Author Name:   deeksh

The article expounds the concept of deductions in general provided under the Income Tax Act , 1961 , and specifically the deductions with respect to health insurance premium and education loans. Further it deals with the latest amendments , international scenario and recent market trends reating to these.

Analysis Of Deduction Provided Under Section 80d And 80e Of Income Tax Act 1961 With Latest Amendments

Basic Introduction To The Topic
Apart from deductions provided by section 80C, which currently has the limit up to `100000/- ; there are deductions provided to the assessee in our income tax law other than these as well. Two significant amongst these are: Firstly, deduction on insurance premium paid on taking Medical insurance policy and Secondly, deduction on interest paid on education loans. These are two deductions as to payments. In the present era of such high technological innovation, growing world markets, shrinkage of world into a petite village, increasing tension and health risks, education and health are the two primary and basic needs which every individual needs to have access to. Health risks and diseases in our nation have now taken altogether a different form, with many novel diseases being discovered. Besides the expenditure on health today has skyrocketed with hospitals now charging equivalent to five star hotels. The current burning topic of debate between health insurance companies on cashless insurance and the big hospitals highlights the significance of the health insurance in India. Another much important sector is of Education. In our nation while with the current efforts of the government gross enrolment ratio for primary education has increased but level of higher education is still abysmally low. Thus government came up with Education loans scheme. Thus in such a scenario providing deduction from income on these two i.e. health and education is really a welfare –oriented step by the government. Let us have a detailed analysis of these two deductions provided under the Income Tax Act, 1961.

1.Concept Of Deductions
Income tax Act allows for certain deductions from the gross annual income. Gross Total Income means the aggregate of income calculated under the various heads after giving effect to provisions as to clubbing of income and set off of losses. These deductions however are not permissible from the following under mentioned incomes although these incomes form a part of Gross Total Income. These incomes are:-

a. Long term Capital Gains

b. Short Term capital gain on transfer of equity shares and units of equity oriented fund through a recognized stock exchange i.e. short term capital gain covered under section 111A.

c. Winnings of lotteries, races etc.

d. Incomes referred to in sections 115A, 115AB , II5AC , 115ACA , 115AD , 115BBA and 115D

The deductions basically are of two kinds:-
· Deductions as to certain payments and investments , enumerated under sections 80C -80GGC

· Deductions as to certain incomes already included under gross total income under sections 81-1A- 80U.

Income arrived at after claiming these deductions is called as Total income or Taxable income. The total income thus arrived at should be round off to nearest `10.

2. Deduction Under Section 80d Of The Income Tax Act
Section 80D of our Income tax act provides deduction to an individual assessee or taxpayer and to the HUF only, (whether resident or not) and not to any other kind of taxpayer for eg.the company, in case any amount is contributed by any of them to keep in force the health insurance policy / medi-claim policy. More details will be dealt as we proceed further. Section 80D of the act reads as:

(1) In computing the total income of an assessee, being an individual or a Hindu undivided family, there shall be deducted such sum, as specified in sub-section (2) or sub-section (3), payment of which is made by any mode, other than cash, in the previous year out of his income chargeable to tax.

(2) Where the assessee is an individual, the sum referred to in sub-section (1) shall be the aggregate of the following, namely:—

(a) the whole of the amount paid to effect or to keep in force an insurance on the health of the assessee or his family as does not exceed in the aggregate fifteen thousand rupees; and

(b) the whole of the amount paid to effect or to keep in force an insurance on the health of the parent or parents of the assessee as does not exceed in the aggregate fifteen thousand rupees.

Explanation — For the purposes of clause (a), “family” means the spouse and dependent children of the assessee.

(3) Where the assessee is a Hindu undivided family, the sum referred to in sub-section (1) shall be the whole of the amount paid to effect or to keep in force an insurance on the health of any member of that Hindu undivided family as does not exceed in the aggregate fifteen thousand rupees.

