Income Tax Deductions and Exemptions

What are Income Tax Deductions?

Income Tax (IT) deductions aid the individuals mitigate their tax liability in a specific financial year (F.Y.). This implies that the investments that are made in a FY offset against the gross yearly income when you file your IT return are called Income Tax deductions. This provision was brought into effect in order to inculcate a savings habit amongst people and help them construct a monetary future which is stable. Few examples of Income Tax (IT) deductions are National Pension Scheme (NPS), Public Provident Fund (PPF), investments done u/s 80 of the Income Tax Act (ITA), 1961, in Equity Linked Savings Scheme funds, etc.

Note: You can calculate the tax deductions using online calculators provided by several sites.

Benefits of Tax deductions

Tax deductions have several advantages to offer. They are:

• Tax deductions help you mitigate a sum from your taxable salary income and save the tax. 

• If the tax on your income is reduced, it helps you develop a savings habit and invest your money in several other areas.

• Income Tax deductions mitigate the income subject to the maximum tax brackets. Hence, you will be able to claim the deduction for the sum spent in medical expenses, tuition fees, and charitable expenses.

Income Tax Return (ITR) is necessary, i.e., it is impossible to avoid the payment of tax completely. However, you can definitely mitigate your taxable income through proper planning.

Several Types of Income Tax Deductions in India

If you increase your income tax deductions, you can mitigate your taxable income. There are several options of investment and forms of expenses that can aid you get minimisations on your taxable income. The Indian Income Tax Act offers several provisions. Below mentioned are the several types of income tax deductions in India:

1. Public Provident Fund (PPF)

You can receive tax deduction u/s 80C of the IT Act, 1961, by giving your contribution to your PPF account.

2. Life Insurance Premiums

If you pay premiums for the life insurance plans for yourself, your children, or your spouse, as per section 80C of the IT Act, you can reap the benefits of Income Tax (IT) deductions. The amount that you receive after the maturity of the insurance policy will be free from any kind of tax. However, this will be subject to the conditions written in your policy.

3. National Saving Certificate (NSC)

The amount that is invested in NSC will be eligible for the income tax deduction u/s 80C of the IT Act, 1961. NSC is one of the most secured investment modes in India. However, the interest amount earned from this investment mode is taxable. The interest amount earned is reinvested and it qualifies for the tax deduction since NSC is cumulative.

4. Bank Fixed Deposits (FDs)

According to Section 80C of the IT Act, 1961, you can get deduction on tax if you invest in FDs for a tenor of five years. Several banks in India have tax-saving FD options. However, the interest amount that is earned on these fixed deposits is taxable.

5. Senior Citizen Savings Scheme (SCSS)

The senior citizen can get a deduction on tax if they invest in SCSS that the banks offer. This is eligible for deduction on tax u/s 80C of the IT Act. However, the interest amount earned from this scheme is completely taxable.

6. Post Office Time Deposit (POTD) 

If you invest in a 5-year POTD, you will get a deduction on tax u/s 80C of the IT Act, 1961. However, the accrued interest amount on it is completely taxable.

7. Unit-linked Insurance Plans (ULIP) 

If you invest in this for yourself, your children, and your spouse, you will get deductions on tax u/s 80C of the IT Act.

8. Home Loan EMIs

The EMIs you pay to repay the principal of your home loan are eligible for deductions on tax u/s 80C of the IT Act, 1961. 

9. Mutual Funds and ELSS

If you invest in ELSS and mutual funds, you will be eligible for deductions on tax u/s 80C of the IT Act, 1961.

10. Stamp Duty and Registration 

The charges involved for the HomeStamp duty and the registration fee of transferring the property are subject to deduction on income tax u/s 80C of the IT Act, 1961.

11. Retirement Savings Plan

You will get deductions on income tax if you invest in the retirement plans which LIC or several other insurance providers offer. If you contribute to the National Pension Scheme (NPS), it will also be eligible for deduction on tax.

12. Tuition Fees

The fees you pay to your child’s tutor for their education will also qualify for the deduction on income tax u/s 80C. However, you are required to pay that fee for your child’s full-time education in a university, school, or college situated in India for 2 of your children in totality. It is to be noted that the tuition fees do not comprise the development fee or donations for the educational institution.

