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…
