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With January almost coming to an end, this is as good a time as any to start planning your tax return. The trick is to start early and take the necessary actions step by step. Tax planning is an all-time process and not a one time, sporadic exercise.

This week’s column examines some of the finer points related to tax deductions — these nuances are less commonly known and it is hoped that an understanding of the same would help the reader optimise his or her tax return, not only in terms of paying lesser tax but also making it error free.

First up is HRA or house rent allowance. Though the following point has been covered in some previous articles, so widespread is the misperception that I think a reiteration is warranted.

HRA and home loan provisions are two different issues as far as the Income-Tax Act (ITA) is concerned and one does not influence the other. So, you may own a flat or any number of flats, either in the same city that you work in or anywhere else in the whole of India or for that matter abroad — this will in no way influence the HRA deduction that you are entitled to. Conversely, notwithstanding the amount of HRA that you receive, your home loan deductions on the EMIs for the house that you have bought or intend to buy will not be affected.

But note that it is not compulsory for your employer to provide HRA. So what happens if you stay in a rented house but your company doesn’t have a policy of paying HRA? How can you still continue to claim deduction on your rental payments? For this, you need to take recourse to Section 80GG of the ITA. This section provides a deduction on rent paid in excess of 10% of your total income to the extent to which such excess does not exceed i) 25% of your total income or ii) Rs 2,000 per month, whichever is lower.

Moving on to Section 80C. Generally, Section 80C is synonymous with deduction available in respect of payment of life insurance premiums or investments in PPF, NSCs and ELSS funds.

However, did you know that tuition fees paid to any school or college for the full time education of up to two children is also allowed as a deduction? Also, recently, investments in Nabard bonds or senior citizen saving scheme and post office term deposits have been added to the list of eligible investments.
Regarding PPF, most know that the deduction is available in respect of contributions made in the name of self, spouse or children.

However, did you know that the combined investment limit for yourself and your minor children is Rs 70,000? I have come across several investors who invest Rs 70,000 for themselves and additionally in the name of minor children. This is not allowed under the PPF rules.

With respect to housing finance, the principal portion of the EMI paid in respect of your house is deductible. However, in order to claim the deduction, the house needs to be owned for five whole years. If you sell your house in the interim, the earlier deductions claimed are to be added back to your taxable income in the year in which the house is sold.

Yet another deduction is Section 80E, which offers a tax break in respect of education loans.

Interest paid on the education loan is fully deductible without any limit for eight successive years starting with the year in which the interest is first paid. Earlier, this deduction had a ceiling of Rs 40,000. Also, it used to be available only to the person taking the loan. So if a student were to take the loan, he or she didn’t really have taxable income to make use of the deduction. And if the parent were to take the loan, the deduction wasn’t available to the parent as it was not used for the parent’s education
but that of the child.

Thankfully, this anomaly has been corrected and now, interest paid on loan taken for the education of children and even the spouse may be deducted.

Moving on to capital gains. The securities transaction tax (STT) paid is not allowed as an expense in calculating your capital gain.
Secondly, in respect of adjusting capital losses, note that any capital loss can be adjusted against capital gain income only and not against any other type of income.

However, taxable capital gain may be adjusted against other losses such as business loss or loss under the head of house property. Even within the umbrella of capital losses, note that though short-term loss may be adjusted against either short-term gains or taxable long-term gains, a long-term loss can be adjusted only against taxable long-term gain.

Unadjusted capital loss may be carried forward to be set-off against eligible capital gains for eight years. However, this facility is not available if the tax return is not filed within time.

Persons who are physically or mentally challenged also get a deduction. Section 80U offers deduction to a handicapped person of Rs 50,000 and Rs 75,000, for non-severe and severe disabilities, respectively. Section 80DD offers similar deduction in respect of handicapped dependents. Note that these deductions are statutory in nature and do not depend upon the actual amount spent on treating the disability. In other words, these deductions may be claimed, irrespective of the expenditure on the treatment or the duration of the disability.

And lastly, for non-resident Indians (NRIs), in respect of capital gain income, the shelter of the basic threshold is not available. For example, say Rajeev, a resident Indian were to sell his house and earn a capital gain of Rs 10 lakh. If this capital gain is his only income, he will have to pay tax only on Rs 8.40 lakh (Rs 10 lakh minus the basic exemption of Rs 1.60 lakh). However, if Rajeev were to be an NRI, he would have to pay tax on the full amount of Rs 10 lakh.

The writer is director, Wonderland Consultants, a tax and financial planning firm.