Medical / Health Insurance Premium - Mediclaim deduction under Section 80D

Section 80D of the Income Tax Act provides for deduction of Health Insurance premium or Medical Insurance premium or Mediclaim premium from Gross Total Income. Just like Life Insurance premium payment can help you save tax under Section 80C, even Medical Insurance premium payment can also help you save tax under Section 80D.

Note that the Income Tax benefit available for Medical Insurance premium under Section 80D is separate and distinct from the tax benefits available under Section 80C. To know more about section 80C deductions.

Eligible Assessees

Individuals and Hindu Undivided Family (HUF) only.

Scope

Mediclaim premium paid under:

• Medical insurance scheme of General Insurance Corporation approved by the Central Government, or
• Any other insurer approved by the Insurance Regulatory & Development Authority (IRDA).

Coverage

• For an Individual: Premium paid for insuring the health of the Individual, Spouse, Parents and dependant Children. Note the criterion of being dependant on the assessee is applicable only for Children. Thus Mediclaim premium paid for covering health of spouse or parents would be available regardless of whether or not they are dependant on the assessee. (Note prior to 1st April 2009, deduction for Mediclaim premium paid for parents was allowed only if the parent was dependant on the assessee).

• For a HUF: Premium paid for insuring the health of any member of the family.

Payment from Taxable Income

Mediclaim premium has to be paid from taxable income of that year to claim deduction u/s 80D. Premium should not be paid from savings or gifts received.

Mode of Payment

The premium may be paid by any mode of payment other than cash. Note prior to 1st April 2009, premium payment was required to be done only by cheque. Credit card or other online payment mechanism where not allowed. Now all payment modes except cash payment are accepted.

Deduction

For Individual

• Basic deduction: Mediclaim premium paid for Self, Spouse or dependant children. Maximum deduction Rs 15,000. In case any of the persons specified above is a senior citizen (i.e. 65 years or more as of end of the year) and Mediclaim Insurance premium is paid for such senior citizen, deduction amount is enhanced to Rs. 20,000.
• Additional deduction: Mediclaim premium paid for parents. Maximum deduction Rs 15,000. In case any of the parents covered by the Mediclaim policy is a senior citizen, deduction amount is enhanced to Rs. 20,000.

For HUF

• Mediclaim premium paid for any member of the HUF. Maximum deduction Rs 15,000. In case any member of the HUF covered by the Mediclaim policy is a senior citizen, deduction amount is enhanced to Rs. 20,000.

Let us now understand the implications with the help of examples:

Example 1

Mr. Anil furnishes the following information relating to premium on Mediclaim policy paid by cheque:

• For self (age 40 years) - Rs. 12,000
• For spouse (age 36 years) - Rs. 10,000
• For father (age 68 years) - Rs. 17,000
• For dependent mother-in-law (age 66 years) - Rs. 15,000

What is amount of deduction allowed under Section 80 D of the Income Tax Act?

Mr. Anil paid total of Rs. 22,000 for self and spouse. Since neither of them are Senior citizen, basic deduction under Section 80D is Rs. 15,000 (premium paid Rs. 22,000 or Rs.15,000 whichever is less).

Mr. Anil also paid Rs. 17,000 for his father, which is eligible for additional deduction. Since his father is senior citizen, deduction under Section 80D is Rs. 17,000 (premium paid Rs. 17,000 or Rs.20,000 whichever is less).

Thus total deduction under Section 80D comes to Rs. 32,000.

Note that Section 80D does not cover relatives other than Spouse, Children and Parents, so the premium paid by Mr. Anil for his dependent mother-in-law isn’t eligible for deduction. However, his wife can, from her taxable income, pay the premium for her mother’s health plan and claim deduction under Section 80D for the same.

Example 2

An individual assessee pays through Credit Card during the previous year health insurance premium as under:

1. Rs. 12,000 to keep in force an insurance policy on his health and on the health of his wife and children
2. Rs. 17,000 to keep in force an insurance policy on the health of his parents.

Under the proposed new provisions, he will be allowed a deduction of Rs. 27,000 (Rs. 12,000 + Rs. 15,000) if neither of his parents is a senior citizen. However, if any of his parents is a senior citizen, he will be allowed a deduction of Rs. 29,000 (Rs. 12,000 + Rs. 17,000). Whether the parents are dependent or not, is not a consideration for deciding the deduction under Section 80D.

SMI TAX PLANNING TIPS

• Make the premium payment from your taxable income. Mediclaim insurance premium should be out of income chargeable to income tax, meaning if payment is made from income exempted from income tax than deduction will not available. If payment is done from a Loan or Gift, then also deduction is not available.

