How to claim income tax deductions
Feeling the heat in chilling winter? This is that time of the year when salaried employees are required to submit final tax-related proofs. If an employee fails to do so, the exemption/deduction claimed are denied by the employer, as it is assumed that no expenses which qualify for tax benefit for the purpose of withholding have been incurred. In such a case, the employee will have to pay a higher tax and so will receive less pay in the last few months of the tax year. Hence, plan your taxes-submit the proofs to the employer and claim the benefit of tax exemption/deduction in your Form 16 and reduce your tax burden.
Some of these exemptions/ deductions are discussed below.
House Rent Allowance (HRA) - Supporting documents for rent payments to the landlord are required to be submitted to claim the tax exemption on HRA. However, if the HRA received per month is Rs 3,000 or less, the employee need not produce any supporting documents for such rent payments. This relaxation is for the limited purpose of tax withholding by the employer. The tax officer, at the time of assessment/enquiry, shall still have the right to call for the supporting documents. It is worthwhile to note that as per the latest circular, if the annual rent paid by the employee exceeds Rs 2,00,000 per annum, it is mandatory for the employee to report the PAN of the landlord to the employer. In case the landlord does not have a PAN, a declaration to this effect from the landlord along with his name and address should be submitted. If the exemption is not considered by the employer, an option to claim it in the tax return is available.
Leave Travel Allowance (LTA) - LTA can be exempted from tax twice in a block of four calendar years. The current block of four years is 2010-13.The exemption is only for travel expenses incurred towards self and eligible family members based on some specified conditions. The exemption is not available for foreign trips. If the employee does not avail of LTA, either one or on both the occasions during the block of four calendar years, only one trip can be carried forward to be availed in the succeeding block. The latest circular issued by the tax authorities casts an obligation on the employer to preserve the supporting documents for LTA exemption. Hence, employees have to submit the actual proof of travel to the employer to avail of the tax exemption at the withholding stage.
Medical expenses - Reimbursement towards medical expenses incurred in connection with family members to the extent of Rs 15,000 is exempted from tax. Family members include parents, brothers and sisters or any of them wholly or mainly dependent on the individual. The definition of family members does not cover parents-in-law. Unlike other exemptions, it may not be feasible to claim this relaxation in the tax return as the benefit is available only in respect of reimbursement by the employer.
Housing loan certificate - Employees could reflect a loss from house property on incurring interest expenditure on housing loan. Repayment of principal amounts could provide a deduction within the total limit of Rs 1,00,000 along with other eligible investments under Section 80C. At the time of submitting the proof to the employer, only a provisional certificate for the housing loan is likely to be available. However, in case of prepayments or change in the EMI amount after the submission of the provisional certificate, the total interest and principal repayment amount, as indicated in the provisional certificate, will change. This will require an adjustment to the housing loan interest and principal repayment in the tax return, possibly resulting in additional tax payment/refunds. This needs to be considered by the employees while filing their tax returns.
The deduction under Section 80C is limited to Rs 1,00,000 and covers investments such as contribution towards provident fund account, LIC policy and public provident fund. Some of these are listed below -
Premium for life insurance policy for self, spouse and any child shall be eligible for deduction. For policies issued after 1 April 2012, deduction shall be restricted to the premium amount not exceeding 10 per cent capital sum assured. Provide your employer with these details to substantiate that these limits are being maintained to ensure that the benefit is granted.
Contribution to a Public Provident Fund account in the name of self, spouse and any child is eligible for deduction under Section 80C. The maximum contribution to this account during the financial year cannot exceed Rs 1,00,000. The annual accretion to the account is not taxable. A copy of the PPF passbook and payment receipt should be provided to the employer. These days, online payments have also been enabled.
Five-year bank fixed deposits (FDs): FDs with a scheduled bank with a lock in period of five years are eligible for deduction under section 80C. However, it needs to be kept in mind that the interest on these FDs is taxable and should be included in the return.
Equity-linked savings schemes qualify for deduction under Section 80C. An account statement from the mutual fund house or an acknowledgment receipt for the investment need to be submitted to the employer to claim this deduction. Long-term capital gain and dividend on these funds and scheme are exempted from tax where securities transaction tax is paid. However, these funds and schemes have a lock-in period of three years.
Employees may submit details of tuition fees for full-time education of any two children to any university, college, school or other educational institution situated in India whether at the time of admission or thereafter. Deduction under Section 80C is available for such payments. Full-time education includes play-school, pre-nursery and nursery classes. Further, the amount eligible for deduction shall include any payment of fee except the amount paid as development fee or donation or capitation fee.
Medical insurance premium: Premium paid in any mode other than cash for self, spouse and dependent children can be deducted up to Rs 15,000 per annum; an additional Rs 5,000 can be claimed if they are senior citizens. In addition to this, premium paid for parents' health cover can be claimed as deduction up to Rs 15,000, with an additional deduction of up to Rs 5,000 for senior citizens. Further, deduction can be claimed up to Rs 5,000 (paid in any mode including payment by cash) on account of preventive health checkup within the overall limit of Rs 15,000/20,000. Receipts of insurance premium/ health checkup expenditure need to be submitted to the employer to claim this deduction.
Interest on education loan: Deduction can be claimed for interest paid on an education loan taken from an approved institution for higher education of self/spouse/ children/student for whom employee is a legal guardian. It is available for eight years starting from the financial year in which the individual starts paying interest.
Donations to certain funds/charitable institutions: Section 80G provides for deduction on account of donations made to various funds, charitable organizations, etc. However, for tax withholding purpose, the employer considers only the donations made to the Prime Minister's National Relief Fund, the Chief Minister's Relief Fund or any other fund notified by the tax authorities in this regard. Other donations must be claimed separately on the tax return.
The golden rule is to declare investments early, spread your investments over the year and submit the relevant proof to your employer on time. In the event the timeline to submit the documents to the employer is missed, the option of claiming the benefit in the tax return needs to be explored. However, the employer would have withheld the taxes excessively and such excess taxes need to be claimed as refund in the tax return. In case, you have not missed the deadline set by your employer, take some time off to plan for your taxes - better to be late than never.
Amarnath S Ambati is Manager and Vijay Bharech is Deputy Manager, Deloitte Haskins & Sells
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