It is important to plan tax-saving investments in advance in order to save on taxes and not end up depositing excess taxes during the tax year.
The end of a year is typically the time when individual taxpayers rush to take a deeper look at various investment avenues with the intent to optimise on their taxes. The India tax law provides a host of investment avenues to bring down the tax liability of taxpayers, subject to conditions.
Some of the investment avenues that may be considered from both tax perspective and at the same time yield reasonable returns or provide insurance coverage are: Unit linked insurance plans (ULIP); Equity linked saving schemes (ELSS); Term deposits/ Post office deposits; National Savings Certificates (NSC); contribution towards Provident Fund (PF); Public Provident Fund (PPF); and Sukanya Samriddhi Yojana (SSY); Life insurance premia (LIP); and annuity plans, among others.
Apart from the above investments, certain expenses such as tuition fees and principal loan repayment can also be covered for claiming deduction under Section 80C.
The aggregate deduction for the aforementioned investments and expenditure made available under Section 80C, 80CCC and 80CCD(1) of the Income Tax Act, 1961 (The Act) is limited to Rs 150,000.
In addition to the above, if cash flow permits, the individual taxpayer can invest an amount up to Rs 50,000 in the National Pension System (NPS) and claim deduction under Section 80CCD (1B) of the Act. The said deduction is available in addition to the aforementioned limit of Rs 150,000. Therefore, if an individual contributes towards NPS, the aggregate deduction available to the individual taxpayer is Rs 200,000.
Further an individual who is repaying a home loan can claim deduction for the interest portion, from his total income up to a maximum of Rs 2 lakh under Section 24 of the Act. The maximum deduction for interest paid on a self-occupied house property is Rs 2 lakh. For let-out property, there is no upper limit for claiming interest deduction. However, the overall loss that a taxpayer can claim under the head ‘House Property’ is restricted to Rs 2 lakh only.
In case of joint borrowers of loan, both borrowers can claim deduction for principal repayment up to Rs 150,000 and for interest payment of Rs 200,000 for a self-occupied house property, and in case of a let-out house, there is no limit for claiming the interest amount.
With increase in the cost of health and medical expenses, it is prudent to also invest in health insurance policies. Through this an individual taxpayer can claim a deduction of Rs 25,000 under Section 80D for insurance premium paid for self, spouse and dependent children. An additional deduction for insurance of parents is available up to Rs 25,000, if they are less than 60 years of age. If the parents are aged above 60 years, the deduction amount is Rs 50,000.
In case both taxpayer and parent(s) are 60 years or above, the maximum deduction available under this section is up to Rs 1 lakh.
For the salaried class, availing allowances such as house rent allowance (HRA), leave travel allowance (LTA) also comes under the ambit for exemption subject to the fulfillment of prescribed conditions and subject to maintenance of adequate documentation.
Typically, taxpayers have the tendency to postpone any tax planning measures till the last moment. However, it is important to plan these investments in advance in order to save on taxes and not end up depositing excess taxes during the tax year.
(By Divya Baweja, Partner, Deloitte India, and Divya Grover, Manager, Deloitte Haskins & Sells LLP)