Income tax benefits for FY 2019-20 (AY 2020-21)

I would like to talk about Income tax benefits for FY 2019-20 (AY 2020-21) because June 30 is an extremely important deadline for a whole range of taxation. The Income tax Act, 1961 providing the deductions and exemptions on our investments and expenses. Here, I have given some of the most important deductions and exemptions. The taxpayers should remember the following tax deductions or exemptions before paying the Income-tax to the government for the Financial year 2019-20.

1. House Rent Allowance (HRA):

If we are living in a rented house and receive HRA as a part of the salary, we can claim this exemption u/s 10(13A) in accordance with Rule 2A of the Income Tax Rules as:

i. HRA received, or

ii. 50% of Basic salary + DA, if we are living in a Metropolitan city. Otherwise, 40% if we are living in other than Metropolitan city., or

iii. Excess of rent paid over 10% of basic salary + DA, whichever is less.

Example:-

Assume that one employee earns a basic salary + DA of Rs. 40,000 per month and living in a rented house (Mumbai) and rent paid Rs. 10,000 per month. His actual HRA is Rs 16,000.

i. Actual HRA received i.e. Rs. 16,000

50% of basic salary + DA i.e. Rs. 20,000

Excess of rent paid over 10% of basic salary + DA i.e. (10,000 - 4,000) = Rs. 6,000.

Hence, Rs. 6,000 per month is the least and will be exempted for HRA deduction.

In the case of self-employed who do not receive HRA from their employer, can claim deduction up to Rs. 60,000 in a financial year u/s 80GG.

2. Leave Travel Allowance (LTA):

This exemption can be claimed by those who receive this LTA from their employer u/s 10(5) of the Income-tax Act, 1961. The deduction is lower of the LTA amount or actual expenses. This exemption can be claimed to the extent of actual expenditure incurred on domestic journey (travel within India). No international travel is covered under LTA. The exemption for LTA allowed to an employee and their family for 2 travels undertaken within a block of 4 calendar years. The block applicable for the current period is calendar years 2018 to 2021.

3. Life Insurance Policy:

We can claim deduction up to Rs. 1,50,000 u/s 80C on premium paid for a life insurance policy. The maximum deduction allowed is only 10% on sum assured. For example, if the sum assured is Rs. 10,00,000, the limit is Rs. 1,00,000. If we pay an actual annual premium of Rs. 1,20,000, the maximum deduction allowed is only Rs. 1,00,000. However, if we purchased the life insurance policy before 31st March 2012, then we are allowed a deduction of up to 20% of the sum assured amount.

4. Health Insurance Policy:

If we are less than 60 years of old and paying health insurance policy for ourselves or spouse or our children, then we can claim maximum health insurance policy premium amount of Rs. 25,000 u/s 80D of the Income Tax Act. If we are above 60 years of old, the maximum deduction will be Rs. 50,000. If we pay health insurance premium for our senior citizen parents as well, we can claim additional deduction of Rs 50,000. If the premium is lesser than the maximum deduction, you can claim maximum amount up to Rs. 5,000 deduction for expenses on preventive healthcare. Super senior citizens who are having more than 80 years, can claim a maximum deduction of Rs. 50,000 on actual expenses incurred on their healthcare.

5. Medical Expenses:

(A) We can claim the deduction for medical expenses u/s 80DD for medical expenditure incurred in case of self, spouse, children, parents, or dependent siblings. Such deduction and deductible amount will be applicable in below conditions:

i. If disability is 40% or more but less than 80%, then fixed deduction of Rs. 75,000.

ii. If there is severe disability i.e. more than 80%, then fixed deduction of Rs. 1,25,000.

It should be noted that the certificate of disability is required from respective medical authority to claim this deduction. 

(B) Deduction for Medical Expenditure u/s 80DDB for Self or Dependent relative

i. A deduction up to Rs. 40,000 is available with respect to any expense incurred towards treatment of specified medical diseases or ailments for himself or any of his dependent in case of individuals and HUFs below age 60.

ii. A deduction up to Rs. 1,00,000 is available with respect to any expense incurred towards treatment of specified medical diseases in the case of senior citizens and super senior citizens.

It should be noted that we need to get a prescription for such medical treatment from the concerned specialist in order to claim such deduction. 

6. Home Loan amount:

If we have taken a home loan for purchasing or constructing a house, then we can claim deduction on both interest and principal payments as the maximum amount of Rs. 2,00,000 as mentioned below.  If we are not able to construct such a home within 5 years, then we are eligible to claim for maximum amount of only Rs. 30,000 per annum.