• Mediclaim policy for Brother or Sister? In case you need to pay Mediclaim insurance premium for your brother or sister, do not make the premium payment from your account. Take Mediclaim policy for Brother or sister in your Hindu Undivided Family (HUF) Income Tax file. If you are taking a floater policy, then don’t add your brother or sister in the floater policy if you are making the premium payment. Include your brother and sister in the Mediclaim policy where the premium payment is done by the HUF. This will ensure that HUF would be eligible for the deduction under Section 80D.

• Floater Mediclaim policy. Unique policies have been devised today by various insurance companies to suit the requirements of families. The family floater plan is the best example of such plans. This helps you and your family enjoy coverage under one single policy. For example, if you purchase a 3 lakhs health insurance policy, every member of your family can avail of the entire sum insured during medical requirements. Pay the Mediclaim premium for floater policy for your family from the Income Tax file where the deduction would have maximum tax savings. Let me explain by way of an example. Suppose your taxable income is greater than Rs. 1,000,000 and your spouse has taxable income of Rs 200,000. Medical insurance premium for the floater policy is Rs 10,000. If the premium is paid by your spouse, deduction under Section 80D is Rs 10,000. Note applicable Income Tax rate for your spouse is 10% plus 3% Education Cess. Thus reduction in tax liability due to this deduction of Rs 10,000 is equal to 10,000 * 10.30% = Rs. 1,030. On the other hand applicable Income Tax Rate for you is 30% plus 10% Surcharge plus 3% Education Cess. Thus if the premium payment is made by you, deduction available is same at Rs 10,000 but the effective saving in tax liability is 10,000 * 33.99% = Rs. 3,399.

• Don’t make premium payment by cash. No deduction under Section 80D is allowed where the Mediclaim premium is paid in Cash. You can make the payment in any other mode like cheque, draft, credit card, online banking, etc.

• Let your spouse pay the Mediclaim premium for your in-laws. In case you are also taking care of healthcare need of your in-laws, make sure the premium payment for Mediclaim policy is done by your spouse. You will not get any deduction under Section 80D for Mediclaim premium for your in-laws. But if your spouse is making the payment, Section 80D deduction is available since your spouse would be making payment for his / her parents which is allowable under Section 80D. Please note your spouse has to make the payment from his / her taxable income.

• One policy, Two claimants. If part payment is done by you and part payment by the parent, both can claim deduction to the extent of their contribution, subject to maximum allowed. Thus for example, if cost of insurance on the health of the parents is Rs 30,000, out of which Rs 17,000 is paid (by any non-cash mode) by the son and Rs 13,000 by the father (who is a senior citizen), out of their respective taxable income, the son will get a deduction of Rs 17,000 and the father will get a deduction of Rs 13,000.

• Unit-linked Health Insurance Plans. Some of the insurance companies have launched unit linked health insurance plan which work akin to Unit Linked Life Insurance plans. Portion of the premium for unit linked health insurance plan would go for covering the health insurance cost and balance would be invested in funds chosen by the person insured. For example LIC, has launched “Health Plus” and Tata AIG has launched “Tata AIG Life InvestAssure Health”. As per the current tax rules, premiums paid in respect of morbidity are eligible for tax deduction under Section 80D of the Income Tax Act. The balance of premium is eligible to tax deduction under Section 80C, provided the annual premium during the year does not exceed 20% of the sum assured.

Appendix: Section 80D of the Income Tax Act

Deduction in respect of medical insurance premium.

80D. (1) In computing the total income of an assessee, being an individual or a Hindu undivided family, there shall be deducted such sum, as specified in sub-section (2) or sub-section (3), payment of which is made by any mode, other than cash, in the previous year out of his income chargeable to tax.

(2) Where the assessee is an individual, the sum referred to in sub-section (1) shall be the
aggregate of the following, namely:—

(a) the whole of the amount paid to effect or to keep in force an insurance on the health of the assessee or his family as does not exceed in the aggregate fifteen thousand rupees; and

(b) the whole of the amount paid to effect or to keep in force an insurance on the health of the parent or parents of the assessee as does not exceed in the aggregate fifteen thousand rupees.

Explanation.–For the purposes of clause (a), “family” means the spouse and dependant children of the assessee.

(3) Where the assessee is a Hindu undivided family, the sum referred to in sub-section (1) shall be the whole of the amount paid to effect or to keep in force an insurance on the health of any member of that Hindu undivided family as does not exceed in the aggregate fifteen thousand rupees.

(4) Where the sum specified in clause (a) or clause (b) of sub-section (2) or in sub-section (3) is paid to effect or keep in force an insurance on the health of any person specified therein, and who is a senior citizen, the provisions of this section shall have effect as if for the words “fifteen thousand rupees”, the words “twenty thousand rupees” had been substituted.

Explanation.— For the purposes of this sub-section, “senior citizen” means an individual resident in India who is of the age of sixty-five years or more at any time during the relevant previous year.

