Little-known tax deductions you might have missed while filing returns

Paying more tax than is due is bad enough. It's worse if you don't even know you have overpaid and are eligible for a refund. Many youngsters are not conversant with tax rules and fail to fully utilise the deductions available to them.

Tax filing portal Taxspanner.com studied last year's returns and found that nearly 51 per cent of salaried taxpayers had not fully used the tax-saving limit under Section 80C. Only one of the four taxpayers had claimed the full deduction for health insurance under Section 80D.

Here are some little-known deductions available to taxpayers. Make sure you claim them when you file your returns this year. If you have already done so, you can file a revised one to claim the deduction you missed.

1. Home loan repayment under Section 80C

If you are paying a hefty home loan EMI, chances are that you will find it difficult to put money in tax-saving options. Take heart. While the interest paid on the home loan is deductible under Section 24b, even the principal portion gets you tax benefits under Section 80C.

This is a godsend for taxpayers, who have not been able to exhaust their Rs 1 lakh saving limit under Section 80C because of the home loan EMI. The deduction for the interest paid on a home loan is capped at Rs 1.5 lakh only in case of a self-occupied house. If you have bought a second house for investment and have rented it out, the entire interest during a given year can be claimed as a deduction. This brings down the effective rate of borrowing for the buyer.

2. 30 per cent standard deduction of rental

If you let out your house, the rent is added to your income and taxed at the normal rate applicable to you. However, there is a 30 per cent standard deduction from this income. So, if you receive a rent of Rs 10,000 per month, the total rent for the year would be Rs 1.2 lakh. Of this, Rs 36,000 would be the standard deduction and you will have to pay tax only on Rs 84,000.

3. Carry forward and adjust capital losses

Certain short-term or long-term capital losses you made during the year can be adjusted against other gains. If you lost money in stocks, equity funds or gold last year, you can set off the loss against short-term capital gains or taxable long-term capital gains from the sale of property, gold or debt funds. If you are unable to adjust the entire loss, you can carry it forward for up to eight financial years.

Suppose you lost Rs 80,000 in stocks and gold funds in 2012-13 and managed to adjust Rs 30,000 against gains from debt funds. You can carry forward the unadjusted loss of Rs 50,000 and keep doing so against other gains till 2020-21. However, you can adjust only short-term losses from stocks and equity funds in this manner. If you have held the stocks and funds for more than one year, the losses cannot be adjusted.

Also, one cannot set off short-term gains from stocks against long-term capital losses from other assets. However, both short-term and long-term losses from other assets, such as gold, property and debt funds, can be adjusted. The taxpayers who earned capital gains from fixed maturity plans (FMPs) and debt funds will find this particularly useful.

4. Use indexation for long-term gains

Do you know you can use inflation to bring down your tax? The indexation benefit can be used to adjust the buying price of an asset to the inflation during the period of holding. If this sounds Greek to you, here's an example.

Suppose you invested Rs 2 lakh in an FMP, in March 2010, and got Rs 2.8 lakh when the plan matured in March 2013. You will have to pay 10 per cent tax on the Rs 80,000 earned as capital gain. However, if you take the indexation route, the 35 per cent inflation during the holding period will adjust your buying price upwards to Rs 2.7 lakh. Even though the gain of Rs 10,000 will be taxed at a higher rate of 20 per cent, the overall tax will be only Rs 2,000, compared with the Rs 8,000 payable, if you were to take the flat 10 per cent option.

Calculating the tax according to the indexation option requires a bit of math, but can be very rewarding.

5. Medical insurance of parents

The premium of your health insurance policy is deductible up to Rs 15,000 under Section 80D. However, you are eligible for an additional deduction of Rs 15,000 if you have insured your parents as well. If even one of them is a senior citizen, the limit of deduction is even higher at Rs 20,000.

6. Illness and disability

If you have a dependant, who suffers from any of the diseases specified under Section 80DDB, you can claim a deduction of Rs 40,000. The deduction is higher at Rs 60,000 if the patient is a senior citizen. The diseases include, neurological ones (dementia, dystonia musculorum deformans, motor neuron disease, ataxia, chorea, hemiballismus, aphasia and Parkinson's disease), malignant cancers, full-blown AIDS, chronic kidney failure and haematological disorders (haemophilia and thalassaemia). Dependants can include spouse, children, parents and siblings.

However, the patient should be wholly or mainly dependent on the taxpayer and should not have separately claimed any sum from an insurance company for the illness. Similarly, if a taxpayer suffers from a disability, he can claim deduction of Rs 75,000 under Section 80U. If he has a disabled dependant, he can claim the deduction under Section 80DD.

Disability includes blindness, low vision, leprosy, hearing impairment, loco-motor disability, mental retardation and mental illness. A minor disability won't get any tax benefits; the disability should be at least 40 per cent. If the disability is over 80 per cent, the deduction is Rs 1 lakh.