13. Medical Insurance Premiums

The medical health insurance premiums which are paid for yourself, your children, or your spouse qualify for the deductions on income tax u/s 80C of the IT Act, 1961. It is to be noted that the deduction of Rs. 25,000 is allowed for youngsters and Rs. 50,000 for the senior citizens under this section.

14. Infrastructure Bonds

If you invest in the infrastructure bonds, you will be eligible for deductions on IT u/s 80C of the IT Act, 1961.

15. Charitable Contribution

If you donate for charitable tasks, you can mitigate your taxable salary income u/s 80G of the IT Act, 1961. However, you must make sure that the proof of your contribution is declared before the 31st of December every year.

16. Treatment of Disabled Dependents

According to section 80DD of the IT Act, 1961, you can mitigate your taxable income for the medical expenses that are incurred for the treatment of any person who is disabled and is dependent on you.

17. Deduction for Preventive Health Check-ups

If you spend an amount of Rs. 5,000 for the preventive medical health check-ups of yourself or your family members, you can get income tax deductions u/s 80D of the IT Act, 1961.

18. Interest Paid on Education Loan

If you pay an interest on your education loan, you can get a deduction on tax as per section 80E of the IT Act, 1961. The loan could have been taken to pursue higher education by you, your spouse, your children, or a student who you are a legal guardian of. 

19. Deduction on House Rent Paid

If you or your spouse does not own a residential accommodation at your employment place, and you pay rent for it, you can get a deduction on tax. This is applicable for salaried employees who are taxpayers u/s 80GG of the IT Act, 1961.

Let’s take an example. Suppose your basic salary per month is Rs. 20,000 and your house rent for a flat in Pune is Rs. 5,000. Your HRA is Rs. 8,000 and you will be eligible for an HRA exemption of 40% of your basic salary. 

HRA = Rs. 8,000

40%*HRA = Rs. 8,000

Rent that you pay in excess of 10%*salary =Rs. 5,000 - Rs. 2,000 = Rs. 3,000.

Therefore, the tax exemption amount will be Rs. 3,000 for the HRA paid.

Income Tax Deduction Under Section 80

Several income tax deductions can be claimed by taxpayers u/s 80 of the IT Act, 1961. Below mentioned table will give you a visual understanding of the various income tax deduction limits and whether you are eligible to claim them or not. Read through the income tax deduction chart carefully:

Features of Tax Deduction u/s 80

The features of each section are mentioned below:

1. Section 80C

Income Tax (IT) deductions u/s 80C are very popular among the investors. It allows a maximum deduction of up to Rs. 1,50,000 each year from the total income of the taxpayer. The HUFs and the individuals can reap the benefits of this section. However, partnership firms, LLPs, and corporations cannot claim this benefit.

The investments which are available for the income tax deductions under this section are mentioned below:

In addition to this, it is to be noted that individuals who opt to file their income tax returns by using the latest tax regime shall not be eligible for tax deductions under this section. 

2. Section 80CCC

Under this section, an individual can provide a tax deduction for a sum that is paid by the taxpayers who subscribe to an annuity plan which is offered by an insurance corporation that has been approved. In addition to this, the payment must be done to a fund that has been mentioned u/s 10(23AAB). It is to be noted that Hindu Undivided Families are not eligible for tax deductions u/s 80CCC. Both residents and non-residents can reap the benefits of this facility. 

Besides this, any interest accrued or bonus received through the annuity plan will not be eligible for tax deduction u/s 80CCC. The proceeds from this policy in the form of surrender of annuity or pension from annuity are taxed.

3. Section 80CCD

The tax deductions u/s 80CCD are categorised in 3 subsections as mentioned below:

• Employee Contribution Under Section 80CCD(1): 

A maximum of up to 10% of salary (for employees) or 20% of gross total income (for self-employed individuals). The limit is capped at Rs.1.5 lakh (aggregate of 80C, 80CCC, and 80CCD).

• Self Contribution Under Section 80CCD(1B):

Both, salaried and self-employed individuals are allowed to claim a tax deduction of Rs. 50,000 for their contribution towards the National Pension Scheme. Along with this, the upper limit of the tax deduction available u/s 80CCD hikes up to Rs. 2,00,000.

• Employer’s Contribution Under Section 80CCD(2):

An additional tax deduction of up to 10% of the salary of an employee for their contribution towards the National Scheme.

It must be noted that the money that is received from the National Pension Scheme every month or because of the surrender of accounts is subject to tax. However, if you reinvest this amount in the annuity plan, it will be completely exempted from tax.

