Tax benefits from Health Insurance

Health, though important, is by far the most neglected aspect when it comes to health expenses. Notwithstanding the rising medical expenses - thanks
to the hectic lifestyle - not many people in the country today have adequate insurance covers.

While the public may not be concerned, government ensures that citizens protect themselves and their dear ones with adequate medical cover by giving tax breaks on expenses incurred for getting health insured.

HEALTH INSURANCE

Premium paid up to Rs 15,000 on a medical insurance policy is exempted from tax under section 80D of the Income Tax Act. A tax-payer paying premium toward insurance cover of dependant parents shall be entitled to an additional tax benefit of up to Rs 15,000.

If the parents are senior citizens, then this limit gets enhanced to Rs 20,000. Thus, the maximum tax benefit that a taxpayer can now avail by insuring the health of his/her entire family (including dependant parents) is Rs 30,000 or Rs 35,000 as the case may be.

MEDICAL EXPENSES

Salaried employees are eligible for taxfree medical reimbursement from their employer up to a maximum of Rs 15,000 per annum. If the tax-payer incurs expenses (up to Rs 50,000)for medical treatment (including nursing, training and rehabilitation ) of a disabled dependant, the same shall be reduced from the taxable income per annum under section 80DD. Where however, the dependant suffers from severe disability, the amount of deduction shall be Rs 75,000 per annum.

Disability, for the purpose of this section includes autism, cerebral palsy and also mental retardation.

Any amount spent on the medical treatment of a dependant suffering from diseases like cancer, AIDS, Parkinson’s disease, chronic renal failure, Thalassaemia etc. can be claimed as a deduction from the taxable income up to a maximum of Rs 40,000 under section 80DDB of the Income Tax Act. In case the dependant is a senior citizen, the amount of deduction shall get enhanced to Rs 60,000 per annum.

LIFE INSURANCE

Any amount paid as a premium to cover the life of the tax-payer , his/her spouse or children shall be eligible for deduction from the total taxable income under section 80C of the Income Tax Act, up to a maximum of Rs 1 lakh per annum.

It is however important to note that this deduction is applicable provided the amount of premium paid does not exceed 20% of the sum assured by the insurance policy. (Sum assured is the amount ought to be received by the policy-holder from the insurance company after completion of the policy term. This term is usually referred to in case of endowment and money-back plans.)

Smart tax-saving strategies without spending a penny

Shuffle strategy

As per tax rules, ELSS schemes are subject to a lock-in period of three years from the day of investing. And since there are no long-term capital gains tax for equity funds sold after a year of purchase, shuffling ELSS schemes practically entails zero costs. How does the shuffle strategy work? Say, for instance, investor A had been investing Rs 50,000 in ELSS every year for the past six years. Since there is a lock-in of three years for ELSS, his/her investment of last two years would not be redeemable. But those investments made more than three years ago could be redeemed and invested back into the fund to gain fresh tax benefits. Section 80 C of the Income Tax Act, allows tax deductions up to Rs 1 lakh of ELSS investment made in any financial year for an individual. “Earlier Section 88 had a condition for claiming rebate that the investment should be made out of the income chargeable to tax. This was subsequently removed to provide relief to the individual tax payers. Current provisions for claiming deduction under Section 80C do not contain this restriction. Therefore, investments could be made out of the current year’s taxable income or even the past accumulated savings/investments to claim the deduction from taxable income by an individual tax payer,” says KPMG executive director Vikas Vasal. While previously, such reinvestments attracted entry loads, the new Sebi rule has done away with such costs for direct investing. In this investment process though, there is a possibility that the investor might make small profit or losses since the NAV might move up or down during the shuffle process. Such shuffles while helping get tax benefits also gives a chance to have a relook at MF portfolio and prune investments if necessary.

Switching Strategy

There is one more quicker method and that is of switching out proceeds to a liquid fund of the same fund house and switching it back into the fund. Switching refers to the process of transfer of money from one scheme of a fund house to another scheme. While for taxation purposes, such switching is considered as redemption and taxed accordingly, the advantage for investors is in terms of getting NAV of the same day. So for instance, if an investor switches from an equity scheme to a liquid scheme, the same day NAV is applicable. How does it work ? Say for instance, an investor with previous ELSS investments doesn’t have money to make further investment in the current financial year 2008. He could consider switching it to a liquid fund and back into the ELSS fund. There are no loads applicable for doing it if done within a short period (say 10 days or lesser). The call centre officials of Franklin Templeton MF and ICICI Pru MF confirmed the same for their respective schemes. The recent Sebi rules also state that waiver of loads would be applicable for “additional purchases done directly by the investor under the same folio and switch-in to a scheme from other schemes if such a transaction is done directly by the investor.”