(5) The insurance referred to in this section shall be in accordance with a scheme made in this behalf by—

(a) the General Insurance Corporation of India formed under section 9 of the General Insurance Business (Nationalisation) Act, 1972 and approved by the Central Government in this behalf; or

(b) any other insurer and approved by the Insurance Regulatory and Development Authority established under sub-section (1) of section 3 of the Insurance Regulatory and Development Authority Act, 1999.

Medical Expenses Allowance vs. Medical Expenses Reimbursement

"What's in a name? That which we call a rose

By any other name would smell as sweet."

- William Shakespeare, "Romeo and Juliet"

But sometimes a name can make a lot of difference. For example whether you are in receipt of Medical Allowance or Medical Reimbursement from your employer, will make lot of difference to your tax liability. Let’s understand by way of an example.

Mr. Smart is getting Medical Expenses Reimbursement from his employer to the extent of Rs. 15,000 every year. On the other hand, Mr. Fool is in receipt of Medical Expenses Allowance of Rs. 15,000 every year from his employer. As per provisions of the Income Tax Act, Mr. Smart will not have to pay any tax on the Medical Expenses Reimbursement, while the Medical Expenses Allowance will be fully taxable for Mr. Fool. Let’s understand in more details.

Medical Expenses Allowance

As a general principle under the Income Tax Act, any Allowance received by an employee is fully taxable unless specifically exempted. Thus for example House Rent Allowance is exempt only to the extent specified in Section 10(13A). There is no specific exemption for Medical Allowance, thus it is fully taxable and will be added to Income of the Employee and taxed at the applicableIncome Tax Rates. Thus if a fixed allowance is received by an employee for the discharge of medical expenses, it is a taxable perquisite. Hence, an employee should avoid the receipt of an allowance for medical expenses but should rather take medical reimbursement, so that it is tax-free.

Medical Expenses Reimbursement

Reimbursement of medical expenses actually incurred by an employee for his medical treatment or the treatment of any member of his family upto Rs. 15,000 per annum is not treated as a taxable perquisite as per Clause (v) of the Proviso to Section 17 (2) of the Income Tax Act. Family is defined to mean Spouse or Children of the Individual or any of dependant relatives being Parents, Brother or Sister. Note there is no requirement for Spouse or Children to be dependant on the individual, but Parents, Brother or Sister should be dependant on the individual. Thus Medical Expenses Reimbursement of expense actually incurred by an employee upto Rs. 15,000 per year is completely tax free. Note deduction under Section 80D for Mediclaim Insurance policy is over and above Medical Expenses Reimbursement being discussed here.

Typically if the employee fails to submit valid medical bills for the entire entitlement amount of Rs. 15,000 then the balance amount is paid by the company in the last month of the financial year (i.e. March) as a taxable amount. Thus to the extent medical bills are not submitted, Medical Expenses Reimbursement received from the employer would be taxable. For example an employee is entitled to Medical Expenses Reimbursement of Rs. 15,000 every year, but is able submit medical bills only for Rs. 10,000 for the year. In this case the company would pay Rs. 10,000 as Medical Expenses Reimbursement, which is not taxable. The balance amount of Rs. 5,000 would be paid in the last month and would be taxable.

SMI Tax Planning Tips

Most of the companies do have Medical Expenses Reimbursement as part of compensation package. However in case your Salary package doesn’t include this component, then it would be prudent from tax-planning perspective to get Medical Expenses reimbursement included. Most often employer is more concerned about the overall compensation payable to the employee and would not be too bothered about how the overall amount is structured. Thus whether the Rs. 15,000 is paid as Special Allowance or Medical Expenses Reimbursement, would hardly have any impact on the employer but can lead to some tax savings for the employee.

Instead of fixed Medical Allowance, always opt for reimbursement of Medical Expenses. For claiming reimbursement, you will be required to submit valid medical bills to your Employer. Some companies, instead of taking actual physical medical bills from the employees, just take declaration to the effect that the employee has actually incurred medical expense for self or family. In this case the Employee is required to maintain the actual medical bills and may be required to present the same to the Income Tax authorities in case of any scrutiny of the Income Tax Return.

Interest on Education Loan - Tax Planning Guide to deduction under Section 80E

For an Individual tax payer, Income Tax Act provides for deduction of interest paid on tow types of loans – Home Loan and Education Loan. Section 80E of the Income Tax Act provides for deduction of interest paid on Education or Study loan taken for higher education (See the appendix for full text of Section 80E).

Note that the Income Tax benefit available for Education Loan under Section 80E is separate and distinct from the tax benefits available under section 80C. To know more about section 80C deductions, please read “Saving Income Tax through Smart Tax Planning – Guide to Section 80C Deductions”.