4. Section 80D

One of the most powerful tax-planning tools is health insurance. You will be eligible for various tax benefits in addition to other medical or financial benefits. Let’s look at the below table to help you understand this better:

5. Section 80DD

The tax deduction u/s 80DD is made available to those HUFs or individuals on whom a disabled person is partially or completely dependent for their maintenance and support. An amount of up to Rs. 75,000 can be claimed for those who have a disability of up to 40%-80%. In case of severe disability (80% or more), an amount of up to Rs. 1,25,000 can be claimed. It must be noted that the HUFs or the individuals can claim a tax deduction only for the dependent persons and not for themselves. 

6. Section 80DDB

U/s 80DDB, the taxpayers can make a claim of a tax deduction for the medical treatment of a person who is dependent on them and suffering from a particular illness. The amount which is allowed as a deduction is mentioned below:

• The lower between the amount paid and a maximum of Rs. 40,000. This is applicable for the individuals who are less than 60 years of age.

• The lower between the amount paid and a maximum of Rs. 1,00,000. This is applicable for senior and super senior citizens.

Below mentioned is the list of the diseases for which an individual can claim the tax deduction:

• The neurological diseases in which the level of disability crosses 40%:

• Ataxia

• Dystonia Musculorum Deformans

• Hemiballismus

• Dementia 

• Aphasia

• Motor Neuron Disease

• Chorea

• Parkinson's Disease

• Full-blown Acquired Immuno-Deficiency Syndrome (AIDS)

• Malignant cancers

• Haematological disorders

• Chronic renal failure - Thalassaemia, Hemophilia

It must be noted that prior to making the claims u/s 8-DDB, you must get a certificate from the authorised specialist. The patients whose treatment takes place at a private hospital are not required to submit the certificate. However, if the patients’ treatment takes place at a government hospital, they must submit a certificate signed by any specialist who is working full-time in that hospital. 

7. Section 80E

The loan taken for higher education helps you save on tax. The interest paid on the education loan which the individuals have taken or are repaying can be claimed as tax deduction u/s 80E. However, it is to be noted that the tax deduction can be provided on the interest component of the loan for education only. It is made available only for 8 years. This period begins from the commencement year of your loan repayment or until the completion of the interest repayment period, whichever takes place earlier.

8. Section 80EE

 U/s 80EE, the tax deduction is available only to the individuals. They can claim on the interest portion of the residential house loan taken from a financial institution. They can claim a maximum sum of Rs. 50,000 under this section. In addition to this, in order to be eligible for claiming under this section, the house must be valued at Rs. 50,00,000 or below. Also, the loan taken for the residential house must be Rs. 35,00,000 or less.

9. Section 80EEA

Under section 80EEA, the first time home buyers are allowed to claim a tax deduction of an amount of up to Rs. 1,50,000 for the interest that is paid on the loan sanctioned from a financier. It must be noted that this particular deduction is above the Rs. 2,00,000 deduction for the payment of interest made available u/s 24 of the IT Act. Hence, the taxpayers will be able to claim a total tax deduction of Rs. 3,50,000 for an interest on home loan. This is possible especially if they align with the conditions mentioned u/s 80EEA.

In addition to this, in order to be able to claim a tax deduction under this section successfully, the stamp duty value of the residential property must be either Rs. 45,00,000 or below. Also, the individual taxpayer will not be able to claim a tax deduction u/s 80EE.

10. Section 80G

People who contribute to the relief funds and charitable institutions will be able to claim tax deductions u/s 80G. However, only the donations which are made to the prescribed funds can get claimed under this section. It must be noted that a donation made in cash which exceeds Rs. 2,000 can’t be claimed. The taxpayers must use a different payment mode for the same. 

11. Section 80GGB

U/s 80GGB, only the enterprises or corporations are allowed to claim the contributions that they make towards a particular political party or the electoral trusts which are registered in India as tax deductions which equal the donated amount. The political party on the receiving end of the donation should get registered u/s 29A of the Representation of the People Act, 1951. 

Electoral trust, a non-profit organisation (NPO), was formed u/s 8 of the Companies Act, 2013. It was created in order to make the entire donation process transparent and reallocate it to the registered political parties. A 100% tax deduction can be claimed against the donations that are made to a registered political party according to section 80GGB. No contributions or cash donations are allowed u/s 80GGB. 

