Tax-saving tips: medical expenses tax deduction
Understand the tax system and explore how you can save on taxes on health insurance under Section 80D by availing medical expenses tax deduction in India.
3 min read
August 16, 2024
Simmran Sharma
Ever wondered what might happen if all forms of taxes in India were one day abolished? That day, we would witness a complete overhaul of how our society functions. What would happen is this:
- All forms of public services you use will run out of money.
- Future financial security will be in jeopardy since revenue generation will most likely hook on to constant borrowing, causing rise in national debt.
- Programs and subsidies that support various sectors, including agriculture, industry, and social welfare, would disappear.
- Education, healthcare, public-safety and infrastructure might all grow solely reliant on the private sector.
This new system will not ensure whether wealth is distributed in an equal manner leaving some at a disadvantage. At some point, the whole system might melt down with no one left in charge. Taxes are important. Then why do we despise it? Problem with the tax system is that it is complex. When people don’t understand taxes they also can’t comply with it. Some go as far as to evade taxes deeming it a money-hungry machine. Taxes aren’t meant to be exploitative. This is the whole reason why the government has tax deductions set in place. Scroll down to understand what taxes are, what are tax deductions and how to avail tax deduction on medical expenses.
What are taxes
Solution to all your tax problems begins with understanding what taxes are. Only then can you understand how you can save on taxes as well as avail medical expenses tax deduction.
1) Introduction
Post-independence the people of India opted for a democratic system of governance, where both center and state subdivisions exercise shared power and carry out their responsibilities. But in order to perform their respective duties the government needs funds. Following are various sources of revenue for the government of India:
a) Tax which we will discuss in-depth further.
b) Non-tax revenue - fees and charges, fines and penalties, rent and royalties.
c) Dividends and profits from public sector enterprises.
d) Grants and aid that trickles down from foreign aid to center and then from center to states.
e) Borrowings from both domestic and international sources.
f) Disinvestment, meaning selling stakes in public sector enterprises to private investors in order to raise capital and reduce government ownership in that sector.
2) Meaning and types
Tax is a mandatory financial charge imposed on an individual or an organization. All countries have a tax system in place to finance government operations. In India, taxes are levied by both central and state governments. Some minor taxes are also levied by the local authorities such as the municipality and the local governments. In broad terms, there are two major classifications of the Indian taxation system:
a) Direct tax - paid directly by individuals or businesses to the government (e.g., income tax).
b) Indirect tax - collected by intermediaries (like sellers) and passed on to the government (e.g., GST, VAT).
Income tax
Income tax is a direct tax imposed on the profits and income earned during the year. Both individuals and businesses are subject to income tax. Income tax department is the central government's largest revenue generator. Out of this corporate tax is the single largest source of revenue for the government of India. Income tax in India is governed by entry 82 of the union list. Which falls under the 7th schedule of the constitution. It enables the central government to tax non-agricultural income. Let us first understand how income tax is calculated, collected and regulated in India.
1) How is income tax calculated? | Income slabs
Income tax is calculated based on income slabs determined by the finance ministry. Through these higher earnings get taxed at progressively higher rates. This helps to ensure that tax liability is proportional to income.In India, the finance minister proposes changes to income tax slabs in the union budget, which is presented to the parliament annually. These proposals are then mulled over. Final rates are then approved by the parliament before they become law. The Central Board of Direct Taxes (CBDT) may also provide inputs and guidelines for implementing these slabs.
You pay tax for the financial year (FY), which is the year in which you earned the income. However, you file your tax returns and make the payment during the assessment year (AY), the year following the financial year. For example, for the financial year 2023-24, you file and pay taxes in the assessment year 2024-25. Both FY and AY start on 1 April and end on 31 March.
The income tax slabs under the new tax regime for FY 2024-25 are as follows:
| Income slab in Rs. | Income tax rate in % |
| Up to 3,00,000 | 0 |
| 3,00,001 to 7,00,000 | 5 |
| 7,00,001 to 10,00,000 | 10 |
| 10,00,001 to 12,00,000 | 15 |
| 12,00,001 to 15,00,000 | 20 |
| 15,00,001 and above | 30 |
2) How is income tax collected?
