The 80C Frenzy… & The Untapped World Beyond…

Given the frantic hunt for tax saving instruments during this time of the year, coupled with the disproportionate amount of print and online media coverage that Section 80C products have been getting all along, it is little wonder that 80C is viewed by many today as the pivot around which the whole tax planning activity revolves…

Fair enough…But in the bargain are we losing sight of the Bigger Picture?... Let’s see…

While 80C is definitely critical from a taxation point of view, the amount of attention it may be getting comes often times at the expense of its lesser known peers… In this blog, we try to look beyond this frenzy and throw light on some of the significant tax saving provisions outside the 80C gamut…

For the sake of understanding, I divide them into three broad categories:

I. Benefits directly linked to the Financial Instruments we avail …

II. Benefits that form a part of our Pay Structure…

III. Automatic benefits provided by the Income Tax Act.

Note:

The bulk of our focus in this blog will be on the first category as this requires our understanding and active involvement.

The heads you would find in the second category are connected with our employment and hence would differ from individual to individual and are determined largely by the employers.

The deductions listed in the third category are automatic benefits under the respective provisions of the Income Tax Act.

I. Benefits directly linked to the Financial Instruments we avail …

Most of the taxation benefits listed below can be availed by all individuals. However, cases where a certain benefit applies only to a specific category of individuals have been highlighted accordingly.

1. 80 CCD (1b) – National Pension System (NPS): Deduction Benefit on Additional Contribution:

Individuals can avail an additional deduction of Rs.50,000/- on their annual contribution towards NPS (Note that this deduction is over and above the benefit that NPS offers under the regular 80C umbrella of Rs.1,50,000/-). NPS, as an Instrument, has evolved over a period of time and has become fairly efficient especially on the taxation front.

2. 80 CCD (2) – National Pension System (NPS): Deduction Benefit on Employer’s Contribution:

This benefit is available only to employees of organizations that offer NPS as part of their retirement benefits programme. Contributions made by such employers towards their employees NPS accounts can be availed as deduction by the respective employees to the extent of 10% of their Salary (Basic+DA). (The recent amendments have put a cap on the tax free contributions made by employers to Rs.7,50,000/- annually. The limit applies cumulatively on the contributions made by the employer towards schemes such as NPS, EPF, etc. Any amount contributed beyond this limit will be taxed to the employee as per the applicable slab rates…)

3. 80D – Health Insurance:

The premium paid for health insurance by a tax assessee for self, spouse & children collectively qualifies for a deduction of Rs.25,000/- annually. Additionally any amount paid as premium for the health insurance of Parents qualifies for a maximum deduction of Rs.50,000/-

4. 24B – Home Loan Interest:

Home Loan Interest paid for a Self-Occupied Property in a financial year qualifies for deduction to the extent of Rs.2,00,000/- per annum.

In case of a Let Out Property, although there is no limit on the deduction allowed on interest paid on Home Loans, the set-off on the overall loss on house property is capped at Rs.2,00,000/- annually. The excess amount can be carried forward and set-off over 8 subsequent years.

5. 80EEA – Additional Deduction on Home Loan Interest paid for affordable housing:

This benefit introduced in FY 2019-2020 and extended up to FY 2021-2022 in the recent budget, benefits first time home buyers availing home loan during this period. The interest paid on the home loan qualifies for a maximum deduction of Rs.1,50,000/- annually. The benefit under Section 80EEA can be availed subject to meeting the defined eligibility criteria w.r.t. the value of the property, the area of the property, etc.

Note: This benefit is over and above the benefit of Rs.2,00,000/- under Section 24B; thereby taking the overall allowable deduction on home loan interest to Rs.3,50,000/- annually. However, given the current home loan interest rates (about 7%), the maximum stamp duty value of property allowed under this section (Rs.45,00,000/-) and the Loan To Value ratio (averaging 80% of the Property Value) considered by banks for deciding on the loan eligibility, it is very unlikely that one would be able to fully leverage this benefit, as the interest paid in a year, in most cases will be far lesser than the available deduction limit of Rs.3,50,000/-.

6. 80E – Interest on Educational Loans:

Educational Loans availed for the purpose of higher studies, qualify for unlimited deduction on the interest paid. The benefit is allowed for a maximum of 8 years beginning from the year in which you are required to start repaying the loan.

7. 80 TTA – Interest deduction (for Non-Senior Citizens only)

Interest earned by individuals (Non-Senior Citizens) on all savings accounts (Bank, Post Office) cumulatively is exempt to the extent of Rs.10,000/- annually. With interest rates hitting the rock bottom, the last thing one would want is taxes further eating into an already poor yield. Thus any amount lying in your savings accounts should be planned keeping in view the potential tax liability. (Note: The benefit under this section cannot be availed by Senior Citizens)

8. 80 TTB – Interest deduction (for Senior Citizens only)

Interest earned by senior citizens on all savings accounts and deposits (Bank, Post Office) cumulatively is exempt to the extent of Rs.50,000/- annually. It is observed that a vast majority of senior citizens have a sizeable chunk of their retirement corpus parked in fixed deposits. Moreover, given the already poor yield on fixed deposits, one has to meticulously plan their allocation towards FDs to put a cap on the overall tax outgo. (Note: The benefit under this section cannot be availed by Non-Senior Citizens)

A closer look at these instruments reveals something very striking. Our decision to avail most of these instruments is driven by a higher order need such as financial protection, retirement, contingency, etc. and not necessarily by the need to save taxes alone; in fact the tax benefits that accrue are incidental. Thus, when it comes to tax planning, your priority should be to choose financial instruments based on their ability to cater to crucial higher order needs, in addition to helping you save some taxes.

