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Factors that influence Personal Taxation – Life insurance premium & home loan deduction

Individuals can use income tax deductions to reduce their taxable income and, as a consequence, their tax liability in a given fiscal year. Simply put, income tax deductions are investments made during the fiscal year that is deducted from gross annual income when filing income tax returns. The provision of tax deductions is intended to instil in people the habit of saving in order to help them build a secure financial future.

The Income Tax Act provides a variety of such deductions and exemptions. However, certain provisions of the income tax laws go largely unnoticed but have significant tax implications. Also, people do not have enough knowledge of the appropriate provisions that may be applicable to them. In this blog, we discuss some of these significant tax laws and their related deductions available to a taxpayer.

Tax laws for life insurance and health insurance premium

Both life and health insurance are subject to separate tax laws under the Income Tax Act. It can be difficult for someone who is unfamiliar with these issues to interpret tax provisions and make the proper claim when filing income tax returns.

Individuals can claim tax breaks under Section 80C for paying premiums for a life insurance policy. Tax deductions, on the other hand, can be claimed under Section 80D of the Income Tax Act for the payment of premiums for a health insurance plan.

The primary conditions for claiming tax exemption on life insurance premium under Section 80C of the Income Tax Act are as follows:

• Only an individual or a member of the Hindu Undivided Family can claim tax deductions. A person can be either a resident or a non-resident.
• The maximum deduction available under this section, when combined with life insurance premium, is Rs 1,50,000 per year.
• A person can purchase a life insurance policy for themselves, their spouse, and their children.
• A traditional plan, pure term insurance, or a ULIP plan are all options for life insurance.
• The tax exemption claims for ULIPs and traditional life insurance plans would be reversed or cancelled if the insured person surrenders the insurance policy prior to 5 years and 2 years, respectively. It further depends on the type of insurance plan.

An individual or a HUF (Hindu undivided Family) can claim a tax deduction for health insurance under Section 80D of the Income Tax Act. Other terms and conditions are listed below:

• Only critical illness and Mediclaim plans are qualified for section 80D tax exemption. Tax deductions are not available for premiums paid for personal accident plans.
• Premiums paid in respect of Central Government Health Schemes, preventive health check-ups, and health insurance plans are tax-deductible.
• Premiums for health insurance can be paid for oneself, one’s spouse, and any dependent children or parents (whether they are dependent or not dependent).
• To qualify for tax deductions, premium payments should be made in any different mode other than cash. Premium payments for preventive health check-ups, on the other hand, can be made in cash.

When we compare the deductions of life insurance and health insurance, we see that you, your spouse, and your children are all eligible for the deduction for life insurance premium. Even if your parents are financially dependent on you, you cannot claim it in relation to the life insurance premium paid for them. In contrast, even if your parents are not financially dependent on you, you can claim a deduction for their health insurance premiums.

Furthermore, you can avail of a deduction for life insurance premium for children even if they are not financially dependent on you, whereas a deduction for health insurance premiums for your children can only be availed of for those children who are financially dependent on you. Even if you have a married son or daughter, you can claim a deduction for life insurance premium. There is no limit to the number of children for whom you can claim tax benefits for health insurance and life insurance, as opposed to education expenses and leave travel assistance (LTA) benefits, which are limited to two children.

Tax laws on the deduction for home loans

For most people, owning a home is a lifelong ambition. The Indian government has consistently shown a strong desire to encourage citizens to buy a property. This is why, under section 80C, a home loan is tax-deductible. And when you buy a house with a home loan, you get a slew of tax breaks that cut your tax liability significantly.

Borrowers of home loans can benefit from a tax deduction on principal repayment under Section 80C, an interest deduction under Section 24(b), and a supplementary home loan interest tax benefit for first-time homebuyers under Section 80EE.

You can claim a tax deduction for home loan interest under Section 24(b) of the Income Tax Act. Under this Section, you can claim a tax exemption of up to Rs. 2 lakhs on the interest paid on a home loan for a self-occupied property. However, no maximum limit applies if such property, which is not self-occupied, is rented or deemed to be rented. Also, a property must be purchased or constructed within five years of the end of the fiscal year in which the loan was obtained.