(4) Where the sum specified in clause (a) or clause (b) of sub-section (2) or in sub-section (3) is paid to effect or keep in force an insurance on the health of any person specified therein, and who is a senior citizen, the provisions of this section shall have effect as if for the words “fifteen thousand rupees”, the words “twenty thousand rupees” had been substituted.

Explanation.—For the purposes of this sub-section, “senior citizen” means an individual resident in India who is of the age of sixty-five years or more at any time during the relevant previous year.

(5) The insurance referred to in this section shall be in accordance with a scheme made in this behalf by—

(a) the General Insurance Corporation of India formed under section 9 of the General Insurance Business (Nationalisation) Act, 1972 (57 of 1972) and approved by the Central Government in this behalf; or

(b) any other insurer and approved by the Insurance Regulatory and Development Authority established under sub-section (1) of section 3 of the Insurance Regulatory and Development Authority Act, 1999 (41 of 1999).

2.1 What is General Insurance Corporation of India? [2]
General Insurance Corporation of India is the only Reinsurance Company in the domestic reinsurance market in India with more than three decades of experience in the Re-insurance business. GIC has its registered office and headquarters in Mumbai. It was formed in pursuance of Section 9(1) of GIBNA It was basically formed for the purpose of superintending, controlling and carrying on the business of general insurance.

2.2 What is Insurance Regulatory and Development Authority of India? [3]
The main aim of IRDA is to protect the interests of the policyholders, to regulate, promote and ensure orderly growth of the insurance industry and for matters connected therewith or incidental thereto. It was set up by the parliament in 1999.The section 4 of IRDA Act'1999 specifies the composition of authority .The Authority is a ten-member team consisting of a. Chairman; b. five whole-time members; c. four part-time members, All these positions are appointed by the Government of India.

Thus from reading the above bare provision, following conclusions regarding availability of deduction can be drawn:
1. An individual taxpayer can claim up to maximum of `30,000/- in any year in case he takes a medical insurance policy of either himself , his spouse or dependant children , or parents whether dependant or not. But in above case, if anyone of the above mentioned is a senior citizen, then maximum limit gets stretched up to `40,000/-

2. Even if the assessee contributes the part payment in any insurance policy of his parents, then also deduction can be claimed up to level of amount contributed. For example: if cost of insurance on the health of the parents is `30,000/-, out of which `17,000/- is paid (by any non-cash mode) by the son and `13,000/- by the father ( who is a senior citizen), out of their respective taxable income, the son will get a deduction of `17,000/- ( in addition to the deduction of `12,000/- for the medical insurance on self and family) and the father will get a deduction of `13,000/-..

3. An HUF can claim deduction up to maximum of `15000/-in case he takes policy in name of any of the members of the Hindu undivided family and in case any member is a senior citizen then limit extends up to `.20.,000/-.

4. The health insurance scheme which has been taken, must either must have been taken from either General Insurance Corporation of India and approved by the Central government or from any insurer approved by Insurance Regulatory Authority of India.

5. Another essential requirement is that the amount should have been paid by any mode other than cash. This rule has been made to ensure transparency.

6. The amount of the insurance should have been paid from the income liable of the tax in the previous year. For more clarity let us have a look at the following illustration.

An individual assessee pays (through any mode other than cash) during the previous year medical insurance premia, out of his taxable income, as under:

(i) `12000/- to keep in force an insurance policy on his health and on the health of his wife and dependent children;

(ii) `17000/- to keep in force an insurance policy on the health of his parents.

Under the new provisions he will be allowed a deduction of `.27000/- (`12000/- ` 15,000/-) if neither of his parents is a senior citizen. However, if any of his parents is a senior citizen, he will be allowed a deduction of `29000/- (Rs.12000/- `17,000 / ). Whether the parents are dependent or not, is not a consideration for deciding the deduction under the new provisions.

3. Amendment As To Deduction Under Health Insurance Premium Ie. Under Section 80d , By Virtue Of Finance Act , 2010-2011[4]
Besides contributions to health insurance schemes which is currently allowed as a deduction under the income-tax act, now even contributions to the central government health scheme also allowed as a deduction under the same provision.

