Rs1 lakh of section 80C, you can claim deduction for the tuition fee that you pay for two children. The benefit is only for full-time courses and on fees paid to a recognised university, college, school or other educational institution in India. Tuition fees paid for pre-nursery, play school and nursery is also included.
The other advantage of this is that since the Income-tax Act doesn’t state that both husband and wife together have to claim this benefit, if you have a large family, you can claim deduction for two of your children, and your spouse can claim deduction for the third or fourth child, or both.
You must, however, remember that deduction is not available for fees paid for private tuition, coaching classes. Also, there is no rebate on other charges paid to schools or colleges, such as for development, transport, hostel, mess, library, and others.
The first home is generally not considered an investment but a necessity. While the equated monthly instalments (EMIs) of the home loan feel like a burden, especially when the interest rates go up, one redeeming fact is that the principal component of a home loan repayment is tax deductible up to Rs1 lakh.
"Home loan is a significant tax-saving product both in the form of principal and investment payment. The home loan principal repayment is covered under section 80C along with the other investments, while interest repayment comes under section 24(b)," says Anil Rego, chartered accountant and CEO, Right Horizons, an investment advisory and wealth management firm. But you can claim this tax benefit only if you have possession of the house. Also, if you sell the property within five years of getting possession, the amount that you had claimed as deduction over the years will be taxed in the year the house is sold. Health insurance
You can claim deduction of up to Rs15,000 under section 80D on the premium that you pay for your health insurance policy. A senior citizen can claim Rs20,000. If you pay the premium for your parents, you can additionally claim upto Rs15,000. And if your parents are senior citizens, the amount goes up to Rs20,000. There’s more.
Says Rakesh Nangia, managing partner, Nangia and Co: "Expenses incurred up to Rs5,000 on preventive health checks are deductible within this limit." So, if you took a blood test as part of a preventive health check-up, you can claim deduction. However, this Rs5,000 is a part of the overall Rs15,000 deduction that you are entitled to under section 80D.
You must also remember that this benefit is available only if you pay for the health insurance premium for yourself, spouse, parents or dependant children. If you pay the premium for, say, siblings, you can’t claim the deduction.
Higher education loan
This is another useful non-investment expense in terms of tax saving. If you are paying your higher education loan, you can claim deduction on the interest paid on it under section 80E. What’s good is that you can claim deduction for the entire interest paid for the first eight years or until the interest is fully paid, whichever comes earlier.
What this means is that if you are able to pay off the loan fully in, say, five years, you can claim deduction for five years and not eight. But if it is going to take you, say, 10 years to pay off the loan, you can avail the deduction benefit on the interest that you paid for the first eight years; no benefit for the remaining two years. The loan can be for yourself, spouse or children. But the loan has to be from a bank or financial institution or an approved charitable institution.
Says Suresh Sadagopan, a Mumbai-based financial planner: "Education is a costly affair. So, if you are getting a tax benefit, that too without any limit on interest paid, it is definitely a boon."
Many of us regularly donate money towards various causes. Encouragement comes in the way of tax benefit on donations by a salaried individual up to a limit under section 80G. For instance, you can get 100% or 50% deduction on the amount donated to certain entities. Under section 80GGA, you can get maximum deduction equivalent to the amount donated to entities involved in scientific research. Same goes for money given to political parties.
"To avail the benefit, you must ensure that the organization that you plan to donate to is registered and eligible for tax deductions."