Moreover, Section 80C of the Income Tax Act provides a tax break on the principal amount of a home loan. Under this clause, the amount paid as principal repayment on a home loan is allowable as a deduction of up to Rs. 1.5 lakh. Such a deduction is permitted only after the house has been completed. In addition, the completion certificate should be awarded in order to obtain such a deduction. Such a deduction shall not be permitted during the period in which the property was under construction.

Section 80EE tax deductions are only available to first-time homebuyers. According to the provisions of this section, people who pay interest on a home loan are entitled to an additional deduction of Rs. 50,000. This incentive shall be in addition to and separate from the deduction of Rs. 2 lakhs allowed under Section 24 and the deduction of Rs. 1.5 lakh allowed under Section 80C.

When we compare these deductions, it can be found that the tax benefit for home loan repayment under Section 80C is only available for home loans taken for residential house property, whereas there is no such restriction for claiming interest deduction under Section 24 (b), which is available for both residential house and commercial property.

Similarly, the deduction for principal repayment is available only if the loan was obtained from a specific institution or entity such as a bank, home finance company, central and state governments, universities, public limited companies, and so on, whereas there is no restriction on the type of lender from whom you can borrow to claim a deduction for interest paid. In fact, you can also claim a deduction for interest paid to friends and relatives if you can prove a link between the money borrowed and its ultimate use for the house. Section 24 allows interest repayment on a home loan obtained from friends, relatives, or any other money lender to be claimed as a deduction. The Income Tax Act of 1961^[1] does not state that this deduction is only available if the loan is obtained from a specific bank.

The deduction for repayment of principal amount under Section 80C is only available for the construction or acquisition of a house, whereas the deduction for interest is even available for renovation or repair of the house property.

Further, if you sell or transfer your residential house within five years of the end of the fiscal year in which you took possession of the house, the tax benefits obtained for repayment of the home loan under Section 80C are reversed and taxed in the year in which you transfer your property; however, there is no similar provision for reversal of tax benefits claimed under Section 24(b). In the case of an under-construction property, interest paid during the construction period, known as pre-EMI, can be claimed in five equal instalments beginning from the year in which you take possession, subject to overall limits, whereas there is no such provision for deduction claimed in the past for principal amount repaid during the construction period.

Tax laws for eligibility of long-term and short-term capital asset

Holding any capital asset for more than 36 months is generally the period prescribed for an asset to become a long-term capital asset, but in the case of land and buildings, the holding period requirement is only 24 months, whereas shares listed in India and units of equity-oriented schemes of Indian mutual funds have a holding period requirement of only 12 months.

Shares of a foreign company are treated as a short-term capital asset if they have been held for no more than 24 months prior to the date of transfer. In all other cases, it is considered long-term capital gains. If such shares are listed on any Indian stock exchange, i.e., the stock exchange located in the International Financial Services Centre (IFSC), the period is reduced to 12 months rather than 24 months. Furthermore, the units of foreign mutual fund equity schemes are treated in part the same way as units of debt funds with a holding period of more than 36 months.

When it comes to the rate of taxes, long-term capital gains on the sale of listed equity shares and equity-oriented mutual funds are fully exempt up to one lakh per year, after which they are taxed at a flat rate of 10% without indexation. Normal short-term capital gains are taxed at the applicable slab rate, but short-term capital gains on the sale of listed shares through a stockbroker and on equity-oriented schemes are taxed flat at 15%, regardless of your slab rate. So, even if you are in the 10% tax bracket, you may still be required to pay a short-term capital gains tax of 15% on listed shares sold on a recognized stock exchange.

Conclusion

It is critical to understand the available provisions when filing tax returns or claiming for refunds. Claiming for more deductions than what is allowed, even if done in error, can result in additional interest, penalties, and taxes. Furthermore, because tax exemptions are dynamic in nature, it is important to stay up to date on all of the changes made to the Income Tax Act each year.

Read our article:Covid-19 Impact on Heath and Life Insurance