When you’re a working woman, disposable income (income you have on hand, and readily available to spend) is as important as a tax efficient savings plan. This is especially significant if you are taking care of your family as well. Plenty of women I know unwittingly put in chunks of their salaries in these tax savings plan only to find themselves grappling with very little money left in their bank accounts at the end of the month, and no significant reduction in tax liability. This is because the Income Tax Act places limits to the amounts that you can deduct from your income. So, putting in money in ‘tax saving’ insurance/savings schemes is beneficial only up to a certain amount. Understanding this helps you save in a better and more tax efficient manner, and free up funds that you can use for other purposes.
Perhaps the most popular and well known part of the Income Tax Act, 1961, is Chapter VI-A, which deals with deductions from total income. It is popularly referred to as ‘section 80’ deductions, and is featured prominently across insurance schemes, savings schemes, loan schemes and every other scheme which calls itself to be ‘tax-saving’. Chapter VI-A of the Income Tax Act, 1961 has roughly 35 sections, rather 35 different types of deductions from your income. Not all of them, however, are relevant to the average working woman. Here are the ones that are:
Section 80C: Section 80C is the most important section in Chapter VI-A, simply because of the number of transactions that it encompasses. Payments made towards Life Insurance, your contribution to a recognised Provident Fund, contributions made to any Central Government notified/Post Office savings schemes, repayment of principal of housing loans, tuition fees for full time education in India, contribution to National Pension Scheme, among others are deductible under this section.
Here’s the catch to this otherwise wonderful sounding section – the total deduction offered is only Rs 1,50,000 (Contributing to the National Pension Scheme or any notified pension scheme will give you an additional Rs.50,000/- as deduction, but be warned that that the proceeds on maturity are taxable).
So, it doesn’t matter if you’re paying school fees of Rs 50,000 for your children apart from paying Rs 2,40,000 every year in Life Insurance premium. You will only be allowed Rs 1,50,000 in total as a deduction from your income. I had a client who was paying Rs 3,00,000 in life insurance premiums although her PF and children’s tuition fees alone covered the deduction limit, because she thought she could save more tax!
Section 80D: Investing in health insurance is a good move, tax-wise if you are taking care of your old parents. Section 80D covers health insurance, the same way section 80C covers life. A total deduction of Rs 25,000 is allowed for health insurance premium paid for yourself, your spouse and your children during the year. If you are over the age of 60, you are eligible for a deduction of Rs 30,000. If you pay your parents’ health insurance premium, an additional deduction of Rs 25,000 is provided, taking the total deduction to Rs 50,000. If any of your parents are senior citizens, the additional deduction is Rs 30,000. An amount of Rs 30,000 is also available as a deduction for medical expenditure incurred provided your parent is over the age of 80, and no health insurance premium has been paid.
Section 80DD: If you are taking care of a parent/child/sibling/spouse with a disability, you are allowed a flat amount of Rs 75,000 with respect to medical expenditure (including nursing and maintenance) that you may have incurred during the year. If the disability is severe, the deduction goes up to Rs 1,25,000. ‘Disability’ under the Act includes mental illness. Section 80DDB allows an additional deduction of Rs. 40,000 for medical expenditure where disability is certified as over 40% in the cases of neurological diseases, apart from AIDS, cancer, renal failure, and haematological disorders.
Section 80E: If you’ve taken a loan for higher education for yourself, your spouse or your children (this includes loans taken to study abroad), the interest portion of the loan paid out during the year can be deducted from your income. There is no limit for this section, so the total portion of the interest paid by you can be deducted in full.
Section 80GG: Rent paid is allowed as a deduction under this section. However, the limit is the lowest of Rs 60,000, 25% of your total adjusted income, or the excess paid over 10% of your adjusted total income.
Section 80U: If you are disabled, you are eligible for a flat deduction of Rs 75,000 (if the disability is severe, Rs 1,25,000) from your income. Disability includes blindness, low vision, leprosy-cured, hearing impairment, loco motor disability, mental illness, mental retardation, autism, cerebral palsy and multiple disabilities.
Section 80TTA: Up to Rs 10,000 of the interest credited to your savings bank account is eligible for deduction from your total income.
Deduce to reduce
Take stock of your current expenditure and see how much of it already fits into the tax deductions available. Look at your tax computation and inform HR if you are eligible for any of these deductions. The lower your tax liability, the lower that is deducted from your salary each month, and the more that you have on hand, for yourself.