Income Tax Deductions and Exemptions

What are Income Tax Deductions?

Income tax deductions help people bring down their tax liability in a financial year. In other words, investments done in a financial year that are offset against gross annual income while filing your ITR are known as IT deductions. The provision of tax deductions was done to inculcate a habit of saving in people and assist them in constructing a stable monetary future.

Some popular examples of income tax deductions are Public Provident Fund (PPF), National Pension Scheme (NPS), investments made under Section 80 of the IT Act, 1961, in ELSS funds, principal repayment of home loan, etc.

What are Income Tax Exemptions/Allowances?

Income tax exemptions/allowances are components of your gross income that, as the name suggests, are exempted from being calculated as part of your total taxable income. These exemptions allow individuals to preserve a significant amount of their income. The Income Tax Act, 1961 mandates income tax exemptions/allowances so that people can save more.

Some well-known examples of income tax exemptions are children’s education allowance, house rent allowance (HRA), leave travel allowance (LTA), and also the exemptions available under Section 24, etc.

Income Tax Deductions vs Income Tax Exemptions/Allowance

People often get confused between income tax deductions and income tax exemptions/allowances when filing their ITR. The table below gives a brief overview of the difference between the two.

Exemption of Allowances

There are various allowances given to the taxpayers in India. Let’s have a look at them:

House Rent Allowance

If you are a salaried individual and live in rented accommodation, you can get House Rent Allowance or HRA. If you are not living in the rented accommodation but still receive the HRA, it will be liable to tax. To claim this allowance, make sure you keep the rent receipts and any evidence of payment done towards rent handy. You can claim the lowest amount of the following as your HRA exemption:

• Total HRA received from employer

• The salary’s 40% (Basic salary+DA) for non-metros and 50% for metros

• Rent paid less than 10% of basic salary + DA

Standard Deduction

Standard deduction is the portion of your income that is not subject to tax and it can be used to reduce your income tax liability. The standard deduction limit is ₹50,000. This amount is deducted from your gross salary which further brings the overall taxable income amount down.

Leave Travel Allowance

If you are a salaried employee, you also get a Leave Travel Allowance. This allowance is restricted to the travel expense incurred during your leaves. You should note that this allowance does not cover any other expenses of the trip like shopping, accommodation, food expenses, leisure activities, etc. The LTA can be claimed twice in a block of four years. If you do not use this LTA within a block, you can still carry the same in the next block. LTA only covers domestic travel and not international travel. Also, you should have travelled either by railway, air travel, or public transport to claim this allowance.

Mobile Reimbursement

This reimbursement is for the expenses incurred on mobile and telephone usage at home. You can claim a tax-free reimbursement of the same. This reimbursement amount can be lower than the actual bill amount or the amount provided in your salary.

Books and Periodicals

The income tax law allows employees to claim a tax-free reimbursement on the expenses incurred on books, periodicals, newspapers, journals, etc. You can get the lower amount between the actual bill amount or the amount provided in the salary as the reimbursement.

Food Coupons

You might be aware of the food coupons that employers provide to employees. Such food coupons are taxable as a prerequisite at the hands of the employee. However, these coupons are tax-free up to ₹50 per meal. As per the monthly calculation of 22 working days with 2 meals per day, it gives a monthly benefit of ₹2,200 that accounts for ₹26,400 as a yearly exemption.

Relocation Allowance

These days, businesses operate in multiple locations. It is possible that you might be asked to move to a different city for business reasons. This relocation can cause shifting expenses like moving furniture, car transportation cost, car registration charges, etc. Such expenses are to be borne by the employer. These payments are sometimes done directly by the employer. The employer may reimburse expenses incurred towards car transportation, registration, packaging charges, accommodation for initial 15 days, etc. The travelling expenses for the employee and family from their current place to the new location are also exempt from tax.

Children Allowance

The employer might also give you children allowance as part of your salary. This allowance received towards children's education is tax-exempt. An employee can claim a maximum of ₹100 every month as an exemption, which is ₹1,200 per year. This exemption is allowed for a maximum of 2 children.

