In light of the extraordinary situation resulting from the COVID-19 lockdown measures, the Finance Department has released an ordinance on 31st March 2020 providing relaxation in various aspects of the Direct and Indirect Tax regimes. One of these announcements extends tax saving investments for FY 2019-20 till 30th June 2020. This can greatly benefit many Income Tax assessees. The following are key details that you must know.
What is the nature of this relaxation?
Typically tax saving investments under Section 80C, 80D, 80G, etc. (Chapter VI-A and VI-B) for a financial year need to be made between 1st April and 31st March of the applicable financial year (FY). Thus to save income tax in FY 2019-20 (AY 2020-21), you were originally required to complete all your tax saving investments between 1st April 2019 and 31st March 2020. However, with the introduction of this ordinance by the Finance Ministry dated 31st March 2020, all tax saving investments made till 30th June 2020 will now be considered as part of FY 2019-20 investments.
Effectively the Finance Ministry has granted everyone an extension of 3 months for making tax saving investments for Assessment Year 2020-21 (AY 2020-21). While it is as of yet unclear whether income considered for AY 2020-21 at the time of Income Tax Return filing will extend from April 2019 to March 2020 or April 2019 to June 2020, this does provide an extraordinary opportunity. The following are 3 possible scenarios and possible ways to benefit from this relaxation:
Scenario 1. You haven’t reached the limit of your investments under Section 80C, 80D, etc.
Possible Resolution: Unlike previous years, where you would have been unable to utilise tax saving investment benefits up to the prescribed limit, you can still do it for FY 2019-20. Just to recap, maximum limit u/s 80C for a year is Rs. 1.5 lakh with an additional Rs. 50,000 u/s 80CCD for investments made into National Pension System (NPS)/ NPS Lite and Atal Pension Yojana (APY).
Also read: Complete list of 80C Investment Options
Also, u/s 80D, you can still purchase medical insurance for yourself/dependants and claim benefits of up to Rs. 25,000 (self and dependants) and up to Rs. 1 lakh (senior citizen tax assessee + dependants + super senior citizen parents) for FY 2019-20. Do note that your medical insurance premium is to be paid by 30th June 2020 to get this benefit. Additionally donations made under Section 80G till June 30, 2020 can provide additional tax relief for FY 2019-20.
Scenario 2. You have already reached the limit of your investments u/s 80C, 80D, etc.
Possible Resolution: Unfortunately this is one of the rare instances that careful tax planning will let you down. Investing in tax saving investments during this 3 month grace period will not provide any additional benefit from a taxation perspective. It is probably a better idea to keep your emergency reserves intact and add to it during this period. Alternately you may consider investing in non-tax saving instruments to add to your wealth.
Scenario 3. Your employer already deducted TDS and you still haven’t exhausted tax saving investment limits
Possible Resolution: If your employer has already deducted TDS, then, the tax calculation was based only on investments made till 31st March 2020. As per this Government announcement, you now have till 30th June 2020 to increase your tax saving investment allocation for FY 2019-20. Any additional tax benefit that you might be eligible for can be claimed as an income tax refund at the time of ITR filing in AY 2020-21.
To Sum up
The COVID-19 lockdown measures are historically extraordinary and we still have a long way to go before we are past the current crisis. While it is only prudent that one maintains and if possible increases emergency cash reserves during these extraordinary times, allocating some more cash towards tax saving investments to share less with the Income Tax Department is not a bad plan either.