Income Tax Deductions and Allowances

Paying income tax is an obligation for every earning citizen of India, but it doesn't mean you can't optimise your tax liability. The Indian Income Tax Act provides several legal methods to reduce your payable taxes through income tax deductions and exemptions. Understanding these options helps salaried individuals, freelancers, and business owners significantly lower their tax burden each year.

By becoming familiar with the income tax exemption list and the various deductions under income tax, you can make smarter financial choices and enhance your savings.

What Are Income Tax Deductions and Exemptions

Income tax deductions reduce your taxable income directly. For instance, if your annual income is ₹10 Lakhs and you claim deductions worth ₹1.5 Lakhs under Section 80C, you'll be taxed on ₹8.5 Lakhs only. If you're unsure what is deduction in income tax, it refers specifically to allowable investments and expenses that reduce your overall taxable income.

On the other hand, an income tax exemption pertains to certain types of income that are entirely excluded from taxation. Common examples include House Rent Allowance (HRA), Leave Travel Allowance (LTA), and agricultural income.

Both tax deductions and income tax allowances are effective strategies to legally minimise taxes and comply with Indian tax regulations.

Income Tax Deductions for FY 2025-26

The following deductions are available under the old tax regime, clearly outlined in an income tax deductions chart for easy reference:

1. Section 80C – Up to ₹1.5 Lakh

Investments and payments eligible for this deduction include:

Employee Provident Fund (EPF)
Public Provident Fund (PPF)
National Savings Certificates (NSC)
Equity-Linked Savings Scheme (ELSS)
Life insurance premiums
Tuition fees for children
Principal repayment on home loans

2. Section 80D – Health Insurance Premiums

Premiums paid qualify for deductions as follows:

Up to ₹25,000 for self, spouse, and dependent children.
Additional ₹25,000 for parents below 60 years.
₹50,000 deduction if parents are senior citizens.

3. Section 80E – Education Loan Interest

Interest paid on loans for higher education is fully deductible for up to 8 consecutive years.

4. Section 24(b) – Home Loan Interest

Claim a deduction of up to ₹2 Lakhs annually on interest payments for a self-occupied property, providing significant tax benefit to homeowners.

5. Section 80G – Donations to Charities

Donations to specified charitable institutions offer deductions of 50% or 100%, with or without limits, depending on the recipient organisation.

6. Sections 80TTA/80TTB – Interest on Savings Accounts

Section 80TTA: Individuals below 60 years can claim a deduction of up to ₹10,000 on savings account interest.
Section 80TTB: Senior citizens can claim deductions up to ₹50,000 on interest from savings and fixed deposits.

Income Tax Exemptions for FY 2025-26

Exemptions refer to income types or components entirely excluded from taxation. Some of the major exemptions include:

1. House Rent Allowance (HRA)

HRA received by salaried individuals can qualify for an income tax exemption, subject to conditions based on salary structure, actual rent paid, and city of residence.

2. Leave Travel Allowance (LTA)

LTA covers travel costs incurred during domestic vacations. This allowance is tax-exempt twice within a block of four calendar years, excluding expenses for food and accommodation.

3. Gratuity

Gratuity received upon retirement is tax-exempt up to ₹20 Lakhs for employees covered under the Payment of Gratuity Act.

4. Standard Deduction

A standard deduction of ₹50,000 is automatically available as a deduction from salary income for salaried and pensioned individuals under the old tax regime. Starting FY 2024–25, this deduction is increased to ₹75,000 under the new tax regime, providing improved income tax benefit to taxpayers.

5. Agricultural Income

Income derived from agricultural sources is entirely exempt from tax, although it might be considered when calculating your overall tax rate if you also have non-agricultural income.

Old Tax Regime vs. New Tax Regime: What to opt for

From FY 2020–21 onwards, taxpayers can select either the old tax regime or the new one. Old regime permitted numerous income tax deductions for salaried employees, while the new tax regime, featuring lower tax rates but significantly fewer deductions.

Here’s the key difference between the 2:

Feature	Old Tax Regime	New Tax Regime
Standard Deduction	₹50,000	₹75,000
Section 80C	₹1,50,000	Not Available
HRA, LTA, Other Exemptions	Available	Not Available
Tax Slabs	Higher Rates	Lower Rates

Tip: If you frequently avail deductions under income tax like 80C and other exemptions, the old tax regime could offer greater overall income tax benefit. However, if your financial profile doesn't rely heavily on such deductions, consider the new tax regime to enjoy reduced tax rates.

How to Plan for Maximum Tax Savings

Start Early

Avoid waiting until the financial year-end to invest. Spread your investments evenly every month to utilise available tax deductions effectively.

Optimise Salary Components

If your employer provides allowances such as HRA, LTA, and food coupons, leverage them optimally for additional income tax exemption benefits.

Review Investments Regularly

Select tax-saving instruments aligned with your financial goals—for instance, ELSS for growth-oriented investors or PPF for safer investments. Regular reviews ensure you remain updated with the income tax deductions chart.

Maintain Proper Records

Always keep essential documentation, such as receipts for tuition fees, medical expenses, and rental payments, readily available to support your deduction claims during tax filing.

Who Can Benefit from Deductions and Exemptions

Salaried Employees

Salaried individuals can leverage several income tax deductions for salaried employees, such as standard deduction, HRA, Section 80C investments, and medical insurance premiums, effectively lowering their taxable income.

Freelancers and Professionals

Self-employed professionals and freelancers can claim relevant business expenses as tax deductions along with specific deductions under sections like 80C and 80D, helping reduce their overall tax liability.