7. Education Fee:

We can claim deduction towards expenses incurred on tuition fee paid during the financial year to any school, college, university or other educational institution situated in India for the purpose of full time education of any two children up to maximum amount of Rs. 1,50,000 u/s 80C(2)(xvii) of the Income Tax Act, 1961. However, no deduction can be available in respect of development fee or donation or any other payment of similar nature.

8. Interest on Education loan:

We can claim deduction towards an interest paid on education loan for self or spouse or children u/s 80E. This deduction has no limit i.e. we can claim entire amount how much we paid during the financial year. The deduction is allowed for a period of 8 years or until the interest is paid by the individual in full, whichever is earlier. However, it should be remembered that no deduction can be claimed during the moratorium period.

9. Exchange Traded Funds (ETFs) by CPSE:

We can claim deduction towards investment in ETFs during the financial year up to a maximum amount of Rs. 1,50,000 u/s 80C of the Income Tax Act, 1961. ETFs are good investment option as contributions of this scheme are invested in a wide range of government companies operating in different core sectors (i.e. electricity, energy, etc.) of the economy. It tracks the CPSE (Central Public Sector Enterprises) index.

10. Unit Linked Insurance Plan (ULIP):

We can claim the premium paid towards ULIPs which are offered by Insurance companies is eligible for a tax deduction up to a maximum amount of Rs. 1,50,000 u/s 80C. Moreover, the returns out of the policy on maturity are exempt from income tax u/s 10(10D) of the Income Tax Act 1961. Hence, we can say that this is a dual benefit from a single contribution of this policy. The benefits of investment in ULIPS are:

i. Life cover,
ii. Income tax benefits,
iii. Flexibility of a portfolio switch,
iv. Finance long-term goals, etc.

However, the returns are not as high as ELSS because, a part of the investment amount goes into buying the insurance cover.

11. Equity linked savings scheme (ELSS):

We can claim deduction towards investment in ELSS of Mutual Funds during the financial year up to a maximum amount of Rs. 1,50,000 u/s 80C of the Income Tax Act, 1961. The ELSS of MF can offer higher returns and tax benefits. However, the returns from these schemes are taxable.  The profit from  ELSS treated as long term capital gains (LTCG) and taxed at 10% for gain more than Rs. 1,00,000.

12. Fixed deposits (FD):

We can claim deduction towards investment in Fixed deposits (5-year lock-in period) of Banks and Post offices during the financial year up to a maximum amount of Rs. 1,50,000 u/s 80C of the Income Tax Act, 1961. However, interest earned on FDs is taxable income. The rate of return on FD of post office 7.7% at present. The interest rate of FD through banks is vary from bank to bank.

13. Public Provident Fund (PPF):

We can claim deduction towards contribution to PPF during the financial year up to a maximum amount of Rs. 1,50,000 u/s 80C of the Income Tax Act, 1961. The PPF which is a long-term tax saving investment scheme having a lock-in period of 15 years and investors need not to pay tax at any stage of the investment. The rate of return on PPF is 7.9% at present.

14. National Savings Certificate (NSC):

We can claim deduction towards contribution to NSC during the financial year up to a maximum amount of Rs. 1,50,000 u/s 80C of the Income Tax Act, 1961. There is no maximum investment limit in NSC, and TDS will not be deducted on the interest amount. However, interest earned on NSC is taxable income. The rate of return on NSC also 7.9% at present.

15. National Pension Scheme (NPS):

(a). We can claim deduction towards self-contribution of NPS (which is a part of Section 80C) during the financial year is 10% of the salary (in case of employees) but not more than the maximum limit of Rs. 1,50,000 or u/s 80CCD(1) of the Income Tax Act, 1961. But, in the case of self-employed taxpayer, this limit is 20% of the gross income.

(b). The employees can claim additional self-contribution up to an amount of Rs. 50,000 u/s 80CCD(1B) as NPS tax benefit. Therefore, NPS allows a maximum tax deduction of Rs. 2,00,000.

(c). Section 80CCD(2) covers the employer's contribution to NPS, which will not form a part of Section 80C. This benefit is not available for self-employed taxpayers. The maximum amount eligible for deduction will be:-

i. Actual NPS contribution by employer,
ii. 10% of Basic + DA,
iii. Gross total income, whichever is lower.

NPS is run by the government of India and is open to public. NPS to boost returns of retirement savings.

16. Other Pension Plans:

Other than NPS, LIC and Mutual fund houses are providing investment options of retirement plans either deferred or immediate annuity income after retirement. Any contribution to such plans will make us eligible to claim deduction of up to Rs. 1,50,000 u/s 80C during the financial year.