Understanding Tax Benefit Under Section 80D, 80DD, 80DDB

We shall be now discussing on importance and income tax deductions under sections 80D, 80DD and 80DDB for the purpose of tax saving which relate to medical insurance premium, medical expenses on treatment of handicapped dependent and medical expenses on treatment of specified diseases.

In today’s world every family has regular medical expenses. This may be towards a health insurance premium, or expenditure related to a family member’s disability/critical illness. The Income Tax Act of 1961 has made provisions to reduce this burden through tax deductions under section 80D, 80DD, 80DDB.

Section 80D in Respect to Health Insurance Premiums

Expenses incurred towards payment of health insurance premiums, qualify for a tax deduction under section 80D.

Deduction Limit: Amount of health insurance premium paid or Rs. 15000 whichever is less.  For senior citizens, amount of health insurance premium paid or Rs. 20,000, whichever is less.

A further deduction of Rs 15,000 could be claimed, for buying health insurance policy for your parents (Rs 20,000 if either of your parents is a senior citizen). This is irrespective of whether they’re dependent on you or not. No deductions can be claimed for in-laws.

Senior Citizen:  Finance Act, 2012 has proposed to amend age of senior citizen from 65 year to 60 year, effect shall take effect from 01.04.12.

Applicable to: Individual assesses can claim deduction for premiums paid towards health insurance of self, spouse, parents and children.

For HUF assesses, premium paid for insuring the health of any member of the HUF, can be used for deduction.

Highlights:

a.       The premium may be paid by any mode of payment, other than cash.

b.      The health insurance premium that you pay must be from the taxable income applicable for the year you claim. Premiums should not be from gifts received by you.

c.       Part payment of premium is allowed. For example, suppose your parents contribute 50% of their health insurance premium and you pay the balance 50% of their premium. In such a case, you could avail the deduction for the amount contributed by you and your parents too could avail deduction for their contribution.

Finance bill 2012 has also proposed deduction for expenditure on preventive health check-up.

 1.   It is proposed to amend this section to also include any payment made by an assessee on account of preventive health check-up of self, spouse, dependent children or parents(s) during the previous year as eligible for deduction within the overall limits prescribed in the section. However, the proposed deduction on account of expenditure on preventive health check-up (for self, spouse, dependent children and parents) shall not exceed in the aggregate Rs.5,000).

2. It is further proposed to provide that for the purpose of the deduction under section 80D, payment can be made – (i) by any mode, including cash, in respect of any sum paid on account of preventive health check-up and (ii) by any mode other than cash, in all other cases.

3. These amendments will take effect from 1st April, 2013.

Section 80DD for Medical Treatment of Handicapped Dependents

If you are incurring expenditure for the treatment of your handicapped dependent, you could claim a deduction under section 80DD.

Deduction Limit: Rs 50000, or actual expenditure incurred, whichever is lesser. For severe handicap conditions Rs. 1,00,000 is the deduction limit.

Applicable to: Deduction can be claimed for dependent parents, spouse, children and siblings. Dependents must not have claimed any deduction for their disability.

Deductions are permissible in either of the following cases.

a) Costs incurred for medical treatment, training or rehabilitation of a disabled dependent, including amount spent for nursing.

b) Amount paid towards an insurance scheme for the maintenance of your disabled dependent in case of your untimely death.  

Meaning of Disability- Disability means a person suffering from 40% or more of any of the below disabilities. A severe disability condition is 80% or more of the disabilities.

a) Blindness and Vision problems b) Leprosy-cured c) Hearing impairment) Locomotors disability e) Mental retardation or illness.

Highlights:

a) Individuals would need to produce a copy of the disability certificate as issued by the central or state government medical board to claim deduction.

b) Insurance policy obtained must be in your name and should be a policy for life. It could pay either an annuity or a lump sum amount for the benefit of the dependent on your death.

c) If the disabled dependent predeceases you, the policy amount is returned to you, and treated as income for the year in which you receive it, thus fully taxable in your hands.

Section 80 DDB for Treatment of Specified diseases

Medical expenses paid for treatment for self or dependent relatives suffering from specified illnesses as mentioned in rule 11DD, tax benefit can be claimed under section 80DDB.

Deduction Limit: For individual assesses  a deduction limit of Rs. 40,000 is applicable. For a senior citizen, the limit is Rs. 60,000.

Applicable to: Deduction is applicable for treatment of self, spouse, children, siblings, and parents, wholly dependent on you.

Diseases covered

a) Neurological Diseases (where the disability level has been certified as 40% or more).

b) Parkinson’s Disease

c) Malignant Cancers

d) Acquired Immune Deficiency Syndrome (AIDS)

e) Chronic Renal failure

f) Hemophilia

g) Thalassaemia

Highlights:

No deduction can be claimed on account of reimbursement for the treatment from insurance company or employer. However, in case of partial reimbursement, the balance amount can be used for a deduction.

A certificate would be required from a specialist working in a government hospital, as proof for the specified ailment.

Senior Citizen:  Finance Act, 2012 has proposed to amend age of senior citizen from 65 year to 60 year, effect shall take effect from 01.04.12.

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Deduction Under Section 80 C of Income Tax Act

As per Income Tax rule, income from different source should be aggregated first to find out Gross Total Income (GTI) & then deduction is allowed under Chapter VIA (80C to 80U) from GTI & then tax is to be calculated.

Deduction u/s 80C is available to individual or Hindu Undivided family (whether resident or non- resident) on the basis of specified investments or contributions or deposits or payments made during the previous year subject to maximum of Rs 1,00,000. Thus if an individual is in highest tax bracket of 30% , full investment u/s 80C  can save him Rs. 30,000 in a year.

