The due date to file the income tax return for AY 2020-21 has been extended to November 30th 2020, considering the existing pandemic situation. It was extended to July 31st 2020 before and the new amendment in the date was announced by the finance minister of India, Ms Nirmala Sitharaman, in a recent press conference. Pandemic has crumbled economies and have ruptured financial as well as tax plans of many individuals. If you still haven’t planned or considered planning on saving tax by the means of various tax saving schemes allowed under the Income tax act, 1961, here is a vague guide to do the same. Keep in mind that the government has announced a new tax regime with lower interest rates on higher income slabs. Although the numbers are promising, this regime does not allow most of the existing exemptions and deductions allowed by the old regime. So here’s a list of important exemptions that can be claimed under the old tax regime under the Income tax act, 1961.
Investment schemes
The covid has crumbled financial planning and expenses of many individuals. Investing on various tax saving schemes are one of the best options to save tax under the sections defined under the Income tax act, 1961. Investing in term insurance is a life saver in this circumstance. The investments made towards the term insurance qualify for tax exemptions upto Rs. 1.5 lakhs. The term insurance can be claimed for premium paid for yourself, your spouse, and your children. The tax exemptions under term insurance can be availed under section 80C of the Income tax act. It is one of the most flexible and affordable options to consider. Ideally, one insurance plan is enough to cover the tax needs for a taxpayer. While investing on more than one term insurance plan, make sure you check all the requirements are met and plan on saving money rather than blindly investing just for the sake of saving tax. The insurance cover can safeguard expenses and finances for yourself and your close ones.Saving money for retirement via various means like NPS (National Pension Scheme), EPF (Employee provident fund), ELSS (Equity Linked Saving Scheme) etc also comes under the section 80C of Income tax act. The National Pension Scheme helps accumulate money for retirement as well as act as a monthly pension scheme for retirement. The lock in period for NPS is 30-35 years or lesser considering the retirement age of the taxpayer. ELSS comes in with the shortest lock-in period ie. 3 years. EPF is deducted from your salary as per the financial planning of your employer on a monthly basis. The EPF amount can be completely withdrawn if the investor is facing unemployment for more than 2 months. Most of these investment schemes provide tax free-withdrawal on maturity. The NPS is regulated by PFRDA and is exempted from tax under the section 80CCD2 for the new and old tax regime.
The public provident fund or PPF is managed by the central government and is a reliable way to gain tax benefits. The lock in period for PPF is 15 years. PPF is one of the efficient ways to save tax under the Section 80 C of income tax act. The interest received on behalf of PPF along with the maturity amount of the PPFunder section 80C of the Income tax act scheme is totally exempt from tax. Upto Rs 1.5 Lakhs can be saved by the means of PPF every year.
Health insurance and medical insurance
Medical insurance is considered one of the wise and strong financial savings. Although it serves as a means of financial support during a medical emergency, it also gains various tax benefits. If you have an active health insurance plan for yourself, your spouse or children, you can claim the amount paid towards the Section 80D of Income tax act. The ceiling amount for tax saving under section 80D would be Rs. 50,000. An individual or HUF can claim the tax benefits for Rs. 25,000 under section 80D on insurance for self, spouse and dependent children. An additional 25,000 can be claimed for the insurance sum paid for the taxpayers’ parents until they reach the age of 60.Donations and charity
The section 80G of the Income Tax Act, 1961 allows contributions towards donations, relief funds and charity. The sum can be deducted from the gross income of the taxpayer. Most of us might have donated to the PM care fund during lockdown and flood relief fund to various state governments. The amount paid towards charity to NGOs and other charitable organizations also falls under the section 80G. The complete donation amount falls under the category of charity in such cases and is exempt from tax.Home loan interest payment
The interest amount paid towards home loan EMI can be claimed as deduction from "Income from house and property" under Section 24 of the IT Act. The maximum amount that can be claimed under this category is Rs. 2 Lakhs for self-occupied property for which the loan is applicable for. For the property which is under construction or maintenance will be delayed for the tax benefits. The pre construction interest can only be claimed after the possession of the property. The pre-completion interest should be claimed in five equal instalments.Tax payers who have bought house/housing property in the affordable housing segment defined under FY 2019-20, can claim for additional deductions under the Section 80EEA. The maximum claim amount under this category would be 1.5 lakhs. This deduction is more convenient for buying a budget home of Rs. 45 Lakhs or lesser. The tax exemption is allowed for interest paid in similar cases for loans taken within 31st March 2020.
Education loan
The interest amount paid on behalf of educational loan for taxpayer, spouse, child or a student under the taxpayer's guardianship can be claimed for tax benefit. The amount paid towards interest can be claimed for the same and not principal amount. There is no ceiling amount for deduction. Education loan interest payment is one of the effective ways to reduce the taxable income and liability. The complete amount of interest paid towards educational loan can be claimed for the exemption. The amount paid in a fiscal year is eligible to claim the deduction for the particular fiscal year alone.The educational loans taken for any higher education pursued after completing 12th are eligible for the claim. To gain the tax benefit under the mentioned section, ie. section 80E of the income tax act, the loan should be taken from any of the authorized banks in India or from any of the notified financial institutions. Some of such notified financial institutions include Credila Financial Services and HDFC.The taxpayer can claim the interest paid toward deduction of the same for approximately 8 years from the date of taking the loan or until the complete interest amount is paid off.
Tuition fees
Parents can claim the deduction for tuition and fees for their children under the section 80C of Income Tax Act. The deduction can be claimed upto Rs. 1.5 Lakhs. Only the tuition fees are allowed to be tax exempt in this case. Donations, development fees and any other extra curricular activities are not eligible under this act. The tuition fee for utmost 2 children can be exempt for a taxpayer. The tax exemption needs to be claimed by the parent who actually made the payment and it can not be splitted among both the parents. If both the parents are taxpayers, each parent can claim deduction for a maximum of 2 children each.For instance, considering the taxpayer's first child's school fees is Rs 3 lakhs in the financial year 2018-19, he can claim Rs 1.5 lakh in his return under section 80C, he or his wife can't claim the rest of the 1.5 lakhs. If there are 2 children, the taxpayers can pay the fees of one child each and claim a tax deduction for the amount paid individually. And keep in mind that the one who is making the payment is eligible for the tax deduction claim.
Advantages of planning your taxes in advance
A pre-planned tax saving strategy is essential for every taxpayer. Saving tax in the means of involuntary expenses is not an illegal practice. But stil, it's always suggested to have a well planned and voluntary means of tax saving scheme. If you have a fixed tax saving plan by utilizing tax-saving investment plans, you might not have to worry about it until your retirement. Start planning your tax saving and other claims at the beginning of the fiscal year itself. Never wait till the end.The income tax returns filing for the financial year 2019-20 has been extended to 30th November 2020. The Form ITR 1 (Sahaj) has been issued again for the running financial year which allows taxpayers to have more tax deductions or exemption claims for payments made towards tax-saving investments made between 1 April 2020 and 30 June 2020 due to the deadline extension. If you have stopped investing on such schemes for the FY 19-20, this is the right opportunity to leverage deductions as much as possible.
Tax planning should be considered as the pivotal part of every individual’s financial planning. Through the help of efficient tax saving plans, your financial planning also falls in place in an effective manner. The core objective of tax planning should always be to reduce tax liability and gain economic stability. Tax planning can be;
- Purposive - planning with a particular objective
- Permissive - planning under the legal framework
- Long range and short range - planning done at beginning and ending of fiscal year