Although income tax in a broader sense is a direct tax levied on individuals and businesses, recovering it from such a large population is a complex process. It can even involve instances of indirect tax collection like TDS and TCS. Several methods used by the government to collect income tax from masses are:
| Tax Deducted at Source (TDS) | Employers and other entities deduct tax from payments such as salaries, interest, and contract fees before disbursing them. This deducted amount is then deposited to the government income tax department on behalf of the taxpayer. |
| Advance Tax | Advance tax applies to individuals who earn income from sources other than salary and whose income surpasses a certain threshold. It also covers earnings from investments such as shares, interest on fixed deposits, rental income, and income from house tenants.
These taxpayers must estimate their annual income and pay the tax in installments throughout the financial year, rather than in a lump-sum payment at the end. |
| Self-Assessment Tax | After paying income tax, TDS and advance tax. SAT allows taxpayers to correctly pay the remaining amount they might have inadvertently missed. This will help avoid any penalties. |
| Tax Returns | Income tax return is an annual record of your income, tax liability, and tax payments. The Income tax department assesses these returns and processes any refunds or additional payments required. |
| Through Banks | Taxes are also paid through designated banks or online platforms using various payment methods, such as debit/credit cards, net banking, or electronic funds transfer |
3) How is income tax regulated?
a) Governing bodies
Income tax is regulated by following government bodies. These entities work together to ensure the proper administration and enforcement of income tax regulations in India.
| Central Board of Direct Taxes (CBDT) | CBDT is the primary body responsible for formulating and enforcing policies related to income tax in India. It operates under the department of revenue in the ministry of finance. The CBDT oversees the administration of income tax laws and ensures proper implementation of tax policies. |
| Income Tax Department (IT Department) | responsible for the assessment, collection, and enforcement of income tax. It operates under the CBDT and is responsible for implementing the provisions of the Income Tax Act, 1961. |
| Ministry of Finance | The Ministry of Finance, which includes the Department of Revenue, plays a crucial role in the broader fiscal and economic policy-making process, including those related to tax regulations. |
| Income Tax Appellate Tribunal (ITAT) | ITAT is a quasi-judicial body that specializes in dealing with appeals under the Direct Taxes acts. It handles appeals against the decisions of lower tax authorities. It acts as a forum for taxpayers to contest and appeal against tax assessments. |
| Indian Judiciary | The Indian judiciary, including the Supreme Court and High Courts, also plays a role in interpreting and adjudicating matters related to income tax laws. |
b) Roles of CBDT
CBDT performs an extensive amount of duties to ensure proper implementation of income tax regulations. Following are its key roles:
- Policy Formulation - CBDT formulates policies and procedures related to income tax administration and enforcement.
- Tax Legislation - It provides inputs for drafting and amending income tax laws and regulations.
- Tax Collection - Oversees the implementation and collection of income tax across the country.
- Guidance and Instructions - Issues guidelines and circulars to ensure consistent application of tax laws.
- Assessment Procedures - Develops and oversees procedures for tax assessment and dispute resolution.
- Taxpayer Services - Enhances taxpayer services and helps resolve grievances related to income tax.
- Audit and Compliance - Conducts audits and enforces compliance with tax laws to prevent evasion and fraud
- Data Management - Manages taxpayer data and maintains records related to income tax collections.
- Training and Capacity Building - Provides training to tax officials and enhances their skills for effective tax administration.
- Coordination - Coordinates with other governmental bodies and international organizations on tax-related matters.
Tax deductions
To ensure a fair arrangement, you can claim deductions on particular expenses or investments. Tax deductions lower your overall tax liability. Refer to the following data to figure out which of these deductions apply to you.