3.1 What is Central Government Health Scheme?[5]
The Central Government Health Scheme (CGHS) provides health care facilities to CGHS beneficiaries, which include All Central Government Servants paid through Civil Estimates, Pensioners drawing pension from Civil Estimates and their family members, Members of Parliament and Ex-MPs, Judges of Supreme Court of India, Ex-Governors and Ex-Vice Presidents, former prime Ministers, Employees and Pensioners of Autonomous Bodies, Former Judges of Supreme Court of India and High Courts and Freedom Fighters.Under CGHS, health services are provided through Allopathic, Homeopathic and Indian system of medicines, which comes under the Department of AYUSH. The medical facilities are provided through dispensaries/polyclinics and the chief medical officers/medical officers are in charge of the dispensaries for the smooth functioning of the scheme.

4. Deduction Under Section 80E
Section 80E[6] provides deduction from the gross total income if an individual has taken an education loan and he is paying interest on this loan.

4.1 Main features of deduction available under section 80E are:

1. This deduction is available only to the individual assessee and not to an HUF or other type of assessee. Thus loan should be in the name of individual only. Deductions on education loan can only be claimed if the loan has been taken in your own name. If your parents, spouse or sibling have taken the loan for your studies, then you are not entitled to get tax benefit.

2. Interest should have been paid on loan taken by him from any financial institution or any approved charitable institution for the purpose of pursuing his higher education .Interest on Loan taken from relatives or friends will not be eligible for deduction under section 80E.

Meaning of Approved Charitable Institution and Financial Institution
· Approved charitable institution means an institution specified in, or, as the case may be, an institution established for charitable purposes and [approved by the prescribed authority] under clause (23C) of section 10 or an institution referred to in clause (a) of sub-section (2) of section 80G.

· Financial institution means a banking company to which the Banking Regulation Act, 1949 (10 of 1949) applies (including any bank or banking institution referred to in section 51 of that Act); or any other financial institution which the Central Government may, by notification in the Official Gazette, specify in this behalf.

3. Loan should have been taken for the purpose of pursuing higher studies of assessee himself or his relative. Earlier to previous year 2006-07 the above deduction was available only for Interest on loan taken and repaid by the assessee for his own studies.

Meaning of relative with latest amendment[7]
Relative includes Spouse, Children of Individual. With respect from financial year 2010-11 relative also includes student for whom the individual is the legal guardian.

Meaning of Higher studies and latest amendment[8]
Higher studies means full-time studies for any graduate or post-graduate course in engineering, medicine, management or for post-graduate course in applied sciences or pure sciences including mathematics and statistics. With respect from financial year 2010-11 additional fields of studies (including vocational studies) pursued after passing the Senior Secondary Examination or its equivalent from any school, Board or University recognised by the Central or State Government will also be covered under deduction in respect of interest paid on loan taken for higher education. Thus now entire gamut of higher education has been covered.

3. Deduction amount: The amount of interest paid is eligible for deduction and moreover there is no cap on the amount to be deducted. An assessee can deduct the entire interest amount from his taxable income. However there is no benefit available on the repayment of principal amount of the loan.

4. Deduction period: Deduction shall be allowed in computing the total income in respect of the initial assessment year and seven assessment years immediately succeeding the initial assessment year[9] or until the interest is paid by the assessee in full, whichever is earlier. The tax benefits on education loan are only valid once you start the repayment and moreover they are only available up to eight years. For instance if your loan tenure exceeds eight years, you cannot claim for deductions beyond eight years .Hence it is better that the education loan is repaid within eight years. Unless if the loan amount is very high and it is difficult to afford a high amount of equated monthly instalment (EMI), one should not opt for education loan with longer tenure.

