There are certain basic needs and wants that one would want to spend money on (and then there are other discretionary spending options). The tax exemptions are designed so that your expense on certain basic needs and wants is exempted from taxation. As you read on, you will understand that the word “basic” is vital here. J
Tax exemption options based on lifestyle needs:
Investment Related
1. Benefit for your retirement I: We earn today not just for today, but also to support ourselves once we retire. Section 80C allows you to save ₹1,50,000 every year for your retirement in pension funds, provident funds, long term life insurance policies, ELSS, retirement funds, etc. While not all options are long term, we encourage investors to invest this chunk with a retirement kitty mindset. We can dig into the details of these options, but for now it’s important to understand this option exists. Using this option to the maximum leads to an annual tax saving of about ₹45,000.
2. Benefit for your retirement II: Beyond the ₹1,50,000 under section 80C, you are now also allowed an additional ₹50,000 investment in NPS under Section80CCD which will be tax deductible. However, one must understand that while you save on taxes today, almost 60% of your withdrawal after retirement becomes taxable. Thereby making this an instrument of only deferring taxes rather than saving taxes. This point may make a strong case for not using this option.
Beyond 80C
3. Relief for your health cover: Everyone needs some monetary relief when it comes to health and illness. The government provides this relief by giving you tax rebates for the premium you pay for your family’s and your parents’ health cover. Under Section 80D, you are eligible for a rebate of ₹25,000 towards health insurance for your family and another ₹25,000 towards that of your parents (₹30,000 if they are senior citizens). Thus you get a rebate of a total of ₹50,000-₹55,000.
4. Exemption for your education finance costs: In today’s ever-changing and competitive world education is of prime importance – for yourself as well as your children. The government allows you to take a tax rebate on the financing cost (interest) of an education loan. Section 80E puts no upper limit on this exemption. Interest on the loan taken for the higher education of self, spouse or child is exempt under this section. The loan can be taken from any bank, financial institution or charitable trust, but not from friends and family. The loan need not be an ‘education loan’ per say. Any loan (personal loan, loan against property) where the end use of funds is for higher education can be used for tax exemption.
5. Exemption for your home finance costs: Buying one’s own home is perhaps one of the most important goals in many Indian’s lives. The government provides tax benefits of up to ₹2,00,000 every year on the interest you pay on a home loan. Further, one must understand that tax benefits on a joint home loan are available to all the joint holders. It is important to note that ownership in the property is required to avail this tax benefit. If a loan is taken jointly, but the borrower is not an owner in the property, then you may not be able to claim tax exemptions. Likewise, owners who are not borrowers and do not contribute to the EMI will not be able to claim tax exemptions on the loan.
6. Relief for charitable work: Bas human beings, we are here to help one another. Contributions made to certain relief funds and charitable institutions can be claimed as a deduction under Section 80G. One must keep in mind that not all donations are covered for deduction under section 80G – only donations made to prescribed funds qualify as a deduction. Interestingly, this deduction is allowed to all types of tax payers – individuals, company, firm or any other person.
7. Exemption for your basic money needs: In our opinion, keeping money secure is the most basic need when it comes to money. For this, we keep money in a bank and earn savings interest on the sum. ₹10,000 of interest income from your savings bank account is exempt from being taxed.
Salary Structure Related
8. Relief for your house rent: For non-home owners, house rent can be quite a daunting expense to your finances. The government provides relief through tax exemptions on full or partial house rent paid. There is no absolute limit to this exemption. However the exemption amount will be the lower of actual House Rent Allowance as per of salary structure, 50% of basic salary (including DA) for metros (40% for non-metros) and the actual rent paid less 10% of basic salary.
9. Help for your medical expenses: In spite of the medical cover that one may have, you are bound to have some other miscellaneous medical expenses in the family. Up to ₹15,000 worth of these expenses annually, if reimbursed by your employer are tax-free in your hands. Considering that this is a reimbursement, one must remember that exemption is allowed up to the actual amount spent.
10. Happiness for your holidays: A holiday or a break is as important in your life as many other things. The government surprisingly comes to the rescue here as well! If Leave Travel Allowance forms a part of your salary structure, then this allowance can be used for tax exemptions for travel expenses on a trip within India. This allowance in only valid for immediate family and other dependent family members. The allowance allows economic air fare, first class AC train travel or other means of public transport.
11. Exemption for regular commute: Travelling to work is another basic necessity for performing your duties. Commuting expenses of up to ₹19,200 every year are exempt from taxes and can be claimed without producing proof or receipts.
This is not an exhaustive list but has all the major exemptions. There are many other exemptions that are eligible in various different special situations.
As you can see, a lot these exemptions have limits to cover only your basic needs and expenses. Knowing and understanding these allowances and exemptions is the first step in tax optimizing your finances.
Hope this helps!
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Anirudh Sheth, CFA
(P.S. I am an ex-London based investment banker. I am a strong believer of mutual funds and have most of my own wealth parked in mutual funds. Currently, I advise clients on managing their personal finance in Mumbai. I am also a CFA charterholder.)
