How income tax provisions ease the burden for caregivers of disabled dependents

Article 21 of the Indian Constitution - Protection of Life and Personal Liberty - states: “No person shall be deprived of his life or personal liberty except according to the procedure established by law.”

Among the many other provisions and laws of the land, Section 80DD of the Income Tax Act, 1961, (the Act) is a vital provision aimed at offering relief to those caring for disabled dependents. This section allows tax deductions for expenses related to medical treatment, training, and rehabilitation of dependents, as well as for contributions to insurance schemes that ensure the welfare of dependents after the caregiver’s demise.

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The section provides a fixed deduction of ₹75,000 from gross total income for expenses incurred by resident individuals for looking after a dependent with a disability. The limit increases to ₹125,000 for severe disabilities. Eligibility requirements include:

· Medical treatment and rehabilitation: Expenses for medical treatment, nursing care, training, and rehabilitation of a disabled dependent.

· Insurance or annuity plans: Contributions to approved schemes are eligible for deduction. These schemes must pay an annuity or lump sum to the disabled dependents upon the taxpayer's death or after they reach age 60 with discontinued contributions.

· Medical certificate: A certificate from a medical authority is required.

The intention behind Section 80DD is to ease the financial burden on caregivers and to create a fund for dependents following the caregiver’s demise, addressing inflation and healthcare costs.

Legal interpretation, amendments

Prior to 1 April 2023, Section 80DD did not permit deductions for deposits made under approved schemes where payments were made to dependents before the caregiver’s death. This raised concerns over the accessibility of funds during the caregiver’s lifetime.

The issue was emphasised in the case of Ravi Agrawal vs. Union of India, in writ petition (civil) No. 1107 of 2017 dated 3 January 2019, where the Supreme Court acknowledged these challenges and urged the government to amend the law.

Budget 2022 amended Section 80DD to allow deductions for payments under approved schemes if they provide an annuity or lump sum to dependents upon the taxpayer's death or after they turn 60 and the contribution to such schemes has been discontinued.

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On 20 August 2024, the Supreme Court rejected appeals to apply the amendments retrospectively to insurance policies taken before 2014, stating that retroactive changes would fundamentally alter the contract's terms, which was deemed inappropriate.

Key considerations for caregivers 

Caregivers for disabled dependents may face challenges beyond the deductions available under Section 80DD. Key considerations include:

1. Ensuring ongoing care and treatment for the dependent after their death.

2. Making suitable investment choices that align with the dependent's needs.

3. Structuring investment programmes to guarantee funds/assets reach the dependent.

4. Selecting appropriate nominees to manage assets for the dependent.

5. Accumulating a financial pool dedicated to the dependent’s well-being.

Need to create a financial pool

As Stella Young, the Australian comedian, journalist and disability rights activist, stated, “My disability exists not because I use a wheelchair, but because the broader environment isn’t accessible.” Financial independence is crucial for dependents to ensure:

1. Independence after the caretaker’s death: Financial resources help maintain living standards and independence.

2. Reduced reliance on family: A dedicated fund minimises vulnerability to changing family dynamics.

3. Economic safeguarding: A financial cushion protects against economic shocks and inflation.

4. Preserving dignity and quality of life: Ensures continuity in lifestyle and essential services after caregivers pass away.

How to create a financial pool

Caregivers should consider various investment options to create a fund such as term life insurance, money-back policies, Sukanya Samriddhi Yojana, and mutual funds. Establishing a trust under the Indian Trust Act, 1882, can provide a structured approach to managing assets for the dependent's benefit.

Government initiatives such as DISHA, VIKAAS, SAMARTH, and NIRMAYA (health insurance scheme) aim to support persons with disabilities.

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In addition, the Department of Empowerment of Persons with Disabilities has introduced benefits/incentives for employers of people with disabilities. The introduction of more such schemes and their widespread awareness would be a welcome move and would contribute to the social and economic empowerment of such people.

Moreover, caregivers must take immediate action to not only provide for their dependents during their lifetime but to also establish accessible funds for the future. Avenues such as setting up of a trust ensure that these funds are properly managed, safeguarding them from disputes or misuse.

Authors: Sonu Iyer, tax partner and national leader, people advisory services, EY India, and Amarpal S. Chadha, tax partner, EY India. Shanmuga Prasad, director tax at EY India, also contributed.