Restrictions for Section 80DD deduction need to be eased

With the budget around the corner, the Mint Money team is highlighting some pain points in taxation that the government may want to address. Today, we will look at two aspects under Section 80DD of the Income-tax Act against which taxpayers can claim a deduction. First, the definition of disability and, second, relaxation for taxpayers to get maturity benefit while securing the life of a differently-abled dependant.

Section 80DD provides a deduction to resident individuals or Hindu Undivided Family (HUF) in respect of expenditure incurred for disabled dependants.

The deduction is available on any expenditure incurred on the medical treatment, training and rehabilitation of the dependant, subject to conditions.

It is also available for life insurance premium paid to LIC or any other insurer, subject to the following conditions:

1) The insurance plan should provide for payment of an annuity or lump sum amount for the benefit of the dependant in the event of the death of the individual in whose name the subscription to the scheme has been made. According to tax experts, generally, the lump sum amount received by the disabled person is tax-free but there is ambiguity about the tax status of the annuity. According to Archit Gupta, founder and CEO, ClearTax, “Any amount received as annuity is taxable.” Sudhakar Sethuraman, partner, Deloitte India, said, “Section 80DD is silent on this case. It only talks in the context when the individual receives annuity on the death of the disabled person.”

2) The individual nominates either the dependant, being a person with disability or any other person or a trust to receive the payment for the dependant’s benefit.

3) The individual is required to furnish a copy of the certificate issued by the medical authority along with the income tax return in the assessment year in which the deduction is claimed.

While Section 80DD allows the benefit of deduction towards insurance premium, in case the dependant dies before the individual, the amount of premium paid or deposited is deemed to be the income of the individual in the financial year in which such amount is received and is taxable at the slab rate. In case the dependant is alive, the individual doesn’t get the maturity benefit because there is a condition which says that the policy must provide annuity or lump sum amount only in case of the death of the individual.

Sethuraman said, “The condition imposed under Section 80DD, that the policy must provide annuity or lump sum amount only in case of death of the person needs a review and relaxation for taxpayers. Also, the taxability of the insurance amount received upon the death of the dependant defeats the essence of Section 80DD. In this regard, the provisions of Section 80DD should be revisited to permit receipt of an annuity or lump sum payout during their lifetimes and such conditions should get imposed to permit either an early withdrawal or withdrawal post attainment of a specified age to meet the expenses of the dependant.”

Besides, more diseases should be included under Section 80DD, said Gupta.

The taxability of the annuity received by the dependant should also be clarified.