Following are the salient features of deduction on interest on Education Loan under Section 80E:

Deduction can be claimed only by Individuals

HUF and other assessee cannot claim Section 80E deduction. Moreover deduction can be claimed by an individual only if the loan has been taken in his name. Thus no deduction is available to an Individual if the loan is taken by any relative, say father, brother or spouse. In this case deduction will be available to the person who has taken the loan, provided that the Individual who is going for higher education is either a spouse or children of the Individual taking the Education Loan (more on this point below).

Loan from Banks

Education Loan should have been taken from a Bank in India (including Indian branches of foreign banks). Loans from notified financial institutions (currently only HDFC is notified) and approved charitable institution are also eligible for Section 80E deduction.

No deduction would be available if the loan is taken from a Bank outside India. For example if you take Education Loan from Bank of America, New York branch for MBA study in Harvard (or in any institution in India for that matter) – no deduction would be available under Section 80E. However if you take a loan from Citibank, New Delhi branch for MBA education in IIM Ahmedabad, deduction would be available under Section 80E.

No deduction under Section 80E would be available if the Education Loan taken from employer, family or friends.

Loan should be taken for Higher Education

Higher education means full-time studies for:

1. Graduate or Post-graduate course in Engineering, Medicine, or Management, or
2. Post-graduate course in Applied sciences or Pure sciences including Mathematics and Statistics.

Note tax benefit is not available for part-time courses.

There is no condition that higher education should be done in India. Thus deduction is available even when the loan is taken for full-time higher education in the above areas outside India.

The loan should be for pursuing higher studies means its includes loan taken not only for tuition or college fees only but other incidental expenses for pursuing such studies like hostel charges, transport charges, etc.

Higher education of Self or Relative

Loan should have been taken for full-time higher education of self or relative. Relative is defined to mean the spouse and childrenof the individual. Thus Education Loan taken for the higher education of brother or sister or father would not be eligible for deduction under Section 80E. Note prior to 1st April 2008, deduction was permissible only for the purpose of education of Self. Education Loan taken for the higher education of Spouse or Children has been added to the purview of Section 80E with effect from Assessment Year 2009-10 pertaining to Previous Year 2008-09.

If an individual takes Education Loan for higher education of spouse or children, the tax benefit in form of Section 80E deduction is available to the individual only – not spouse or the children.

Repayment from Taxable Income

The repayment should be out of income chargeable to income tax, meaning if repayment is made from income exempted from income tax than deduction will not available. If repayment is done from another Loan or Gift, then also deduction is not available.

Deduction only for Interest

There is no deduction allowed under Section 80E for principal repayment of Education Loan. Note prior to 1st April 2006, both interest and principal repayment were eligible for deduction (but with an overall limit of Rs. 40,000 per annum). Currently Section 80E deduction is available only for the interest payment. (In order to calculate Principal and Interest component of Education Loan repayment, please download excel based calculator – Loan Amortisation Schedule)

No ceiling on the amount of deduction

There is no ceiling for deduction under Section 80E. Note prior to 1st April 2006, there was a ceiling of Rs. 40,000 for deduction under Section 80E. Currently the entire amount of interest paid in the year is eligible for deduction.

Deduction for Eight years

Deduction under Section 80E is available for 8 years or until the loan is repaid fully, whichever is earlier. First year starts from the year in which interest payment starts. Thus if the loan repayment stretches beyond 8 years, no benefit is available from 9th year onwards. Note it is not compulsory to complete the higher education before deductions can be claimed under Section 80E.

SMI TAX PLANNING TIPS

• Should you avail Education Loan if you have surplus funds available? This is interesting consideration and the answer would depend on how the surplus funds are invested. As long as the tax adjusted return from surplus funds is greater than the tax adjusted cost of the loan, it is better to avail Education Loan. What do I mean? Okay, let me explain by way of an example.
  
  Suppose you need Rs. 100,000 for higher education and have two options to finance the same. You can avail Education Loan at 12% p.a. or you can are utilize your fixed deposit which is earning 9% p.a. Assuming you fall in the highest tax bracket (see the Income tax Rates) effective tax rate including surcharge and education cess is 33.99%. Since the interest on Education Loan is deductible under Section 80E and you save tax on the deduction, tax adjusted cost of Education Loan is 12% * (1 – 33.99%) = 7.92%. As long as you can generate tax adjusted return greater than 7.92%, it is advisable to go for Education Loan. In this example Fixed deposit interest is taxed at 33.99% and the tax adjusted return is 9% * (1 – 33.99%) = 5.94%. Thus if you intend to make a normal fixed deposit with the surplus funds, then taking Education Loan is not advisable since tax adjusted cost of 7.92% is greater than tax adjusted return of 5.94%. However if we assume that you make a 5-year Tax Saving fixed deposit under Section 80C (or for that matter any other investment allowed under Section 80C), then there is an additional deduction of Rs. 100,000 from the taxable income which means a tax savings of Rs 33,990. Thus to calculate effective return from the surplus funds, we have to consider tax adjusted interest income from fixed deposit plus the tax savings on the investment under Section 80C. After tax interest income is Rs 9,000 * (1 – 33.99%) = Rs 5,941. Tax saving under Section 80C is Rs. 33,990. Thus total return = Rs. 39,931, which translates to effective tax adjusted return from the surplus funds of 39.93%
  