Taxable and Non-Taxable Components of Your Salary

Any earning individual’s income/salary structure has several components that help them save on tax with the available income tax deductions and exemptions/allowances. Some of these components can be fully or partially taxable, while some are fully tax-exempt. The following infographic will walk you through the different taxable and non-taxable components in the salary structure as well as the concept of TDS (tax deducted at source).

Now, let us understand income tax deductions and exemptions in detail.

Income Tax Deductions Under Section 80

Taxpayers can claim several income tax deductions under subsections of Section 80 of the Income Tax Act. The following table will help you understand the tax deduction limits and your eligibility to claim them.

Features of Income Tax Deductions Under Section 80

Let’s take a detailed look at the features of each section we discussed in the table above.

1. Section 80C

Income tax deductions under Section 80C are quite popular among investors. The section allows for a maximum deduction of up to ₹1.5 lakh every year from the taxpayer’s total income. The benefit of this section can be availed by individuals and HUFs. However, companies, partnership firms, and limited liability partnerships (LLP) cannot avail said benefit.

The investments available for tax deductions under this section are as follows:

Additionally, please note that people choosing to file their ITR using the new income tax regime will not be able to avail deductions under this section. We have discussed the income tax deductions and exemptions/allowances eliminated from the new regime in detail going ahead.

2. Section 80CCC

This section provides a tax deduction for an amount paid by taxpayers who have subscribed to an annuity plan offered by an approved insurance company. Also, the payment has to be to a fund mentioned in Section 10(23AAB). Please note that HUF is not eligible for availing tax deductions under Section 80CCC. This facility is available to both residents as well as non-residents.

Additionally, any bonuses received or interest accrued through the annuity plan is not eligible for tax deduction under Section 80CCC. Proceeds from the policy in the form of pension from annuity or surrender of annuity are taxed.

3. Section 80CCD

Tax deductions under Section 80CCD are categorised in three subsections:

• Employee Contribution Under Section 80CCD(1): A maximum of upto 10% of salary (for employees) or 20% of gross total income (for self-employed individuals). The limit is capped at ₹1.5 lakh (aggregate of 80C, 80CCC, and 80CCD).

• Self Contribution Under Section 80CCD(1B): Individuals can claim an additional tax deduction of ₹50,000 (available to both salaried and self-employed individuals) for contribution towards NPS. With this, the maximum tax deduction available under Section 80CCD increases to ₹2 lakh.

• Employer’s Contribution Under Section 80CCD(2): Additional tax deduction up to 10% of an employee’s salary for contribution towards NPS.

Please note that the money received from NPS on a monthly basis or due to surrender of accounts is taxable. However, if this amount is reinvested in the annuity plan, then it is entirely exempt from tax.

4. Section 80D

Health insurance is one of the most powerful tax-planning tools. With the announcement of Budget 2021, you can avail several tax benefits along with other financial/medical benefits. Here’s a quick walkthrough of the same.

5. Section 80DD

The tax deduction under Section 80DD is available to individuals or HUFs for a dependent who is disabled and wholly dependent on the individual (or HUF) for support and maintenance. They can claim up to ₹75,000 for those with 40%-80% disability and ₹1.25 lakh for severe disability (80% or more). Please note that individuals or HUFs can claim tax deduction for a dependent only and not themselves.

6. Section 80DDB

Under Section 80DDB, taxpayers can claim a tax deduction for medical treatment of a dependent who is suffering from a specific illness. The amount allowed as deduction is as follows:

• A maximum of ₹40,000 or amount paid, whichever is less (for individuals under 60 years)

• A maximum of ₹1 lakh or amount paid, whichever is less (for senior citizens and super senior citizens)

The list of diseases for which one can claim tax deductions under this section is as follows:

• Neurological diseases where the disability level has been certified to be of 40% and above:

   

1. Dementia

2. Dystonia Musculorum Deformans

3. Motor Neuron Disease

4. Ataxia

5. Chorea

6. Hemiballismus

7. Aphasia

8. Parkinson's Disease

• Malignant cancers

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

• Chronic renal failure

• Hematological disorders

1. Hemophilia

2. Thalassaemia

Please note that before making claims under Section 80DDB, you need to get a certificate from the concerned specialist. Patients who are seeking treatment at a private hospital do not need to submit any certificate. However, those receiving treatment at government hospitals have to take the certificate from any specialist working full-time at that hospital.

