What is disability deduction, and how is it deducted from income?
The COVID-19 pandemic has made it abundantly clear that medical expenses are heavy and always on the rise. Furthermore, for a person suffering from an illness or disability, the medical expenses demand higher savings to cover the costs. As people with disabilities are also liable to pay income tax, it can sometimes leave them with a lesser amount to cover their rehabilitation or medical expenses. However, under the Income Tax Act, there is a great way through with people with disabilities can claim disability deduction on their paycheck and reduce their tax liability.
If you or any of your dependents have a disability, you can claim tax deductions under sections 80U or 80DD. However, to claim disability deduction, you need to understand the applicable criteria of disability under the Income Tax Act.
Definition of disability under the Income Tax Act
Under the Income Tax Act, a Person with Disability (PwD) is defined as someone who is 40% disabled as certified by the medical authorities. The rights and rules of such individuals are governed under the Disability Act, 1995 which has classified disabilities under these seven categories:
- Low Vision
- Hearing Impairment
- Leprosy Cured
- Mental Retardation
- Locomotor Disability
- Mental Illness
What is Severe Disability?
The Income Tax Act defines a person with a severe disability who is 80% disabled as certified by the medical authorities. The categories mentioned above under the Disability Act, 1995 apply to a person with a severe disability and include other disabilities such as autism, cerebral palsy, etc.
What deductions can you claim if you are disabled?
The Income Tax Department, under the Income Tax Act, allows eligible taxpayers with a defined disability to claim tax deductions under the following two sections:
Tax Deductions under section 80U
Section 80U of the Income-tax Act provides disability deductions to people who fulfill the definition of disability as mentioned in the Income Tax Act. Individuals suffering from 40% disability can claim a tax deduction of Rs 75,000. However, individuals suffering from 80% disability (severe disability) can claim a tax deduction of Rs 1,25,000 under the section.
Tax Deductions under section 80DD
Section 80DD of the Income Tax Act provides disability deductions to the disabled kin or the family members of the taxpaying individual. The deduction can also be claimed if the individual has contributed a specific amount as a premium towards an insurance policy to take care of the disabled dependent family member. The claim limit is similar to Section 80U, i.e. Rs 75,000 for a person with 40% disability and Rs 1.25 lakh for a person with 80% disability.
The dependents are characterized as follows:
- Individuals themselves
- Any member of the Hindu Undivided Family
How are disability deductions eliminated from your income?
Suppose an individual has a severe disability and earns a total income of Rs 9,00,000. Since the individual is eligible to claim a disability deduction of Rs 1.25 lakh, the total income of Rs 9,00,000 will be reduced by 1,25,000. After the reduction, the total taxable income will be Rs 7,75,000 (9,00,000- 1,25,000). To register the claim for the tax deduction, individuals are required to present the medical certificate along with the return of income certificate according to section 139 of the Income Tax Act.
The government has made provisions of these tax deductions to support individuals with disabilities financially. The tax deductions are based on the percentage of the disability, irrespective of the age or the actual expenses incurred. Therefore, if the expenses are lower than Rs 75,000 or 1,25,000, an individual who is personally disabled or has a disabled dependent can claim these tax deductions.