  However if you read carefully, there is one flaw in the argument above. The above logic is valid only if the individual would not be able to make Section 80C investment, if the Rs. 100,000 surplus funds are utilized for higher education. But if you have enough surplus funds or income to make the Section 80C investment, regardless of how you finance higher education, then it would logically incorrect to consider the tax benefit of Section 80C investment while evaluating whether or not to avail Education Loan. In such a scenario, where Section 80C investment has already been made, we should compare only the after tax return from surplus funds with the tax adjusted cost of the loan. One option could be to invest the surplus in such a way that the returns are tax free. For example if we assume that the Rs. 100,000 is invested in Debt Mutual Fund or Liquid Mutual Fund with Dividend Reinvestment mode, returns would be tax free. If these investments are expected to deliver returns greater than tax adjusted cost of the Education Loan (i.e. 7.82% in our example), it is still advisable to avail Education Loan.

• Start interest payment only after you start earning. While Principal repayment is typically always deferred till completion of Education, most of the banks provide option to either pay interest starting immediately from disbursement or defer interest payment also till completion of Education. Logic is since the individual is not expected to have any income source prior to completion of education, moratorium is provided for both principal and interest till few months after completion of higher education. From tax planning perspective, it is recommended to defer both principal and interest payment till you start earning. The 8 year clock for claiming deduction under Section 80E starts ticking from the year in which interest payment starts, and not from the year in which education is completed. If you start making interest payment during the education period, in the initial years when your education is getting completed, you might not have any taxable income to claim Section 80E deduction. Note that interest on Education Loan paid in a particular year can be claimed as a deduction only that year, not later. Thus to maximize tax savings on deduction under Section 80E, it is always better to go for option to defer interest payment till completion of education.

• Take loan in your name for your spouse or children’s education and start paying interest immediately. This suggestion is exactly opposite of what I told you just in the last point. But note the difference. In the first case you have taken loan for your own Education. Thus you are not expected to have taxable income till you complete your education. However in this example we are talking about scenario where you have availed Education Loan for the higher education of your spouse or children. Thus better to start paying interest immediately and start availing deduction immediately since it will reduce your tax liability immediately. There is no sense in delaying the deduction benefit if you are in tax paying bracket.

• Take Education Loan for maximum possible amount. Education Loan is permissible for pursuing higher studies, means its includes loan can be taken not only for tuition or college fees only but other incidental expenses for pursuing such studies like hostel charges, transport charges, etc. Higher loan amount would mean higher interest amount which would be deductible from taxable income under Section 80E of the Income Tax Act. Remember, there is no upper limit on the amount of deduction allowed for interest payment on Education Loan under Section 80E.

• Take the Loan from a Bank in India - Not from Family, Friend or Employer. Deduction under Section 80E is available only when the Education Loan is availed from a Bank in India (Loan from approved charitable institution also allowed). So do not take a loan from your family, friend or employer, as the interest paid on such loan would not qualify for Section 80E deduction.

• Repay the Education Loan in 8 years. If possible, structure a ballooning repayment structure. Interest deduction under Section 80E is allowed over 8 years, beginning from the year in which interest payment starts. Thus repaying the loan in less than 8 years would mean you will forgo possible deduction from taxable income. A ballooning structure, where higher principal repayment happens in later years would ensure more interest payment and hence deduction. However, it is doubtful if the bank providing the loan would agree to a ballooning structure, since the average maturity of the loan under such a structure would be higher than a normal amortising loan for same tenor, which will make the loan more risky from debt-servicing perspective. However if an option to structure a ballooning repayment structure is available, it would be advisable to go for the same.

Appendix: Section 80E of the Income Tax Act

Deduction in respect of interest on loan taken for higher education.

(1) In computing the total income of an assessee, being an individual, there shall be deducted, in accordance with and subject to the provisions of this section, any amount paid by him in the previous year, out of his income chargeable to tax, by way of interest on loan taken by him from any financial institution or any approved charitable institution for the purpose of pursuing his higher education or for the purpose of higher education of his relative.

(2) The deduction specified in sub-section (1) shall be allowed in computing the total income in respect of the initial assessment year and seven assessment years immediately succeeding the initial assessment year or until the interest referred to in sub-section (1) is paid by the assessee in full, whichever is earlier.

