Taxpayers are normally aware of the common tax-saving deductions (such as 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.
Remember that from FY 2020-21, there are 2 tax regimes to opt for an individual. Either an Individual can continue with the old tax regime by availing of existing deductions and tax exemptions or can opt for the option to pay tax under the new, concessional tax regime which disallows most of the existing deductions and tax exemptions.
In both the income 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.
This is the most commonly used section where an individual can save tax by investing a maximum of Rs 1.5 lakh in a financial year in 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 the principal amount of home loan, children’s school fees, etc.
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, the 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 of the tax benefit under this section, do ensure that the employer’s contribution to your NPS account as well as EPF contribution does not exceed Rs 7.5 lakh in a financial year.
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, the premium paid for the health insurance of parents can offer an 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 premiums 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.
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.
If you are an individual with a 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 defendant 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 loans taken for self-occupied property. If you are paying interest on a home loan for an under-construction property, this benefit will be available after the possession of the house, provided it happens within five years. The interest paid during the construction period can be accumulated and claimed in five equal installments 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 an 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 benefits 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 an 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.