Senior Citizens

Senior citizens benefit from higher deduction limits on health insurance premiums and enjoy an exemption from TDS (Tax Deducted at Source) on interest income up to ₹50,000, enhancing their overall income tax benefit.

Key Points to Remember

Income tax deductions are specific investments or expenditures deducted directly from your taxable income, reducing the tax payable.
Income tax exemptions refer to particular income components entirely excluded from taxation, such as HRA, LTA, and agricultural income.
It’s crucial to understand what are the deductions in new tax regime, as this regime restricts most standard deductions and exemptions available under the old regime.
Regularly review your income tax eligibility criteria for various deductions and exemptions as per the current financial year's Income Tax guidelines.
Always verify the latest limits, conditions, and rules through the Income Tax Department website or reliable financial portals.

Conclusion

Effective tax planning is essential for minimising your taxable income and maximising your savings. By thoroughly understanding the income tax exemption list and clearly identifying available income tax deductions, you can strategically reduce your tax outgo, significantly boosting your financial health.

Regularly assess your income tax eligibility for various exemptions and deductions.
Keep accurate records, including rent receipts, insurance premium payments, and investment proofs.
Carefully evaluate which deductions are allowed in new tax regime to decide between the old and new regimes, ensuring optimal tax benefit based on your financial profile.

To ensure compliance and make informed decisions, consult a tax professional who can guide you according to the latest tax laws and regulations.

Can I claim the 80C deductions at the time of filing the income tax return in case I have not submitted proof to my employer?

Employers consider the proof of investments submitted by employees to compute their taxable income. It is advisable to submit the proof on time, but if you fail to do so, you can always make the tax deduction claim at the time of filing the tax return. To claim tax deductions while filing your income tax return, the investment should have been made during the relevant financial year.

I have availed a loan from my employer for pursuing higher education. Can I claim the interest paid on such a loan as a tax deduction under Section 80E?

Tax deduction can be claimed for interest paid on a loan for higher studies under Section 80E. However, the deduction is available only if the loan has been provided by a financial institution. Interest on the loan granted by your employer will not qualify for a tax deduction under the law.

Is there a maximum limit on the tax deduction claimable under Section 80E?

Interest paid on an education loan is eligible for tax deduction under Section 80E. However, the section doesn’t specify any limit for the tax deduction. As such, the actual interest paid can be claimed as a tax deduction.

Can a company or firm reap the benefits of Section 80C?

A company/firm cannot claim tax benefits under Section 80C as its provisions apply only to individuals and Hindu Undivided Families (HUF).

Can a company claim a deduction for donations made under Section 80G?

Donations to specific institutions, funds, etc., qualify for a tax deduction under Section 80G and every taxpaying entity, including companies, are eligible to claim the tax benefit.

Are the tax exemptions available under Section 80D available to corporates?

The premiums paid for medical insurance are tax-exempt under Section 80D of the Income Tax Act. The tax benefit is available only to individuals and Hindu Undivided Families (HUF), but not to corporate entities. The section also mandates payment through demand draft (DD), cheque, or electronic means to claim tax benefits. Cash payments are not eligible for tax deduction under Section 80D.

What are the tax exemptions available under Section 80DD?

Section 80DD allows for a tax deduction of up to ₹50,000 for the treatment cost of a handicapped dependent. The deduction limit can be extended to ₹1 lakh depending on the severity of the disability.

Are bank recurring deposits eligible for tax deduction?

Section 80C is very specific about the investments eligible for tax deduction and recurring deposits do not qualify for the same. To claim a tax deduction under this section, you will have to invest in specific tax-saving instruments. For instance, a five-year, tax-saver bank fixed deposit will be eligible for tax deduction, but a recurring deposit will not.

Are all allowances taxable for salaried individuals?

The nature of the allowance determines if it is taxable or not. Allowances like Hostel Expenditure Allowance, Children’s Education Allowance, Leave Travel Allowance (LTA), and House Rent Allowance (HRA), which are often part of the salary break-up, are partially tax-exempt. On the flipside, allowances such as City Compensatory Allowance, Special Allowance, and Overtime Allowance are taxable in the hands of the employee.

Can both earning members of a family claim tax deduction for a home loan taken as co-applicants?

Yes, both earning members of a family can individually claim maximum tax benefits for home loans taken jointly (as co-applicants). The interest on a home loan is eligible for a tax deduction of up to ₹2 lakh in a year under Section 24 of the Income Tax Act. Additionally, the principal repayment qualifies for a deduction of up to ₹1.5 lakh under Section 80C.

Can self-employed individuals claim the HRA benefit?

No, the HRA benefit is only limited to salaried people, but self-employed people can avail a tax deduction for house rent under Section 80GG of the Income Tax Act.

How can I save tax on an education loan?

An individual can easily avail a tax deduction on education loans taken for self, spouse, or children. Under Section 80E of the Income Tax Act, a tax deduction can be claimed for the interest paid on an education loan.

What is the standard deduction limit?

As announced in the Budget 2024, w.e.f FY 2024-25, the standard deduction for salaried employees is proposed to be increased from ₹50,000/- to ₹75,000/-.

How much child education allowance can I claim?

You can claim ₹100 per month, i.e. ₹1,200 a year for a maximum of two children.

What are the examples of income tax exemptions?

House rent allowance (HRA), leave travel allowance (LTA), children’s education allowance, and exemptions under Section 24 are some of the examples of income tax exemptions.

What are the examples of income tax deductions?

Investments done under Section 80 of the Income Tax Act, 1961, in ELSS funds, principal repayment of home loan, Public Provident Fund (PPF), National Pension Scheme (NPS), etc. are some of the examples of income tax deductions.