When it comes to tax saving, most tax payers restrict themselves to three broad sections of the Income Tax Act. There is the Section 80C which gives them benefit for contributions to a variety of purposes like insurance, provident fund, ELSS, long term bank deposits, home loan principal, tuition fees etc. Secondly, there is Section 80D for medical insurance which has become quite common with the rising costs of healthcare in India. Finally, there is Section 24 of the Income Tax Act which provides relief for interest paid on home loans. But these are not the only methods available and there are many more techniques to save taxes which are not frequently looked at.
When we understand how to save income tax in India, you must also look at tax saving methods that are outside the normal course. There are other items like education loan, donations; rent paid etc which offer substantial deductions. You can impute these values into an income tax saving calculator and simulate the impact on your tax liability. Here are five such ideas to save tax that are normally used.
Educational Loans under Section 80E
Lot of tax payers confuse Section 80E of the Income Tax Act with the tuition fees exemption available under Section 80C of the Income Tax Act. It is completely different. Section 80E applies in case of loan take from a recognized bank or financier for the purpose of funding higher education. This loan can be taken for your own studies, your spouse’s studies or for your children. To be eligible for Section 80E benefit, the loan must be taken from a bank, financial institution or charitable institutions approved by the IT Act. Section 80E benefit is available for higher studies in India and abroad. There is no upper limit to the deduction that can be availed. The deduction is available only on the interest component paid without any upper limit. This deduction is restricted to 8 years from the time the loan is disbursed. This can be a good way to save tax if you are spending heavily on your child’s higher education.
HRA Tax exemption under Section 10 (5)
For people in the middle and upper income groups, the HRA deduction can be a huge tax saving, especially in metro cities. You only need to ensure that your salary is structured so as to give you the maximum benefits. Normally HRA deduction is available as the least of the following 3 amounts:
Actual HRA received
50% of (basic + DA) in metros and 40% in other locations
Actual rent paid less 10% of Basic + DA
Interestingly, if you have a house in another location then you can claim interest deduction on home loan and also HRA benefits at the same time. Documents are necessary in the form of a stamped receipt and landlord PAN is required if the rent payout is above a threshold.
Medical treatment and maintenance Section 80DD and 80DDB
The tax benefits under Section 80DD and Section 80DDB are applicable for long term illness and are different from Section 80D benefits for payment of medical insurance premium. There is a subtle difference between Section 80DD and Section 80DDB. For example, Section 80DD exemption is available for maintenance of disabled dependent, which includes spouse, children, parents or even siblings. This includes severe disabilities like cognitive and mental disabilities, blindness, motor impairment, autism, cerebral palsy etc. The limits under Section 80DD have been enhanced to Rs.75,000 for partial disability (up to 40%) and an exemption of Rs.125,000 per annum for severe disability (up to 80%).
While Section 80DD is allowable for maintenance, Section 80DDB is allowed for actual medical expenses incurred. This has to be supported by actual bills.
National Pension Scheme under Section 80 CCD
The NPS has been offered as an adjunct to the existing Section 80C benefit. While the overall limit for Section 80C exemption is restricted to Rs.150,000 per annum, NPS entitles you to an additional carving out of Rs.50,000 exemptions which make your total exemption Rs.200,000. That means; stand alone NPS gets a deduction of Rs.2 lakh and when combined with other Section 80C products it enhances your exemption limit to Rs.2 lakh. The NPS benefit can be claimed by salaried and non-salaried individuals.
Saving on Capital Gains Tax
When you buy and sell assets during any financial year, there could be a capital gain or capital loss. You can make smart tax benefit in both the cases. Capital gains can be set off against capital losses to reduce the burden. Also capital losses can be carried forward for a total of 8 assessment years. This applies only to STCG and LTCG (now that it is taxable) but not in case of speculative gains. Apart from the benefit of write-off, capital gains tax can also be saved by reinvesting the proceeds of the sale. For example, one can claim tax exemption under Section 54 by reinvesting the proceeds of sale into another property. Alternatively, the proceeds can also be reinvested in Section 54EC bonds to claim capital gains tax exemption with lock-in period conditions.
Tax saving is not just about the traditional methods. An understanding of the newer techniques can go a long way in enhancing your post-tax income.