One of the significant reasons is to know what all instruments of investments and deductions / exemptions have been included in the Section 80C of Indian Income Tax for employees, so that they can plan their tax savings according to the same, and maximize the benefits. However, it is important to know the Section in toto so that one can make best use of the options available for exemption under income tax Act.   One important point to note here is that one can not only save tax by undertaking the specified investments, but some expenditure which you normally incur can also give you the tax exemptions.

As income tax is major component of the salary, the changes / additions in 80C Section has major impact on the savings and expenses of salaried employees as they have a fixed source of income. The 80C Section deductions are introduced to boost savings of employees on one side and save tax on the other side.

We will now see in detail those deductions that are permissible (Qualifying Investments) under section 80C in this section. The following is section 80c deductions / exemption list.

Provident Fund (PF) & Voluntary Provident Fund (VPF): As per act PF is deducted from every one salary. Both employee and your employer contribute to it equally. While employer’s contribution is exempt from tax, employee contribution is only eligible for deduction u/s 80C.

Public Provident Fund (PPF): Among all the assured returns small saving schemes, Public Provident Fund (PPF) is one of the best. Current rate of interest for FY 2012-13 stands @ 8.8% P.a which is tax-free and the normal maturity period is 15 years. Minimum amount of contribution is Rs 500 and maximum is Rs 100000 (w.e.f. 01.12.2011). Read More

Life Insurance Premiums: Any amount paid towards life insurance premium for yourself, your spouse or your children can also be included in Section 80C deduction. Please note that life insurance premium paid for parents (father / mother / both) or in-laws is not eligible for deduction under section 80C. If premium is paid for more than one insurance policy, all the premiums can be included. It is not necessary to have the insurance policy from Life Insurance Corporation (LIC) – even insurance bought from private players can be considered here.

Equity Linked Savings Scheme (ELSS): Some mutual fund (MF) schemes specially created to offer tax savings, and these are called Equity Linked Savings Scheme (ELSS). The investments that you make in ELSS are eligible for deduction under Sec 80C. Investment under ELSS can also be made by way of SIP.

Home Loan Principal Repayment: The Equated Monthly Installment (EMI) that one pay towards repayment of home loan consists of two components – Principal and Interest. The principal component of the EMI qualifies for deduction under Sec 80C. Even the interest component can save significant income tax – but that would be under Section 24 of the Income Tax Act. Details shall be discussed in latter post for our readers

Stamp Duty and Registration Charges for a home: The amount of stamp duty and registration charges paid for registration of the documents of the house can be claimed as deduction under section 80C in the year of purchase of the house.

National Savings Certificate (NSC): National Savings Certificate (NSC) is a 6-Yr small savings instrument eligible for section 80C tax benefit. Rate of interest is eight per cent compounded half-yearly, i.e., the effective annual rate of interest is 8.16%.The interest accrued every year is liable to tax (i.e., to be included in your taxable income) but the interest is also deemed to be reinvested and thus eligible for section 80C deduction.

Infrastructure Bonds: These are also popularly called Infra Bonds. These are issued by infrastructure companies, and not the government. The amount of investment in these bonds can also be included in Sec 80C deductions.

Pension Funds – Section 80CCC: This section – Sec 80CCC – stipulates that an investment in pension funds is eligible for deduction. Section 80CCC investment limit is clubbed with the limit of Section 80C – it means that the total deduction available for 80CCC and 80C is Rs. 1 Lac. This also means that the investment in pension funds up to Rs. 1 Lac can be claimed as deduction u/s 80CCC. However, as mentioned earlier, the total deduction u/s 80C and 80CCC is available up to Rs. 1,00,000 both inclusive.

5-Yr bank fixed deposits (FDs): Tax-saving fixed deposits (FDs) of scheduled banks with tenure of 5 years are also entitled for section 80C deduction. This FDs are not available in PSU banks but now some of the private banks are also offering  5 years FD which are eligible for deduction u/s 80C.

Senior Citizen Savings Scheme 2004 (SCSS): A recent addition to section 80C list, Senior Citizen Savings Scheme (SCSS) is the most lucrative scheme among all the small savings schemes but is meant only for senior citizens. Current rate of interest is 9% per annum payable quarterly. Please note that the interest is payable quarterly instead of compounded quarterly. Thus, unclaimed interest on these deposits won’t earn any further interest. Interest income is chargeable to tax.

5-Yr post office time deposit (POTD) scheme: POTDs are similar to bank fixed deposits. Although available for varying time duration like one year, two year, three year and five year, only 5-Yr post-office time deposit (POTD) – which currently offers 7.5 per cent rate of interest –qualifies for tax saving under section 80C. As the rate of interest is compounded quarterly but paid annually. The Interest is entirely taxable.

NABARD rural bonds: There are two types of Bonds issued by NABARD (National Bank for Agriculture and Rural Development): NABARD Rural Bonds and Bhavishya Nirman Bonds (BNB). Out of these two, only NABARD Rural Bonds qualify under section 80C.

Unit linked Insurance Plan: ULIP stands for Unit linked Saving Schemes. ULIPs cover Life insurance with benefits of equity investments. They have attracted the attention of investors and tax-savers not only because they help us save tax but they also perform well to give decent returns in the long-term.

Others: Apart from the major tools which are listed above, there are some other things, like children’s education expense (for which you need receipts), that can be claimed as deductions under Sec 80C.

Note: If anyone’s income falls under taxable limit, he/she should defiantly invest in any of the tools as mentioned above up to Rs 1 Lac to save tax, tools in which one should invest will entirely depends upon his/her needs, investor could evaluate the same and make plan investment after detailed market study. It is advisable to start making investment from the beginning of year instead of going for unplanned investment at the end of the year just to save taxes.

Income tax slab for FY 2012-13 and FY 2011-12

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