7. Section 80E

Education loan taken for higher studies also helps you save on tax. Those who have taken an education loan or are repaying it, the interest paid on that loan can be claimed as tax deduction under Section 80E.

However, please note that tax deduction is provided only on the interest component of the education loan. It is available only for eight years, starting from the year your loan repayment begins or until the interest is fully repaid, whichever is earlier.

8. Section 80EE

Tax deduction under Section 80EE is available to individuals only. It can be claimed on the interest part of the residential house property loan availed from a financial institution. A maximum of ₹50,000 can be claimed under this section. Additionally, to claim under Section 80EE, the value of the house should be ₹50 lakh or less and the loan taken for the house must be ₹35 lakh or less.

9. Section 80EEA

Section 80EEA allows first-time homebuyers to claim a tax deduction of up to ₹1.5 lakh for interest paid on the loan sanctioned from a financial institution. Please note that this deduction is over and above the ₹2 lakh deduction for interest payments available under Section 24 of the Income Tax Act. Hence, taxpayers can claim a total tax deduction of ₹3.5 lakh for interest on home loan, especially if they meet the conditions under Section 80EEA.

Additionally, to successfully claim a tax deduction under this section, note that the stamp duty value of the house property should be ₹45 lakh or less, and the individual taxpayer should not be eligible to claim a tax deduction under Section 80EE.

10. Section 80G

Those making contributions to relief funds and charitable institutes can claim tax deductions under Section 80G. However, only the donations made to prescribed funds can be claimed under this section. Note that any donation made in cash (exceeding ₹2,000) cannot be claimed and taxpayers should use another mode of payment for the same.

11. Section 80GGB

Under Section 80GGB, only companies or enterprises can claim the contributions made towards any political party or electoral trusts registered in India as tax deductions equal to the amount donated. The political party that receives the donation must be registered under Section 29A of the Representation of the People Act, 1951.

An electoral trust is a non-profit organisation created under Section 8 of the Companies Act, 2013, to enhance transparency in the donation process and reallocate donations to the registered political parties. Tax deduction of 100% can be claimed against donations made to a registered political party as per Section 80GGB. No cash donations or contributions are allowed under Section 80GGB.

12. Section 80GGC

Under Section 80GGC, individuals can avail tax deductions on any contributions made to an electoral trust or a political party registered under Section 29A of the Representation of the People Act, 1951. Individuals can claim tax deductions in the range of 50%-100% of the donation made towards an electoral trust or a political party.

Note that companies cannot avail tax deductions under Section 80GGC, only individuals can. No cash donations or contributions are allowed under Section 80GGC.

13. Section 80GG

Under Section 80GG, self-employed and salaried individuals can claim tax deductions towards rent for any furnished or unfurnished residence. It should be noted that only individuals who do not receive HRA from their employer are eligible for a tax deduction under 80GG. The lowest amount from the following will be considered as the eligible amount of deduction.

• 25% of the total income

• ₹5,000 per month

• Rent less than 10% of income

14. Section 80RRB

Under Section 80RRB, individuals who receive royalty payments can avail a tax deduction of up to ₹3,00,000. If royalty payments received are less than ₹3,00,000, then only that amount will be considered for tax deduction. Only Indian residents who hold the original patent registered under the Patent Act, 1970, can claim tax deduction under Section 80RRB.

15. Section 80TTA

Under Section 80TTA, individuals and HUFs can claim a tax deduction on income earned as interest. A maximum of ₹10,000 can be availed as a tax deduction under this section.

Types of interest income allowed as tax deduction under Section 80TTA:

• Savings account with a bank

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

• Savings account with a post office

Types of interest income not allowed as tax deduction under Section 80TTA:

• Interest earned on fixed deposits

• Interest earned on recurring deposits

• Interest earned on any time deposits

16. Section 80TTB

Under Section 80TTB, senior citizens can claim a tax deduction of up to ₹50,000 from their gross total income in a given financial year. Senior citizens eligible for Section 80TTB cannot avail a tax deduction under 80TTA. Exemptions to Section 80TTB include deposits held by or on behalf of a partnership firm, an association of persons (AOP), or a body of individuals (BOI).