5.Moreover lastly, deduction available if Interest is been paid during the previous year and was paid out of income chargeable to tax which means if repayment is made from income not chargeable to tax than deduction will not available

5. Comprehensive Education Loan Policy Formulated By The Government In Association With RBI  & IBA[10]
The Finance Minister in a meeting with the Chief Executives of the public sector banks on 13 June 2000 had highlighted the role of commercial banks in facilitating pursuit of higher education by poor and meritorious students.In pursuance thereof the Indian Banks’ Association constituted a Study Group under the Chairmanship of Shri R.J.Kamath, Chairman and Managing Director of Canara Bank to examine the issue in detail. Based on the recommendations of the Study Group, a comprehensive model educational loan scheme was prepared by the Indian Banks Association for adoption by all banks. The Scheme aims at providing financial support from the banking system to deserving/meritorious students for pursuing higher education in India and abroad.The scheme was announced in the Union Budget for 2001-2002 and discussed in the meeting the Finance Minister had with the Chief Executives of banks on 7 April 2001.It was further clarified that this Scheme is separate and in addition to and not in supersession of the scheme earlier circulated by RBI under Supreme Court orders vide our circular RPCD.SP.BC.10/09.07.01/99-2000 dated 31st July 1999 issued to public sector banks.

This is the scheme under which an individual gets his loan from the commercial bank and then can avail off the above mentioned deduction.

5.1 Object of the scheme
The Educational Loan Scheme aimed at providing financial support from the banking system to deserving/ meritorious students for pursuing higher education in India and abroad. The main emphasis is that every meritorious student though poor is provided with an opportunity to pursue education with the financial support from the banking system with affordable terms and conditions. No deserving student is denied an opportunity to pursue higher education for want of financial support.

In short, the scheme aims at providing financial assistance on reasonable terms:
* to the poor and needy to undertake basic education.
* to the meritorious students to pursue higher/ professional/ technical education.

6. Banks Cannot Impose New Terms To Deny Education Loans
The significance of the Comprehensive Education Loan policy framed up by the government in association with RBI and IBA was highlighted in a recent judgment by the Madras High Court, where the court iterated that the banks cannot in any way impose more conditions that have been laid down by these bodies.The Madras High Court ruled that Educational loan is a state welfare measure streamlined by the Reserve Bank of India and that the other banks can’t introduce new conditions to deny the facility to eligible students. .Justice K Suguna, directed the Tiruchi branch of the ICICI Bank Limited to give educational loan to petioner S Yoganathan, a Scheduled Caste student who had obtained admission in an MBA course in a private college. The single judge bench ruled: “Educational loans are welfare measures to enable poor students to pursue higher education with the assistance of loan facilities provided by banks."Amazed, the court said "here is a case where the loan sought by Yoganathan is rejected on wrong assumption and presumption. This cannot be accepted... The circular issued by the Reserve Bank of India is binding on ICICI Bank. Overlooking the guidelines, the bank cannot follow its own norms in the matter of sanction of educational loans.”Yoganathan, who completed his BBA course with 56 per cent marks, got admission in MBA in Kavery Engineering College, Salem, under the government quota.

As the tuition and boarding fees worked out to Rs 1.45 lakh, he sought an educational loan from ICICI Bank. On June 16, the bank rejected the application, saying that Yoganathan wasn’t a meritorious candidate. Questioning the rejection, he filed the writ petition, stating that the April 28, 2001, circular of RBI didn’t talk about merit. It just required SC students to score at least 50 per cent marks to be eligible for the loan. Justice Suguna pointed out that private banks were also bound by RBI guidelines. Since Yoganathan satisfied the eligibility norms prescribed by RBI, it wasn’t for the bank to deny him a loan. She then directed ICICI Bank to sanction the loan within 30 days.

7. International Perspective: Position In United States Of America Regarding Deduction As To Interest On Education Loan
Just like we have Income Tax Act, 1961 which governs our direct taxation in India , similarly in U.S.A. there is Internal Revenue Code of 1986,which is the main body of domestic statutory tax law of the United States including laws covering the income tax, payroll taxes, gift taxes, estate taxes and statutory excise taxes. The Internal Revenue Code is published as Title 26 of the United States Code (USC), and is also known as the internal revenue title. Its implementing agency is the Internal Revenue Service. Internal Revenue Code[12] of United States of America also like Indian Income Tax Act provides for deduction as to Interest paid on qualified Education loan and amount paid on Health Savings.