(3) For the purposes of this section,

(a) approved charitable institution means an institution specified in, or, as the case may be, an institution established for charitable purposes and approved by the prescribed authority under clause (23C) of section 10 or an institution referred to in clause (a) of sub-section (2) of section 80G;

(b) financial institution means a banking company to which the Banking Regulation Act, 1949 (10 of 1949) applies (including any bank or banking institution referred to in section 51 of that Act); or any other financial institution which the Central Government may, by notification in the Official Gazette, specify in this behalf;

(c) higher education means full-time studies for any graduate or post-graduate course in engineering, medicine, management or for post-graduate course in applied sciences or pure sciences including mathematics and statistics;

(d) initial assessment year means the assessment year relevant to the previous year, in which the assessee starts paying the interest on the loan.

(e) relative, in relation to an individual, means the spouse and children of that individual.

All you wanted to know about House Rent Allowance (HRA)

House Rent Allowance (HRA) is generally paid as component of salary package. This allowance is given by an employer to an employee to meet the cost of renting an accommodation. Section 10(13A) of the Income Tax Act provides for exemption of HRA based on certain rules. In order to claim HRA exemption, the following basic conditions should be met:

1. You should be staying in a rented accommodation.
2. The house should not be owned by you or your wife.
3. You should be paying the rent.

What is the exemption amount?

Minimum of the following three is exempt:
1. Actual HRA received
2. Rent paid minus 10% of Salary
3. 50% of salary if you live in Mumbai, Delhi, Kolkata or Chennai, otherwise 40% of Salary

Salary means Basic Salary + Dearness Allowance + Commission based on a fixed percentage of turnover achieved by employee. Most of the private sector companies don’t have the last two components in the salary package.

Simple example:

Basic Salary: Rs 30,000 per month, i.e. Rs 360,000 for the year
HRA: Rs 10,000 per month, i.e. Rs 120,000 for the year
Rent paid: Rs 8,000 per month, i.e. Rs 96,000 for the year (House in Chennai)

HRA exemption:

HRA received: Rs 120,000
Exempt: Minimum of following,
1. Actual HRA: Rs 120,000
2. Rent less 10% of Salary: Rs 96,000 – (10% of 360,000): Rs 60,000
3. 50% of Salary: Rs 180,000

Thus Rs 60,000 HRA is exempt and balance Rs 60,000 HRA is taxable.
Thus out of Rs 480,000 Salary package; Rs 420,000 is taxable and Rs 60,000 is exempt (For the time being let’s ignore all other exemptions under Income Tax Act).

SMI Tax Planning Tips:

1. Negotiate Salary Package

When negotiating Salary package try to make HRA component 50% of Basic Salary. For example your employer is willing to pay Rs 600,000 Salary for the year. You can structure it as Rs 500,000 Basic + Rs 100,000 HRA OR Rs 400,000 Basic + Rs 200,000 HRA. It would be better to go for the second option since maximum HRA exemption is limited to 50% of Basic. HRA of more than 50% of Basic and you will get stuck in Rule 3, i.e. 50% of Salary.

Disclaimer: This would at times be not in your hand and many companies would have their own criteria about how much HRA would be. Next tip is more practical

2. “Ideal Rent”

“Decide” on the “Ideal Rent” amount for the “Rent Receipt” you need to submit to your employer. Follow the simple formula:

Ideal Rent = HRA + 10% of Salary

Thus Rent for example above would be Rs 10,000 + (10% of 30,000) = Rs 13,000 per month, i.e. Rs 156,000 per annum

Quick Re-calculation of our example:

HRA received: Rs 120,000
Exempt: Minimum of following,
1. Actual HRA: Rs 120,000
2. Rent less 10% of Salary: Rs 156,000 – (10% of 360,000): Rs 120,000
3. 50% of Salary: Rs 180,000

Thus entire Rs 120,000 HRA is exempt.
Thus out of Rs 480,000 Salary package; Rs 360,000 is taxable and Rs 120,000 is exempt. That’s a neat saving of tax on Rs 60,000 compared to first scenario!!

Note: If the tip 1 is also implemented, Salary Package of Rs 480,000 is negotiated as Rs 320,000 as Basic Salary and Rs 160,000 as HRA.

“Ideal Annual Rent” is Rs 160,000 + (10% of 320,000) = Rs 192,000. Exemption as under:

HRA received: Rs 160,000
Exempt: Minimum of following,
1. Actual HRA: Rs 160,000
2. Rent less 10% of Salary: Rs 192,000 – (10% of 320,000): Rs 160,000
3. 50% of Salary: Rs 160,000

Thus entire Rs 160,000 HRA is exempt.
Thus out of Rs 480,000 Salary package; Rs 320,000 is taxable and Rs 160,000 is exempt. That’s a neat saving of tax on Rs 100,000 compared to first scenario!!

3. Staying with your Parents?

Paying rent to family to claim exemption. It would be advisable for the landlord, in this case your parent, to declare this income in his/ her personal Income Tax return. This will prevent any litigation in the future. However paying rent to spouse is not advisable.