17. Section 80U

Section 80U offers a tax deduction to individuals suffering from a disability. Any individual who has been certified by a medical authority of being at least 40% disabled can claim a tax deduction under Section 80U. A tax deduction of up to ₹75,000 is applicable for individuals with disabilities, and a tax deduction of up to ₹1,25,000 is applicable for individuals with severe disabilities.

Tax Exemptions/Allowances

One good way to reduce your tax liability is by being aware of tax exemptions/allowances that are available under the Income Tax Act. Under Section 10 of the IT Act, you can avail tax exemptions on HRA, standard deduction, contributions towards EPF and pension, etc. Here is a list of the major tax exemptions applicable to salaried individuals:

• House Rent Allowance: Exemption will be the minimum of:

i) Total HRA received;

ii) 50% of the income (basic + DA) for individuals living in metro cities, or 40% for those living in non-metro cities;

iii) Rent paid less than 10% of basic salary + DA

• Standard Deduction: All salaried individuals can claim a flat deduction of ₹50,000 as Standard Deduction. This was increased from ₹40,000 per year to ₹50,000 during the Union Budget 2019.

• Child Education Allowance: Tax exemption/allowance of maximum ₹100 per month for up to two children only can be availed by employees.

• Hostel Subsidy: Subsidies on hostel expenditure are also tax-exempt up to ₹300 per month for a maximum of 2 children.

• Interest Paid on Housing Loans: One can avail income tax exemption of ₹2 lakh on interest paid on home loans, provided the house is currently occupied by the owner or is set to finish construction within 3 years.

• Leave Travel Allowance: The Income Tax Act also allows for a tax exemption to salaried employees on travel expenses. However, LTA does not cover all expenses such as food, shopping, and entertainment. LTA exemption can be used twice in a period of four years and only covers domestic travel by railway, air travel, or public transport.

New Regime for Income Tax

Under the new income tax regime announced with Union Budget 2020, around 70 tax deductions and exemptions, including standard deduction, HRA, housing loan interest payments, education loan interest, expenses incurred on disability of self or dependent, cost of medical treatment of self or dependent, LTA, investments under Section 80C, savings bank interest under Section 80TTA, interest income for senior citizens under Section 80TTB, and donations under Section 80G have been removed.

The new regime, however, has not removed around 50 tax exemptions and deductions.

Note that the new tax regime is optional, and you can continue with the old tax slabs and rates if it is more beneficial to you. Some of the tax exemptions and deductions that can be claimed under the new tax regime are:

• Employer’s contribution to the National Pension Scheme (NPS)

• Standard deduction on rent up to a maximum of 30%

• Income from life insurance provided the insurance coverage is 10x the annual premium

• Agricultural income with zero specified limit

• Retrenchment compensation up to a maximum of ₹5 lakh

• Proceeds from Voluntary Retirement for Service (VRS) up to a limit of ₹5 lakh

• Leave encashment on retirement: No limit for government employees; capped at ₹3 lakh for private employees

New Tax Regime vs Old Tax Regime: Which One to Choose?

The new tax regime offers lower income tax rates, especially for individuals that fall under the annual income slab of ₹15 lakh. However, to avail these lower tax rates, you must forego a wide array of tax exemptions and deductions available under the old income tax regime. There is no direct answer for the question: which tax regime is better? You can choose either of the tax regimes after calculating the tax-free components from your salary and assessing the total deductions that you are eligible to claim.

Once you calculate the total income tax exemptions and deductions, adjust them with your salary to arrive at your total taxable income. If your taxable income is higher despite subtracting the deductions and exemptions, you can opt for the new tax regime.

However, if you are saving more money under the old regime after all tax deductions and exemptions, then it may be the right choice for you. According to industry experts, while opting for a tax regime, along with a reduced tax burden, you should also consider factors like your investment goals and your family’s financial security. A robust insurance and investment portfolio should complement the selection of your tax regime.

To calculate your income tax liability under the old regime, you can make use of the income tax calculator available on Bajaj MARKETS. Moreover, if you wish to reduce your tax liability, check out our tax-saving instruments that can help achieve this objective.

Regardless of what your financial requirements are, Bajaj MARKETS has you covered. Invest today!