12. Section 80GGC

According to section 80GGC, the individuals are eligible for tax deductions on the contributions that are made to a political party or an electoral trust that has been registered u/s 29A of the Representations of the People Act, 1951. The individuals are allowed to claim the tax deductions within the range of 50%-100% of the donations which are made towards a political party or an electoral trust. 

It must be noted that the corporations are not eligible for tax deductions u/s 80GGC. No contributions or cash deductions can be made u/s 80GGC.

13. Section 80GG

According to section 80GG, salaried and self-employed individuals are eligible to claim the tax deductions towards the rent of any unfurnished or furnished residence. Note that individuals who don’t receive the house rent allowance from their employer can claim for a tax deduction u/s 80GG. The least amount from the following mentioned will be considered as the eligible deduction amount:

• 25%* total income

• Rs. 5,000/month

• 10%*income-Rent

14. Section 80RRB

 According to section 80RRB, individuals receiving the royalty payments are eligible for a tax deduction of an amount of up to Rs. 3,00,000. If the royalty payments received are below Rs. 3,00,000, then only that particular amount will be taken into consideration for tax deduction. Indian residents who hold the original patent which is registered under the Patent Act, 1970, are eligible to claim a tax deduction u/s 80RRB.

15. Section 80TTA

According to section 80TTA, HUFs and individuals are eligible to claim a tax deduction on salary income earned as an interest. Maximum of Rs. 10,000 can be considered as a tax deduction under this section. Types of interest income which are allowed as tax deduction u/s 80TTA are as follows:

• Savings account with a bank

• Savings account with a post office

• Savings account with a cooperative society that functions as a bank

Types of interest income which are not allowed as tax deduction u/s 80TTA:

• Interest earned on fixed deposits

• Interest earned on any time deposits

• Interest earned on recurring deposits

16. Section 80TTB

According to section 80TTB, the senior citizens are eligible to claim a tax deduction of an amount of up to Rs. 50,000 from their gross total income in a particular financial year. Senior citizens who are eligible for section 80TTB are not allowed to claim a tax deduction u/s 80TTA. Exemptions to section 80TTB comprise the deposits which are held by or on behalf of an association of persons (AOP), a body of individuals (BOI), or a partnership firm.

17. Section 80U

According to section 80U, individuals suffering from a disability are eligible to claim a tax deduction. If you are an individual who has received a certificate by an authorised medical specialist which states that you are at least 40% disable, you are eligible to claim a tax deduction u/s 80U. Tax deduction of an amount of up to Rs. 75,000 can be claimed by the individuals with disabilities. Also, an individual with severe disabilities can claim a tax deduction of an amount of up to Rs. 1,25,000.

Income Tax Exemptions/Allowances

Income tax allowances or exemptions are the components of your gross salary income which are exempted from being computed as a part of your entire taxable income. Individuals are allowed to preserve a significant portion of their income through these income tax exemptions. The IT Act, 1961 has made the income tax allowances or exemptions mandatory in order to inculcate the habit of saving amongst people. Few of the well-known examples of such exemptions are house rent allowance (HRA), children’s education allowance, leave travel allowance (LTA), all the exemptions mentioned u/s 24, and many more.

Taxable and Non-taxable Components of Your Salary

There are various components of the salary structure of any earning individual. These components aid them save on tax along with the present income tax exemptions/allowances and deductions. Few of these components are either fully or partially taxable, whereas others are fully exempted from tax. The following section of ‘Exemption of Allowances’ will help you get a clear understanding of the various taxable and non-taxable components in the salary structure. It will also help you understand the concept of Tax Deducted at Source (TDS).

Exemption of Allowances

Being aware of the tax allowances/exemptions which are available under the IT Act, 1961, is one of the best ways to mitigate your tax liability. U/s 10 of the IT Act, you are eligible for tax exemptions on standard deduction, HRA, contributions towards EPD, and pension. Below mentioned is a list of all the major tax exemptions which are applicable to the salaried employees:

• House Rent Allowance

If you are a salaried employee who lives in a rented accommodation, you will get a house rent allowance (HRA). It will be subject to tax if you receive the HRA but you are not living in a rented house. In order to claim this allowance, you must produce a proof of your rent receipts. You can claim the lease of the following as your HRA exemption:

• Total HRA which you have received from your employer

• 40% of your salary (basic salary+dearness allowance) for non-metro residents and 50% of your salary for metro residents.