4. Taken a Housing Loan?

Can you claim both deduction for Interest on Home Loan u/s 24(1) and HRA u/s 10(13A)?

YES and NO.

If the own property and rented property are in different cities, both exemption can be claimed. For example you have property in Kolkata where your parents reside and you work in Mumbai and stay in rented apartment. You can claim both deduction for Interest on Home Loan and HRA. Note the owned property should be self-occupied and should not have been rented out. In that case deduction for Interest on Home Loan is not available.

If the own property and rented property are in same cities, both exemption cannot normally be claimed. However you can still claim both exemptions if you can proof that the owned property is far off from your work place and you stay in rented house near to your office. For example Loan is taken for house in Borivali and you stay in rented house in Colaba and your office is in Fort area in Mumbai, you can claim both exemptions. Again note the owned property should be self-occupied and should not have been rented out. In that case deduction for Interest on Home Loan is not available.

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Deduction u/s 80DDB of Medical Treatment

Deduction in respect of medical treatment etc. Sec. (80DDB)

Who can Claim
A resident individual or HUF (Hindu Undivided Family)

Which Period
Deduction is allowed in respect of amount actually paid during a year for the medical treatment of specified disease or ailment for himself or a dependent or a member of a HUF. The diseases an ailments specified under rule 11DD

(1) neurological diseases being dementia, dystopia musculorum deformans, motor neuron disease, ataxia, chorea, hemibilismus, aphasia and parkinsons disease (2) CANCER, (3) AIDS (4) chronic renal failure, (5) hemophilia and (6) thalassaemia.

Amount of deduction

- Amount actually paid or Rs. 40000 whichever is less.

- amount actually paid or Rs. 60000 whichever is less.(In case the amount is paid in respect of the assessee, or a person dependent on him, who is a senior citizen (exceeding 65 year of age).

Conditions:

The deduction allowable shall be reduced by the amount or insurance cover for medical treatment, if any received.

The assessee shall furnish a certificate in form 10-I (download) from neurologist, oncologist such other specialist, as may be prescribed, working in a Government hospital.

Deduction u/s 80D Mediclaim (Medical Insurance Premia)

Deduction in respect of Medical Insurance Premia [Sec. 80D]

Deduction is allowed for any medical insurance premium under an approved scheme of General Insurance. corporation of India, (popularly known as MEDICLAIM) or of any other insurance company, paid by any mode except cash, out of assessee's taxable income during the previous year, in respect of the following:

Feature

This is an additional deduction after deduction u/s 80C because overall limit on deductions u/s 80C, 80CCC and 80CCD is Rs. 1,00,000. (Sec.80CCE). See below example.

For Whom Deduction u/s 80D is available

(a) In case of an individual- Insurance on the health of the assessee, or wife or husband, or [dependent] parents or dependent children.

(b) In case of an H.U.F.- Insurance on the health of any member of the family.

Amount of Deduction

For A.Y. 2008-09: Maximum Rs.15,000 (Rs.20,000 in case any person insured is a senior citizen).

For A.Y. 2009-10:(1) In case of an individual assessee :

An additional deduction upto Rs. 15000 (Rs. 20,000 in case of the person insured is senior citizen) shall be allowable in respect of medical insurance premium for parent(s) whether or not dependent on the assessee.

Example of Mediclaim deduction

If 'A' has paid medical insurance premium (mediclaim) u/s 80D as follows

Deduction u/s 80C for PPF, NSC/LIC	1,20,000/-
Medical Insurance Premium
-For self, wife and dependent children	18,000/-
-For parents (both Senior Citizens)	22,000/-
Total Sum paid by 'A'	1,60,000/-
Solution: Allowable Deductions
Deduction u/s 80C for PPF, NSC/LIC	1,00,000/-
Medical Insurance Premium
-For self, wife and dependent children	15,000/-
-For parents (both Senior Citizens)	20,000/-
Total Allowable Deduction	1,35,000/-

2) In Case of an H.U.F, the maximum deduction is Rs. 15000 (Rs.20,000 in case any person insured is a senior citizen.)

Mode of Payment (Mediclaim)

Medical insurance premia may be paid by any mode (including by credit card, internet banking) except cash.

Only House Owner can Claim Deduction u/s 80C

I Work in an IT Company and took a housing loan from HDFC Bank. I am the co-applicant. The property is in my mother's name but she is a housewife and i pay all EMIs. Am I eligible for tax benefit ?

A Deduction under section 80C of the act toward the payment made by way of repayment of amount borrowed by the assessee from the bank for the construction or the acquisition of a residential house is allowed to a person who is the owner of the residential house. in your case, the owner of the house being your mother, you would not be entitled to any deduction under the saidsection.

Q. I took a loan in my wife’s name for buying a house in her name. I am a salaried employee and I have been repaying the EMIs on the said loan out of my income. Can I claim the deduction under Sections 80-C and 24 in respect of the principal repayment and the interest on the housing loan?

