Here are some of the lesser-known tax-saving tools and expenditures that can help many to plan and reduce their tax liability. The onset of the last quarter of the financial year witnesses many taxpayers to frantically invest in various tax-saving investment options. They usually limit their horizon to popular ones like Equity Linked Savings Schemes (ELSS), tax-saving fixed deposits, Public Provident Fund, ULIPs, etc. On the expenditure side, awareness is mainly limited to home loan interest and principal repayment, EPF contribution, term insurance premiums, and health insurance premiums.
Here, I will focus on some of the lesser-known tax-saving tools and expenditures that can help many to plan and reduce their tax liability.
1. Interest earned from a savings account
While saving accounts are usually associated with low-interest rates, some private sector banks and small finance banks have started offering a higher rate of interest on deposits in their savings bank accounts. Presently, the interest rate of saving bank accounts offered by these banks can be as high as 7.50% p.a. Coupled with higher interest rate and benefits such as high liquidity and deposit insurance cover of up to Rs 1 lakh from DICGC, these high-yield savings accounts can be an excellent option for investors to park their emergency fund and surpluses. What most taxpayers are unaware of is the tax benefit that comes with saving accounts. Under Section 80TTA, interest income of up to Rs 10,000 p.a. is tax-free beyond which it gets taxed as per your tax slab.
2. Deduction on rent for those not receiving HRA
Employees receiving HRA can claim a tax deduction on the rent paid by them under Section 10(13A). Self-employed people or salaried ones not covered under Section 10(13A) can claim deduction under Section 80GG for the rent paid for their own accommodation. This deduction has been capped at Rs 5,000 per month or 25% of the assessee’s total income for the year or actual rent less 10% of his annual income, whichever is less. The taxpayer will also have to submit Section 10BA to avail this deduction.
3. Tuition fee paid for your children’s education
Section 80C allows taxpayers to claim a tax deduction of up to Rs 1.5 lakh for expenses incurred towards school/tuition fee for a maximum of two children. Apart from the university, college and school fees, expenditures incurred towards nursery, pre-nursery, and playschool fees are also covered under this section. However, tuition fee paid for self-education or for the spouse is not eligible under this section. Similarly, the fee paid for your children’s coaching or private tuition or educational institutions located outside India does not qualify for a tax deduction. Also, certain common fees charged by educational institutions, such as uniform fee, admission fee, transport fee, development fee, and late fee do not qualify for deduction under Section 80C.
4. Avail HRA exemption by paying rent to parents
There is a common misconception that those earning HRA but living with their parents do not qualify for tax deduction under Section 10(13A). However, the reality is that they can still claim tax deduction on their HRA if they pay rent to their parents. All that they need to do is to make their landlord-tenant relationship legal through a rent agreement and submit rent slips. Doing this will not impact their parents’ tax liability as they would still be eligible for a 30% standard deduction on their house property’s NAV (Net Annual Value).
5. Deduction on interest earned by senior citizens on deposits
Senior citizens can claim an exclusive tax deduction of up to Rs 50,000 under Section 80TTB on the interest income earned from deposits held with banks, post offices, and co-operative banks. These term ‘deposits’ include savings account, term deposits, and recurring deposits. This deduction is especially important as most banks offer an incremental interest rate of 50 bps on fixed deposits opened by the senior citizens. Awareness of this deduction will help conservative senior citizens in planning their tax-savings investments to earn tax-free returns.
6. Deduction for medical treatment of certain diseases
Section 80DDB allows taxpayers to claim a deduction for treatment of chronic renal failure, AIDS, malignant cancers, hemophilia, thalassemia and various neurological diseases specified in Rule 11DD of Income Tax Act for self or many any of his dependents. However, the deduction can be claimed only on submitting the relevant prescription from neurologist, urologist, oncologist, hematologist, and immunologist. If the person requiring treatment is a senior citizen, then the maximum deduction available is Rs 1 lakh. Or else, the deduction is capped at Rs 40,000. Thus, tax assessees incurring medical expenditure for these diseases, either for self or for their dependents, should ensure to claim this deduction.
* This article was published in Financial Express on 7th February 2020.