• Rent paid less than 10% of basic salary + Dearness Allowance

• Standard Deduction

Standard deduction is the part of your salary which is not liable to tax. It can be used to mitigate your income tax liability. The limit of standard deduction is Rs. 50,000 and it is deducted from your gross salary. It further reduces the overall taxable income.

• Leave Travel Allowance

You get a leave travel allowance (LTA) if you’re a salaried individual. This is an allowance which is restricted to the expenses incurred on your travel during your leaves. It is to be noted that any other expense of the trip like food expenses, shopping, leisure activities, and shopping are not covered under this allowance. You can claim the LTA two times within a block of 4 years. It can be carried forward to the next block if you don’t use it within a particular block. Only domestic travel is covered under the LTA. Also, in order to be able to claim this allowance, you must travel either by air, public transport, or railway.

• Mobile Reimbursement

Expenses incurred due to the telephone and mobile usage at home are reimbursed and it can be claimed without any tax. This amount is usually lesser than the total bill amount or that provided along with your salary.

• Books and Periodicals

The employees can claim reimbursement on the expenses incurred on periodicals, books, journals, newspapers, etc. under the IT Act. This is a tax-free reimbursement which is the lower amount between the total bill amount and the amount provided along with the salary. 

• Food Coupons

The food coupons provided to the employees by the employers are taxable as a prerequisite. Up to an amount of Rs. 50/meal, these coupons are tax-free. With the monthly computation of 22 working days with two meals each day, it provides a monthly benefit of Rs. 2,200 which comes up to Rs. 26,400 as an annual exemption.

• Relocation Allowance

You may require to relocate to a new city for business. This can cause several expenses in the name of shifting, such as car transportation costs, moving furniture, car registration, air fare, and many more. Such expenses are taken care of by the employer. It is either directly paid by the employer or they may reimburse these expenses such as travel fare for the employee and their family, accommodation for the first 15 days, packaging costs, and many more. These expenses are exempt from tax.

• Children Allowance

The allowance given by the employer to the employee for their child’s education is tax-exempt. A maximum of Rs. 100/month can be claimed by an employee as an exemption. This comes up to Rs. 1,200/year. This exemption is valid for a maximum of two children. 

Exemptions vs Deductions

The table mentioned below gives a brief overview of the differences between the tax deductions and tax exemptions in order to clarify your confusion you face while filing your tax return:

Tax Slabs for Senior Citizens (60-80 Years)

Tax Slabs for Super Senior Citizens (Above 80 Years)

You can calculate the income tax deductions using the online calculators that are present on the online websites.

Tax Slabs for Women

Income tax slabs for the assessment year 2021-22 and 2022-23 for women are the same as they are for men under both old and new tax regimes.

Below mentioned table depicts the income tax slabs for women under the old tax regime:

Below mentioned table depicts the income tax slabs for women under the new tax regime:

Old Tax Regime v/s New Tax Regime - Which is Better?

In order to help you understand which tax regime is better for you, look at the below mentioned scenarios which will offer you a better insight into both the worlds:

When your taxable Income is less than Rs. 10 lakh:

When your taxable income lies between Rs. 10,00,000 and Rs. 15,00,000:

When your salary income is above Rs. 15,00,000:

Low income tax rates are offered under the new tax regime. This is especially for the individuals who fall under the annual income slab of Rs. 15,00,000. However, in order to claim these lesser tax rates, you must let go of a wide array of income tax deductions and exemptions which are available under the old tax regime. There is no one answer to the question, ‘which tax regime is better?’. After assessing the total deductions that you can claim and computing the tax-free components based on your salary, you can choose which tax regime best aligns with your goals.

After having computed the total income tax deductions and exemptions, you must adjust them with your income salary in order to arrive at your final total taxable income. If this amount is greater despite subtracting the exemptions and deductions, you can choose the new tax regime. However, if you notice that you end up saving more under the older tax regime after subtracting all the income tax exemptions and deductions, you can then choose the old tax regime.

Industry experts claim that while choosing a particular tax regime, in addition to a mitigated tax regime, you must also take into account the factors like your investments and savings goals to secure your financial future. A strong investment and insurance portfolio must complement the choice of your tax regime. You can calculate your income tax liability under the old regime by using the income tax calculator which is available on Bajaj Markets.