Wealth and wisdom
There are countless ways to claim income tax deductions. One may not always be familiar with all the sections of the Income Tax Act of 1961. However, a quick web search or skimming through the Act would provide plenty of useful ideas on how your income tax can be meaningfully-and in some cases, effortlessly-reduced.
The most convenient way to save taxes is through expenses that have already been incurred. For example, healthcare expenses towards the treatment of malignant cancer for a dependent family member can earn you deductions under Section 80DDB of the Income Tax Act.
Taxpayers can legally turn to their parents to curb their tax liabilities. The start of the financial year is a good time to create a financial roadmap that would help you maximise tax savings, improve investment returns,expand your insurance coverage, and maintain liquidity.
Let’s look at some ways to secure your tax savings with your parents’ help.
Mediclaim for parents
Section 80D of the Income Tax Act allows you to claim tax deductions for the purchase of health insurance.
You can claim Rs 25,000 rebate on tax in a year for premium paid towards health insurance for yourself, your spouse and dependent children.
If your age is 60 or more, this limit rises to Rs 50,000 in a year. Above this, you can claim another deduction of Rs 25,000 for health insurance purchased for your parents.
If one or both of your parents are aged 60 or more, this limit rises to Rs 50,000.
If both you and your parents are senior citizens, you can collectively claim Rs 100,000 in a year under section 80D. Since financial year 2015-16, the 80D limit also includes deductions up to Rs 5000 for expenses towards preventive health check-ups.
Some sections of the Income Tax Act allow deductions for healthcare expenses incurred towards serious health conditions — both for self and for dependent relatives such as your parents.
Under Section 80DDB, deductions for expenses incurred for the treatment of “specified” ailments such as dementia, malignant cancers, and Parkinson’s can be claimed. The limit for this is Rs 40,000. For senior citizens, it is Rs 100,000.
Under Section 80DD, expenses incurred towards the treatment and rehabilitation of disabilities is also included. Where the disability is more than 40 per cent and less than 80 per cent, a deduction of Rs 75,000 is allowed.
Where the disability is more than 80 per cent, the deduction allowed is Rs 125,000. In both sections, the certification of medical authorities is required to claim deductions.
As you may be aware, tax deductions are allowed for housing rent paid. Your HRA deduction is the lowest of the following three — Rs 5,000 per month; 25 per cent of total income; actual rent minus 10 per cent of income.
You can claim HRA deductions by paying rent to your parents under certain circumstances. Namely, the house you’re renting must be owned by your parent. You cannot be an owner or co-owner of the said property. Also, you cannot claim the deduction if your parents sub-let you a property that they’re paying rent for. The rent received by your parents is their income, which would be taxable according to the slab they fall under.
Invest through your parents
It’s not enough to simply save income tax. It is also necessary to invest in tax-efficient instruments where the returns generated are taxed at a rate lower than your slab rate — or in some cases, at a zero-tax rate.
It is quite likely that your parents may be retired and, therefore, may be in a lower tax bracket than you. If they are senior citizens, they enjoy several additional tax and investment benefits.
Senior citizens have tax-exempted income of up to Rs 3 lakh, whereas super senior citizens (those above 80) pay no tax on income up to Rs 5 lakh.
Senior citizens enjoy higher returns on fixed deposits (typically, 0.50 per cent higher interest returns).
They also enjoy tax-free interest income of Rs 50,000 from various fixed deposits whereas your interest from such deposits is fully taxable.
The transfer of money from you to your parents is tax-exempt. You can use these transfers to invest in your parent’s name by opening deposits or investing in the Senior Citizen’s Savings Scheme, which currently offers a whopping 8.70 per cent per annum.
You can also invest in PPF for your parents if you have exhausted your personal 80C limit of Rs 1.5 lakh.
Saving income tax requires careful planning and research. By taking some initiative and creating a smart tax plan early in the year, you will be able to save taxes every month. By March, most of your tax-saving needs would have been taken care of, and you will not be stressed looking for last-minute tax-saving solutions.
The writer is CEO of `BankBazaar.com`