In this article, tax expert Manmohan Sethumadhavan explains a situation where investments in products eligible under section 80C may be beneficial even if the net income is lower than the taxable limit.
Investments like EPF, PPF, ELSS etc., are made in a financial year to reduce the tax outgo by claiming a deduction u/s 80C of the income tax act. Currently, the maximum deduction allowed is 1.5 Lakhs. But many small salaried taxpayers do not avail this benefit or just avail it partially since their net income would not be taxable even without this deduction.
Such people may benefit in future if they make some investments (if cash flow permits) and claim full deduction under 80C even if they do not require it. This happens when they get some arrears of their salary in the future years.
When arrears of salary are given in lump sum, it is actually taxed in the year it is received. But, a relief u/s 89(1) can be claimed by the taxpayer by submitting Form-10E. This relief is calculated by apportioning the arrears received to the relevant previous financial years to which such arrears are related and finding out if there is any tax reduction if such arrears were taxed in the respective previous years as if it had been received then. If there is any tax benefit, it can be claimed as a relief u/s 89(1) in the current year.
If a person had claimed an 80C deduction in a previous year, even if it was not needed, this arrears of salary, when apportioned to that year, would not increase his tax outgo to that extent in the relevant previous year, and thus claim relief in the current year.
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For, e.g., in FY2020-21, a person received a gross salary of Rs.6,35,000, and after a standard deduction of 50,000 and an HRA deduction of 90,000, his net salary is Rs.4,95,000, for which he needs to pay no tax. But in anticipation of arrears to be received in the next year, he invests in some ELSS this year and claims a deduction of Rs.1.5 Lakhs in his returns even though not needed.
In FY2021-22, his gross salary is Rs.8,00,000, and he needs to pay tax. In addition to this, he receives salary arrears of Rs.1,50,000 related to the previous year. But since he had already made a deduction of Rs.1.5 Lakhs in the previous year, which was left unutilised, there would be still no tax outgo when these arrears are apportioned to the previous year. Had he not made this deduction claim in the previous year, he would receive no relief u/s 89(1) in FY2021-22 and would have to pay more tax.
It is important to note that people making such an investment in anticipation should ensure that it is claimed in their income-tax returns also, else which it would serve no purpose. I am just pointing out an option available. People should read relevant articles from freefincal to understand that focus should not be on saving tax, rather on your goals, liquidity, plan, and asset allocation.
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