A. The deduction under Section 80-C in respect of the principal repayment and under Section 24 in respect of the interest on the housing loan can be claimed by the owner of the property.

The question therefore will be whether you are the owner of the house property for the purpose of the claim under these sections.

You may note that the ownership in this context does not refer to the registered ownership but to the real ownership.

In your case if you are able to show on the facts that you are the real owner of the property, the deductions will be available to you though your wife is the registered owner of the property.

Post Office Time Deposit Account

POST OFFICE TIME DEPOSIT ACCOUNTS

Who can open an account

Any individual can open an account, whether singly or jointly with another person. Account can be opened on behalf of a minor or a person of unsound mind. Even more than one account can be opened without any limit. The deposit shall be made in multiples of [Rs. 200].

Maturity

The account can be opened for 1 year, 2year, 3year or 5years.

Interest

Interest on time deposits is payable as under:

Deposit made from 1.3.2003 onwords

1st year 6.25%

2nd year 6.50%

3rd year 7.25%

5th year 7.50%

Withdrawals

Not permitted before 6 months. No interest is payable if deposit is withdrawn after 6months but before 1year. If deposits made for 2years, 3years or 5years are prematurely withdrawn after one year, then interest shall be payable at a rate 2% less than the rate applicable to the period for which the deposit has run.

Income Tax Benefit

Amount invested in 5years POTD, alongwith PPF/LIC/NSC/ULIP, etc. upto a maximum of Rs. 1,00,000 is eligible for deduction u/s 80C. In case of deposit under joint holding, deduction u/s 80C shall be available to the first holder.

Download Form 16 | Form 16A | TDS Certificate in Excel Format

What is Form 16 ?

As you all know it is most important form and regularly used by us. It is a certificate issued to you by your employer stating the details of the salary you have earned and the tax deducted on your behalf and paid to the government

If you are an employee of the company (which means you are on the company's payroll), you should receive your Form 16 by April 30 every year.

Download Form 16 | Salary Certficate | Excel Format .

What is form 16A ?

Form 16A is the TDS Certificate which every person deducting tax has to provide to the deductee for every month or for a year.

Form 16 - TDS Certificate for Salaried Employees

Form 16A - For other Payments

Download Form 16 A | TDS Certificate | Excel Format

How to Deduct Tax at Source (TDS) on Salary Step by Step

How to Deduct Tax at Source on Salary Step by Step

Step 1

Gross Salary (including salary received from former employer, if details are submitted) and the value of benefits or perquisites or amenities provided free of cost or at concessional rate to the employee.

Step 2

Deduct the receipts which are exempt from income tax under Sec.10, such as, leave travel concession, gratuity, commuted pension, leave salary, retrencment compensation, payment on voluntary retirement, house rent allowance, allowlances specified u/s 10(14)etc., if include in income from salary.

Step 3

Allow deduction for entertainment allowance, if eligible, and also Profesional tax, if any to arrive at net taxable salary. Standard deduction is not available from A.Y. 2006-07.

Step 4

Allow set off of any loss under the head 'house property' relating to a self-occupied residential house on account of interset on loan subject to a Maximum of Rs. 30,000.(Rs. 1,50,000 in case of loan taken on or after 1.4.1999 for construction or purcahse of house within three years from the end of thefinancial year in which the loan was taken). Particulars of such loss shall be furnished by the employee in a statement duly verified by the employee, alongwith a certificate from the person to whom interest is payable on the capital borrowed.

Step5

Deduct the amount invested in LIC, P.F., P.P.F., repayment of housing loan, subscription of certain equity shares or debentures tuition fees etc. subject to maximum of Rs. 1,00,000.

Step 6

Deduct the amount contribution to notified Pension Scheme by employees of Central Government or any other employer.

Step 7

Deduct the amount of health insurance premium (Mediclaim), subject to a maximum of Rs. 15,000.

Step 8

Deduct the amount of expenditure incurred, if any, on the medical treatment, training and rehabilitation or the amount deposited in a scheme of LIC or UTI for the maintenance of a handicapped dependent relative. Deduction allowable is Rs. 50,000 (Rs. 75,000 in case of severe disability), irrespective of the amount of expenditure incurred.

Step 9

Deduct the amount paid to a financial institution or an approved chartiable institution, towards interest on a loan taken for higher eduction, without any limit.

Step 10

Deduct the amount of house rent paid by the employee for his own residence, subject to specifieed conditions. Maximum deduction allowable is Rs. 2000 p.m.

Step 11

Deduct allowance for physical disability.

Step 12

Total Income as computed above should be rounded off to the nearest multiple of Rs. 10.

Step 13

Calculate Income Tax

Step 14

Divide the amount of tax as calculated in Step 13 by twelve, to arrive at 'monthly deduction' of tax from salary.