II. Benefits that form a part of our Pay Structure…

In addition to the benefits offered by the above instruments, salaried individuals must also look at the tax saving options provided by their employers as part of their pay structure. Some of the popular tax-saving components offered by employers are HRA – House Rent Allowance, Meal Coupons, Education Allowance, Books and Periodicals, Gifts / Vouchers, Leave Travel Allowance, Communication, Fuel, etc. While in some of these cases the employee entitlements are clearly defined under the law, several others allow the employer to exercise flexibility in determining the extent of benefit to be offered to employees. In all such cases the extent of benefit is decided in accordance with the grade, pay scale, nature of work of the employee and/or in line with the organizational policies. Depending on your pay, these tax saving components can help you save several thousands (at times even lakhs) more in a year. Thus knowing your entitlements will help you negotiate with your employer for a tax efficient pay structure.

III. Automatic benefits provided by the Income Tax Act.

While some benefits require meticulous planning on the part of the tax payer, others are served on a platter… Here are a couple of benefits that we stand to gain automatically as per the latest provisions of the Income Tax Act.

Standard Deduction (For Salaried Individuals & Pensioners):

Under this benefit, all salaried individuals and pensioners are eligible for a flat deduction of Rs.50,000/- annually. Reintroduced in FY 2018-19 with an allowable deduction of Rs.40,000/- annually and later hiked to Rs.50,000/- annually from FY 2019-20, standard deduction comes at the expense of Medical Reimbursement (Rs.15,000/- annually) and Transport Allowance (Rs.19,200/- annually), amounting to Rs.34,200/- in a year. Considering the trade-off, the quantum of benefit doesn’t appear to be substantial; however, this move definitely leads to a lot of administrative ease for employers and hassle free tax benefit for employees.

Rebate under Section 87A:

Under this section, 100% tax rebate is available to Resident Individuals whose Annual Net Taxable Income does not exceed Rs.5,00,000/-. The Net Taxable Income is arrived at after adjusting for all the available deductions. The benefit can go up to a maximum of Rs.12,500/- annually for non-senior citizens. (5% tax on the excess income earned over Rs.2,50,000/- up to Rs.5,00,000/-). For senior citizens the maximum benefit can go up to Rs.10,000/- in a year. (5% tax on the excess income earned over Rs.3,00,000/- up to Rs.5,00,000/-). Note: Cess not included on tax amount. Thus for gross annual incomes of up to Rs.7,50,000/-, a prudent mix of all the eligible benefits discussed here will bring your Net Taxable Income below the threshold limit of Rs.5,00,000/-, thereby making you eligible for the stated benefit. In fact with better planning, it is possible that even individuals with gross annual incomes beyond Rs.7,50,000/- can use this section to their benefit by efficiently deploying these instruments. (don’t forget… You have the 80C benefit too…J…). However one has to keep in mind that if the Net Taxable Income after all the eligible deductions, exceeds the stipulated limit even marginally (For e.g. Rs.5,00,001/-), one has to pay the entire tax. This requires your careful consideration.

With proper understanding and prudent use of the various tax saving instruments, one can leverage the tax saving opportunities to make substantial savings…

Kindly note that Tax liabilities (Capital Gains/Losses) arising out of transactions such as transfer of Shares and MF units, Tax Treatment of Day Trading and Derivatives Transactions, and several other areas have not been discussed in this article…There’s definitely a lot more to taxation than what a single article can ever do justice to. However the benefits discussed above are some of the most critical ones and cover the taxation needs of a large chunk of the tax paying populace…

And there’s more to come… Till Then … Stay Connected…

Deepak Rameshan, CERTIFIED FINANCIAL PLANNER^CM, Dip TD, MMS.

Deepak Rameshan is a CFP^CM professional, and has been working in the financial services domain for close to 13 years. He holds a Master’s Degree in Management Studies and a Diploma in Training & Development and has been actively engaged in Training & Content Development during this period. As a Personal Finance Enthusiast and an avid researcher of the subject, Deepak has delivered several Investor Awareness Workshops over the years covering areas such as Risk Planning & Insurance, Retirement & Goal planning, Tax Planning and a few other specialized areas. He takes keen interest in writing and has penned numerous articles for this blog, addressing some of the most relevant concerns that individuals face with respect to their finances.

“Financial Planning Standards Board Ltd. (FPSB Ltd.) is the proprietor of the CFP^CM, CERTIFIED FINANCIAL PLANNER^CM and marks outside the United States, including in India, and permits qualified individuals to use these marks to indicate that they have met FPSB Ltd.’s initial and ongoing certification requirements.”