AS the time for annual tax planning draws near, salaried individuals need to look at various options to reap maximum gains. While most taxpayers look at financial products like Employees’ Provident Fund, Public Provident Fund, National Savings Certificates, etc., for exemptions under Section 80C of the Income Tax (I-T) Act, one must look at some other options to minimise the annual tax outgo.
The equated monthly instalment (EMI) paid for housing loan has two components—interest and principal—and both can help the taxpayer minimise the tax payout each year while creating a long-term asset. Under Section 24 of the I-T Act, up to R2 lakh can be deducted from the taxable income as interest repayment for a self-occupied house. Even the principal repaid each year is eligible for deduction under Section 80Cof the Act, which has an overall limit of R1.5 lakh. However, these deductions are not available if the house is still under construction or if the individual has not taken possession of the house.
One can claim an additional deduction of R50,000 on home loan interest. However, to be able to claim this deduction, there are certain conditions. The loan must be taken from April 1, 2016 to March 31, 2017, as on the date of sanction of the loan the taxpayer should not own any property, the loan must be taken from a financial institution, the value of the house must be less than R50 lakh and the loan must be for less than R35 lakh.
National Pension System (NPS)
It is an ideal investment tool for retirement planning where up to 50% of the contribution of non-government employees can be invested in equities (index funds) and the rest between corporate and government debt paper. Tax exemption is allowed for up to R50,000 in a year under Section 80CCD, which is over and above the benefit available on R1.5 lakh under Section 80C.
Taxpayers covered by NPS will not have to make additional investments to claim the new deduction. Other tax-saving investments and expenses, such as home loan principal repayment, children’s tuition fees, PPF, NSC, life insurance premium can be claimed under Section 80C while the mandatory contribution to NPS can be claimed under Section 80CCD (1b).
In this year’s Budget, the finance minister has also made withdrawals from NPS on maturity tax-free up to 40% of the total corpus accumulated. Since 40% of the maturity corpus is invested to buy annuity, in effect an investor has to pay tax on only 20% of the maturity proceeds now. Also, the amount received by the nominee, on the death of the subscriber at the time of closure of the account, is exempt from tax.
Under Section 80D, medical insurance premium of up to R25,000 paid for self, spouse and children will qualify for deduction. Health insurance premium and medical expenditure incurred for parents would get tax exemption of up to R30,000 a year. Also, money spent on the medical treatment or rehabilitation of handicapped dependent children can be claimed as tax deduction up to R75,000 under Section 80DD of the I-T Act.