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Income Tax Deductions for 2014 You Should Not Ignore

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It’s that time of the year when you have to start submitting your investment proofs to your employer for tax deductions. Most of you may be planning your tax investments over the next couple of months, and we thought it would be a good idea to give a primer on some important sections of the Income Tax Act under which you can claim tax benefit.

Let’s start by discussing the “not-so-popular” sections of the Income Tax Act.

Sec 80D: Premium paid towards health insurance for yourself, spouse, dependent children and your parents is deductible from your taxable income. The limit is Rs. 20,000 in the case of senior citizens and Rs. 15,000 in all other cases. You can further claim Rs. 15,000 (Rs. 20,000 if parents are senior citizens) for buying health insurance policy for your parents.

Sec 80DD: Expenses incurred towards medical treatment of dependent parents, spouse, children and siblings suffering from a disability is eligible for deduction. The limit is Rs. 50,000 and this has been increased to Rs. 1 lakh for severe disability.

Sec 80DDB: Expenses incurred towards treatment of specified illnesses for self, spouse, children, siblings and dependent parents is eligible for tax deduction upto Rs. 60,000 for senior citizens and Rs. 40,000 for others.

Sec 80G: This is for Donations to recognized Charitable institution. Depending on the institution, you can get upto 50% to 100% of the donations made as tax deduction. You can claim deductions under Sec 80G, 80GGA and 80GGC.

Sec 80E: Interest on education loan taken by the borrower, parent or spouse from a recognized financial institution is fully tax deductible. The loan must be taken for a full-time course, which can either be a graduate course in engineering, medicine or management or post graduate course in engineering, medicine, management, applied sciences or pure sciences including mathematics and statistics.

Sec 24b: You can claim a deduction of upto Rs. 1.5 lakh a year on the interest payments on your home loan. In case of a let out or deemed to be let out property, interest paid is fully deductible. Further, if you buy a second home under another home loan, the entire interest paid on this can be claimed as a deduction.

Sec 80C: This is the most popular section under the Income Tax Act and used to the maximum by most assesses. The limit of investment under this section is Rs. 1 lakh per year, irrespective of your income and the tax bracket. Since there are no sub-limits under this section, you can choose your investments according to your wish. The following investments/payments fall under the ambit of Sec 80C:

1) Public Provident Fund
2) National Savings Certificate 
3) Equity Linked Savings Scheme
4) Bank fixed deposits above 5 years tenure
5) Infrastructure bonds (available over and above Rs. 1 lakh, upto Rs. 20,000)
6) NABARD Bonds
7) Unit Linked Insurance plans
8) Employee Provident Fund
9) Payment on Life Insurance policies
10) Full time education fees paid for up to 2 children’s education
11) Principal repayment on home loan

As you can see, there are several options for you to claim deduction under Sec 80C. One important consideration is the lock in period. Based on your Financial Priorities in the near future, you can choose Tax Saving Mutual Funds (Lock in period of 3 Years) to Public Provident Fund (Lock in period of up to 15 Years, based on opening date). While objective is to reduce tax liability, one should also not get stuck in a longer lock in period.

While many people plan their investments correctly to get the full benefit under this section, there are some people who under-invest, thus not obtaining tax deductions to the fullest. We have found this to be common among people below 35 years, who do not understand the importance of Tax Planning. It is highly recommended to invest up to the maximum limit of Rs. 1 lakh under Section 80 C to avoid payment of extra taxes, by choosing different options to diversify your investment portfolio.

There are many others who also over-invest under Sec 80C. You may be wondering how this could happen. More often than not, it is due to the principal repayment on home loan. The principal component of your EMI is eligible for tax deduction up to Rs. 1 lakh under Sec 80C. You may forget this component, and continue to make investments for tax purposes, only to realize later that you have invested way beyond Rs. 1 lakh.

The investments you make should not be with the sole intention of reducing tax outflow. It should be with a long term view of augmenting savings and retirement planning. It is thus recommended to avail the services of a Financial Planner who can help you in your investments and also tax planning.

 

 

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