The Financial Year 2021 is about to end. Today, we are standing on the 10th of March 2021, and this is the time to think about tax liability and tax planning.
As we all know that if we fail to avail of certain eligible deductions it will result in higher tax liabilities.
Also note that from FY 2020-21, a taxpayer has 2 options to choose from for income tax. One is the old tax regime and the second one is the new tax regime. A new tax regime is beneficial to all those who have not made any investment during the year.
If the taxpayer who has the investments, opts for the new tax regime, he/she will have to forego most of the tax deductions and exemptions.
In some cases, the taxpayer may want to opt for the existing tax regime but due to cash 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 a tax deduction.
The deductions a taxpayer 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 the deductions which can be used to reduce tax payable under the old tax regime.
Leave Travel Allowance – LTA
Section 10(5) of the Income-tax Act grants deduction towards the leave travel allowance (LTA) based on the provision of proof of travel and related expenditure, which are subject to certain conditions. This deduction can be availed only for a maximum of 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 a 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 of 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.
Deduction of interest income
Taxpayers deriving interest income from a 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 of the deduction under section 80TTB on interest income derived from fixed deposits, Senior Citizen Saving, etc.
Children’s tuition fees, education, and hostel allowance and tuition fees
Any allowance (up to specified limits) for the 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 are eligible for deduction. Any individual taxpayer (salaried and non-salaried) can avail of this deduction if the 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’s 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 the education of his children.
The amount of allowances deductible is Rs 1,200 annually per child, up to two children. However, in the case of tuition fees, it is allowable on the basis of actual expenditure incurred for the education of children to an extent of Rs 1.5 lakh under section 80C, even though the same may not form part of the salary component of the taxpayer.
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 the 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 the 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.
Deduction in respect of medical insurance, expenses, and preventive health checkup
Section 80D provides for deduction in respect of medical insurance premium paid, preventive health check-up expenses, and other medical expenditures subject to conditions. Deduction up to Rs 25,000 can be claimed for medical insurance premium paid for self, spouse, or dependent children.
An additional deduction of up to Rs 25,000 can be claimed for the medical insurance premium paid for the parents below 60 years of age.
Further, in cases where the insured is a senior citizen, the above deduction limit is Rs 50,000. For a senior citizen, who does not have medical insurance, medical expenses can be claimed as a deduction under this section subject to an overall limit of Rs 50,000.
The section also allows for deduction towards preventive health check-up expenditure up to Rs 5,000. This expense is included in the overall limit, as applicable. The above expenses have to be incurred by any mode other than cash.
However, preventive health check-up expenses can be incurred in cash. The deduction shall be available to Senior Citizens even if the medical expenditure is incurred by them in cash.
Deduction in respect of interest on loan taken for residential house property
If a residential property is bought by taking a home loan, an individual can claim two types of tax breaks – deduction for repayment of principal of home loan under section 80C and deduction for interest payment made on the home loan u/s 24. The latter deduction would be restricted to a maximum of Rs 2 lakh annually in case of a self-occupied property.
Further, if one has bought a house in the affordable segment, they get a deduction of Rs 1.5 lakh in a financial year under section 80EEA. This deduction is available over and above the Rs 2 lakh deduction available on the interest payment on the housing loan.
It is available on the home loan taken between April 1, 2019, and March 31, 2021, for the acquisition of a residential house whose stamp duty value does not exceed Rs 45 lakh.
Thus, the total deduction available to an individual taxpayer on the interest payment of a housing loan for buying an affordable house is Rs 3.5 lakh in a financial year.
Deduction under section 80CCD(2): Employer’s contribution to NPS
Under Section 80CCD(2), an employee can get a deduction in respect of the employer’s contribution towards the employee’s National Pension Scheme (NPS) account.
Such deduction will be limited to a maximum of 14% of basic salary plus DA in case of a Central Government employee, and 10% of basic salary in case of any other employee, subject to the combined upper limit of Rs. 7,50,000 which is applicable in respect of employer’s contribution in a year to NPS, superannuation fund, and recognized provident fund. Further, interest, dividend, etc. earned on the excess contribution will be taxable as well.
The deduction under Section 80CCD(2) is in addition to the deduction available under section 80C, where the overall limit is Rs 1.5 lakh and 80CCD(1B) which is Rs 50,000. Also, this deduction can also be availed by a person opting for the new, concessional tax regime.
House Rent Allowance or deduction for rent paid
The House Rent Allowance (HRA) is a common component of the salary structure. Employees who stay on rent can avail of the deduction of HRA based on the actual rent paid by them. With respect to HRA, Section 10(13A) provides for an exemption of least of the following amounts:
- 40 percent/50 percent (in case of metropolitan cities) of the salary amount;
- The actual amount received as HRA;
- Amount of rent exceeding 10 percent of the salary
The employee/taxpayer will have to provide the necessary rent receipts/agreements and other details to the employer in order to enable the employer to compute the exemption amount. Even if rent receipts are not submitted to the employer, the employee can claim the tax benefit at the time of filing ITR.
With respect to taxpayers not receiving HRA, section 80GG provides for deduction in respect of rent paid. It is pertinent to note that the benefit under this section is available subject to certain conditions.
The taxpayer claiming this deduction or his spouse or minor child should not own any residential house property at the place where he ordinarily resides for performing his duty or the taxpayer himself should not own any other house property which he is claiming as self-occupied for the purpose of calculating income from house property. Section 80GG provides for deduction of least of the following amounts:
- An amount of Rs 5,000 per month, i.e., Rs 60,000 p.a.;
- Actual rent paid in excess of 10 percent of total income;
- 25 percent of total income.
In the above computation, the total income shall include the total income arrived at after considering all deductions under Chapter VI A other than under this section. For claiming deduction under section 80GG, the taxpayer is required to file a declaration in Form 10BA.
Employees’ Provident Fund (EPF)
Employees’ contribution towards recognized provident fund, which is deducted from their salary on a monthly basis, shall be allowable as a deduction with an overall limit of Rs 1.5 lakh under section 80C.
Standard deduction on salary
A standard deduction of up to Rs 50,000 is available to all salaried employees. This deduction is considered by the employer while computing tax liability of each employee and deduction of TDS from salary.
The deduction is to be claimed in the ITR form at the time of filing ITR. While planning your taxes for FY 2020-21, one must consider standard deduction as well to compute the total tax liability if one is opting for the old tax regime.