Section 221[13]
Section 221 of the Internal Revenue Code of 1986 of the USA provides for deduction as to interest on any qualified loan.

(a) Allowance of deduction
In the case of an individual, there shall be allowed as a deduction for the taxable year an amount equal to the interest paid by the taxpayer during the taxable year on any qualified education loan.

(b) Maximum deduction
(1) In general
Except as provided in paragraph (2), the deduction allowed by subsection (a) for the taxable year shall not exceed the amount determined in accordance with the following table: In the case of taxable years The dollar beginning in: amount is:

1998 $1,000
1999 $1,500
2000 $2,000
2001 or thereafter $2,500.

(1) Qualified education loan
The term "qualified education loan" means any indebtedness incurred by the taxpayer solely to pay qualified higher education expenses -

(A) which are incurred on behalf of the taxpayer, the taxpayer's spouse, or any dependent of the taxpayer as of the time the indebtedness was incurred,

(B) which are paid or incurred within a reasonable period of time before or after the indebtedness is incurred, and

(C) which are attributable to education furnished during a period during which the recipient was an eligible student. Such term includes indebtedness used to refinance indebtedness which qualifies as a qualified education loan. The term "qualified education loan" shall not include any indebtedness owed to a person who is related (within the meaning of section 267(b) or 707(b)(1)) to the taxpayer or to any person by reason of a loan under any qualified employer plan (as defined in section 72(p)(4)) or under any contract referred to in section 72(p)(5).

(2) Qualified higher education expenses
The term "qualified higher education expenses" means the cost of attendance (as defined in section 472 of the Higher Education Act of 1965, 20 U.S.C. 1087ll, as in effect on the day before the date of the enactment of this Act) at an eligible educational institution, reduced by the sum of -

(A) the amount excluded from gross income under section 127, 135, 529, or 530 by reason of such expenses, and

(B) the amount of any scholarship, allowance, or payment described in section 25A(g)(2). For purposes of the preceding sentence, the term "eligible educational institution" has the same meaning given such term by section 25A(f)(2), except that such term shall also include an institution conducting an internship or residency program leading to a degree or certificate awarded by an institution of higher education, a hospital, or a health care facility which offers postgraduate training.

(3) Eligible student

The term "eligible student" has the meaning given such term by section 25A(b)(3). Section 25 (b)(3) of Internal revenue code reads as :

Eligible student
For purposes of this subsection, the term "eligible student" means, with respect to any academic period, a student who -
(A) meets the requirements of section 484(a)(1) of the Higher Education Act of 1965 (20 U.S.C. 1091(a)(1)), as in effect on the date of the enactment of this section, and

(B) is carrying at least 1/2 the normal full-time work load for the course of study the student is pursuing.
(4) Applicable limit
(4) Dependent

The term "dependent" has the meaning given such term by section 152.
In the case of taxable years the dollar beginning in: amount is: 1998 $1,000 1999 $1,500 2000 $2,000 2001 or thereafter $2,500.

8. Provision As To Deduction Under Direct Tax Code
To have a uniform tax structure in the country, DTC was decoded by the government in April 2009.Presenting the Union Budget for the year 2010-2011, Current Finance Minister of India Mr. Pranab Mukherjee told that the Direct Tax Code would be applicable from the financial year 2011-2012.[15]As far as provisions with regard to deduction under 80D and 80E are concerned, they have been retained in DTC as well. So this is praiseworthy on the part of the government.

