Before rushing into tax-saving investments for the fiscal year, first check to see if you need to make such investments or not. This is because there are several investments with different characteristics and holdings. And in our rush to select a financial product, we miss the expenses that can be claimed to save taxes. Here are some expenses that come with tax advantages and will help you neutralize your tax expenses for the current fiscal year.
Contribution to the Employees Provident Fund
Although not an expense, the contribution to the Employee Provident Fund (EPF) is primarily an involuntary exit, unless one voluntarily increases the contribution. Verify your (employee’s) total contributions for the year and count toward Section 80C benefit. As a salaried individual, an employee contributes 12 percent of his basic salary to EPF, which qualifies for the tax benefit under Section 80C. The employer is supposed to match the employee’s minimum contribution of 12 percent of base salary, but the employee is not entitled to tax benefits.
Health insurance premiums
For health insurance premiums for self, spouse, children and parents, the maximum deduction that can be used has a limit of Rs 25,000 per year, as long as the person’s age does not exceed 60. If the premium paid per person is for the health policy for a parent (older person 60 years or older), the maximum has a limit of Rs 50,000. Illustratively, if someone in the 30 percent tax slab pays a premium of Rs 10,000, the tax liability is reduced by approximately Rs 3,000 and there is health coverage to cover medical expenses.
And yes, if you are expecting to undergo a medical checkup, do so. A maximum of Rs 5,000 spent on preventive health check-ups may be used as a deduction under section 80D of the Income Tax Act, but this limit is within the general limit of Rs 25,000 or Rs 50,000 (whichever is applicable) and it is not exclusive to that.
Financial planners often suggest starting the financial planning process by purchasing health insurance coverage. Buy adequate coverage for you and your family members and, if you have already purchased it, even the renewal premium qualifies for the Section 80D tax benefit.
However, if your parents are over the age of 60 and are not covered by any medical policy, medical expenses incurred may also be claimed as a deduction under section 80D for a maximum of up to Rs 50,000 in a financial year.
Payment of the principal of the mortgage loan
If you have taken out a mortgage loan, the repaid principal qualifies for the tax benefit under section 80C. The matched monthly installments (EMI) of the mortgage loan constitute both the principal and the interest. You can ask your mortgage loan lender to issue a statement showing the provisional breakdown of the principal and interest for the entire year. Even partial or full repayment of principal made during the year qualifies for the tax benefit.
Payment of interest on mortgage loans
The interest component in the EMI can be claimed as a deduction for “House and Property Income” in Section 24. The maximum tax deduction allowed in this section is Rs 2 lakh for the self-occupied property for which the loan. And if it is a property under construction, the benefit is delayed. After possession, provided it occurs within five years, pre-construction (pre-completion) interest can be claimed from the time construction is completed and after possession is obtained, in five equal installments.
Homebuyers who purchased a home in the affordable housing segment in fiscal year 2019-20 can claim an additional deduction under Section 80EEA.
Parents can also claim the deduction of tuition fees for up to two children within the general limit of 1.5 lakh rupees under section 80C. However, any payment for development fees or donations to institutions is excluded. And if both parents are taxpayers, then the parent who made the payment can claim the tuition fee deduction.
Suppose if A made her daughter’s school fees payment of Rs 1.7 lakh in fiscal year 2018-19, she can claim Rs 1.5 lakh on her return under section 80C (the maximum limit of section 80C is Rs 1.5 lakh ). The remaining amount of Rs 20,000 cannot be claimed by A’s wife. However, if A has another child, he and his wife can plan to pay the school fees of the two children between them. A can pay for child 1 and his wife can pay for child 2. In this way, the payment made can be claimed by both separately on their tax returns. The payer can claim the amount paid on his tax return.
Interest paid on an educational loan for yourself, your spouse, children, or a student under your guardianship qualifies for the tax benefit. However, loans taken for siblings and family do not qualify. The amount paid as interest in a financial year is eligible for the deduction of the total gross income without limit, thus reducing the total taxable income and the tax obligation. Only the interest portion qualifies for the tax benefit and not the principal amount paid.
To claim this deduction, make sure that the loan is taken for higher education, that is, any course followed after completing the twelfth standard. This deduction is available for eight years, starting from the year in which the interest payment began. The full amount of interest paid will be obtained as the deduction for eight years from the date of taking the loan or until the interest is paid in full (whichever is earlier). To obtain income tax benefits under Section 80E, you must take the educational loan from any of the programmed banks in India or from the two notified financial institutions, Credila Financial Services and HDFC.
What should you do
Although there is nothing wrong with saving taxes through involuntary means or expenses, it is always better to have a financial plan and choose tax savers in tune with your goals. After all, what you need to do is save for a long-term goal using the tax breaks. Also, the ideal is to start saving taxes at the beginning of the year.