1) List of tax deductions available in India
| Section 80C | Investment in Life Insurance Premium Contributions to Employee Provident Fund (EPF) Public Provident Fund (PPF) National Savings Certificate (NSC) Equity-Linked Savings Scheme (ELSS) Tax-saving Fixed Deposits (FDs) Principal repayment on home loan Sukanya Samriddhi Yojana 5-year Fixed Deposit with banks Certain bonds issued by the Government of India
|
| Section 80D | Premiums paid for Mediclaim (Health Insurance) policies for self, spouse, children, and parents. Preventive health check-ups (subject to a maximum limit) |
| Section 24(b) | Interest on home loan |
| Section 10(14) | House Rent Allowance (HRA) if you live in a rented house |
| Section 80E | Interest on loans taken for higher education. It can be claimed for a maximum of 8 years. |
| Section 80G | Donations to charitable organizations and institutions (subject to conditions and limits) |
| Section 80TTA | Interest on savings bank accounts (up to ₹10,000) |
| Section 80TTB | Interest on deposits for senior citizens (up to ₹50,000) |
| Section 80U | Deduction for individuals with disabilities |
| Section 80GGA | Donations for scientific research or rural development |
| Section 80GGB | Donations by companies to political parties |
| Section 80GGC | Donations by individuals to political parties |
2) Tax deduction Vs Tax exemption
Tax exemption and tax deduction both reduce taxable income but in different ways. While deductions save a portion of income from taxation, tax exemption directly and entirely excludes specific income or assets from being taxed. Following table might help you understand this difference better.
| Feature | Tax Deduction | Tax Exemption |
| Objective | Encourage savings, investments, and certain types of expenses | Relief for specific income types |
| Impact on income | Reduces taxable income | Not subject to taxation |
| Method | Deducted from gross income | Omitted from gross income |
| Scope | Wide range of expenses and investments | Certain types of income |
How to save taxes on medical expenses? | Section 80D
Under Section 80D, every individual or Hindu Undivided Family (HUF) can claim a deduction for medical insurance premiums paid during the financial year. This includes premiums for top-up health plans and critical illness plans. However, companies or firms are not eligible for this deduction. The deduction can be claimed for premiums paid for oneself, a spouse, dependent children, and parents. To get tax deduction on medical expenses keep the following points in mind.
a) Payment Mode
To claim deduction under Section 80D, payments must be made using a specified method:
| Payment | Scope | Payment mode |
| Preventive health check-up | Introduced in the 2013-14 budget, the preventive health check-up deduction under Section 80D encourages proactive health management. It offers a deduction of ₹5,000 for payments towards preventive health check-ups. | Any mode (including cash) |
| Medical Insurance Premium | Tax deduction of up to ₹25,000 each year for health insurance premiums. For senior citizens, this increases to ₹50,000. | Any mode other than cash since cash payments are not allowed as deduction.
|
| Medical Expenses | Covered under health insurance. | Any mode other than cash since cash payments are not allowed as deduction. |
b) Claim process
If you are a salaried employee, you can claim the 80D deduction by providing insurance premium receipts or medical bills to your employer, or you can claim it when filing your income tax return (ITR).
c) Age benefits
Medical expenses tax deduction is substantially increased along with the age bracket of those insured.
| Insured | Age of family (self, spouse and dependent children) | Age of parents | Deduction (₹) |
| Self & Family | Below 60 years | - | 25,000 |
| Self & Family + Parents | Below 60 years | Below 60 years | 50,000 |
| Self & Family + Parents | Below 60 years | Above 60 years | 75,000 |
| Self & Family + Parents | Above 60 years | Above 60 years | 1,00,000 |
As demonstrated, the maximum tax deduction on health insurance can range from ₹25,000 to ₹1,00,000.
In conclusion
Medical expenses, often an unavoidable aspect of life, come with potential tax-saving opportunities. Understanding and utilizing available deductions can significantly benefit your financial well-being. Section 80D encourages citizens to embrace tax-saving strategies and secure the future of themselves and their family by getting health insurance. To explore suitable health insurance options, consider reaching out to experts like OneAssure. Don’t know what they do? Understand how third party administrators help you choose the right health insurance policy here. To make informed decisions that align with both your health needs and financial goals read more of our blogs here.