9. Recent Trends In The Market Regarding Education Loans
Now I would like to throw some light on the recent market trends in this particular area. As we all know well, that Education loans in our country fall under priority sector lending. By doing market analysis, it is hearting to say it has been found that this sector of lending is fairly doing well in our country and to encourage the banks and keep their spirits high, banks have been accredited with awards for their best education loan providence to the public. Recently, by comparing data of various banks, Central bank of India has been adjudged as winner in this field , Bank of India – the Runner up and the Syndicate Bank –the second runner up . Though the loopholes remain, but nevertheless it is

Central Bank Of India Adjudged As Best In Providing Education Loans
The three parameters included were:
1. Performance and reach : 20%
2. Cost and Convenience : 70%
3. Disclosures and good governance : 10%

Winner’s Edge
• Low Interest Rate
• Speed of Loan Approval & Disbursal
• Low Penalties

The bank was also the winner in this category in the 2008 edition of the Awards. Central Bank of India performed fairly well across most parameters. However, there were two areas where the bank didn't fare well. First, the number of defaults in FY 2009 compared to FY 2008. Second, the average number of loans sanctioned per branch was very low compared to other players.

The major factor that led to Central Bank of India topping the tables was its offer of education loans at the cheapest interest rate among the institutions in the running. Considering that public sector banks dominate this space, offering largely a similar product, the jury awarded the highest marks to the cost and convenience parameter and, within it, awarded the highest marks to the rate of interest.Other factors that strengthened Central Bank of India’s position was the speed of approval of loan, speed of loan disbursal after approval, and low cheque bounce charges. Its wide reach only worked in the bank’s favour.

Conclusion
It is indeed a welfare oriented measure on the part of the Indian Government to allow the deductions to the taxpayers on amount paid towards interest on education loans and health insurance policy. Comparing deduction as to education loans in India with United States of America, we found that there is limit as to quantum of deduction in US but in India there is no limit as to quantum of deduction under education loans. So this is where India leads. Considering the priority and need for these basic two necessities the government of India in future also I think should make available more benefits as to deductions regarding these to Indian taxpayers.
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[1] Systematic Approach to Income Tax Service Tax & VAT, Dr. Girish Ahuja Dr. Ravi Gupta, 21st edition, Bharat Law House Pvt. Ltd., New Delhi, p. 507.
[2] http://gicofindia.com/(last visited on 7-07-2010)
[3] http://www.irdaindia.org/(last visited on 7-07-2010)
[4] http://law.incometaxindia.gov.in/DIT/File_opener.aspx?page=FINA&schT=FIN&csId=53a83704-446e-4cfa-9d50-aa879a7551fd&&pId=74ff37e3-476e-48c6-81a2-5f2ac4386354&sch=section 80d &title=Taxmann - Direct Tax Laws( last visited on 7-08-2010)
[5] india.gov.in/citizen/health/cghs.php( last visited on 6-07-2010)
[6] SYSTEMATIC APPROACH TO INCOME TAX SERVICE TAX AND VAT , Dr. Girish Ahuja Dr. Ravi Gupta , 21st edition , Bharat Law House Pvt. Ltd. , New Delhi, p. 521.
[7] Taxmann’s Income Tax Act , as amended by Finance ( No. 2 ) Act 2009 , 53rd Edition , 2009 , p. 1.399
[8] Ibid
[9] Initial assessment year means the assessment year relevant to the previous year, in which the assessee starts paying the interest on the loan.
[10] http://rbi.org.in/scripts/NotificationUser.aspx?Id=369&Mode=0(last visited on 7-07-2010 )
[11] http://www.thehindu.com/2009/08/16/stories/2009081659620600.htm( last visited on 06-07-2010)
[12] http://uscode.house.gov/download/title_26.shtml( last visited on 7-07-2010)
[13] http://www.fourmilab.ch/uscode/26usc/www/t26-A-1-B-VII-221.html( last visited on 7-07-2010)
[14] 1st Discussion paper released on Direct Tax Code, http://finmin.nic.in/DTCode/Discussion Paper.pdf( last visited on 6-07-2010 )
[15] http://www.moneycontrol.com/news/business/aim-to-implement-direct-tax-code-gst-by-1st-april-2011-fm_443928.html( last visited on 06-07-2010)
[16] http://money.outlookindia.com/article.aspx?262673(last visited on 07-07-2010)

The  author can be reached at: deeksha@legalserviceindia.com

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