Governments levy income taxes on persons and businesses operating inside its borders in order to finance public services, meet financial obligations, and supply residents with goods. And every citizen of India whose income fall under the taxable slab, is required to pay the tax every year.
However, the government provides various benefits to the individual taxpayers who most frequently claim income tax deductions under section 80C of the Income Tax Act. It permits deductions for contributions made to a number of long-term investment alternatives up to ₹1.5 lakh for a fiscal year.
The requirements and conditions for such investments must be satisfied in order for these tax exemptions to remain in effect. Let's discuss the various circumstances in which these deductions can be overturned.
EPF, supported by the Indian government, is a long-term, high-yield investment that helps salaried people to save for retirement. Under section 80C, contributions made to the plan during a fiscal year are eligible for a tax deduction.
However, if the participant decides to leave the plan before accumulating five years of nonstop employment, tax will be applied to the whole amount of the withdrawal. Although, the employee is not required to pay taxes on the amount withheld if they quit their job owing to health problems, a company closing, or other circumstances beyond their control.
Under section 80C of the Income Tax Act, premiums paid for life insurance plans throughout a year may also be tax deductible. Only insurance plans in the names of the individual, his or her spouse, and children are subject to these deductions. However, any premium-related deductions made in prior years would become taxable if it is surrendered during the first two years after issuing.
This typically occurs when tax payers engage naively in insurance-cumulative investment products near the end of a fiscal year in an effort to reduce their tax burden. Later, they quit paying premiums, believing that their goal has been achieved.
It's crucial to realize, though, that typical insurance plans sometimes involve a very long-term financial commitment, and taxpayers may suffer significant losses if they abandon them in the first few years.
Home loan deductions
People who utilize a home loan to buy a house are eligible for income tax deductions under sections 24, 80E, and 80C. Under section 80C, deductions can be made for money used to pay off the house loan's principle up to a maximum of ₹1.5 lakh each year.
The tax benefits under Section 80C are eliminated if the property owner sells the home within 5 years after the end of the fiscal year in which they took possession of it.
According to section 80C, taxpayers with school-age children may deduct expenses of up to two children from their taxes. If the taxpayer has a third child, the paying spouse may claim a tax deduction in accordance with Section 80C regulations.
However, it is important to note that, tuition fees are the only educational expenditures that can be deducted under section 80C. Section 80 C tax deductions for educational costs can be overturned if they are claimed for more than two children or for expenses other than tuition fees.
Many people invest in the Senior Citizen Savings Scheme (SCSS) as a lump payment for five years in order to have a consistent cash flow after retirement. Under Section 80C, a tax deduction is available for the principal amount placed in the SCSS.
The claimed deductions, however, will be reversed and reported as income for the next tax filing year if it is withdrawn before the five-year period has passed. In addition, an early withdrawal fee will also be assessed.
In numerous other schemes, an early withdrawal before the required number of years reverses whatever deductions the taxpayer has previously claimed, and the total value of those deductions is again considered income for the next year.
Applying for a deduction under section 80C may provide the taxpayer with advantages for a number of tax years, but it's important to remember that if the necessary circumstances aren't satisfied, benefits may be reversed.