Income Tax Deductions and Exemptions

Income Tax Deductions

Being one of the most significant and regular taxpayers in India, we often look for opportunities to save money. Salaried employees tend to save money on tax by investing in plans that offer tax benefits. Due to the facility of claiming deductions and exemptions, one can significantly reduce tax.

In the Union Budget 2020 announcement, the Finance Minister introduced the new tax regime to help people save money on tax. However, the new tax regime eliminates certain deductions and exemptions such as the deduction under Section 80C of the Income Tax Act. However, you can continue to claim these deductions in the old tax regime as the new tax structure is completely optional. 

Here is a look at the major income tax deductions and exemptions available to the salaried individuals under the old tax regime.

What are Income Tax Deductions?

Income tax deductions help lower one’s taxable income and ultimately lower how much income tax an individual pays at the end of a fiscal year. Put simply, income tax deductions are tax-free expenses made during the year, which are then subtracted from one’s gross annual income at the time of filing tax returns.

Your income or salary structure consists of several components which can help you save on taxes by way of deductions and exemptions. Some of these components may be fully or partially taxable, while some may be fully exempt from tax.

Tax Exemptions vs Tax Deductions

Income Tax Deductions Under Section 80

Detailed Income Tax Deduction - Benefit

A taxpayer can apply a variety of deductions on their total income to decrease their taxable income and consequently, their tax payment. Let us look at some of the key deductions that a taxpayer can claim under Section 80C.

1. Section 80C (Deduction on Investments)

Under Section 80C, individuals and HUFs, alike, can reduce their tax outgo by Rs. 1.5 Lakhss. To avail the Section 80C deduction, you can invest in a variety of instruments, including but not limited to ELSS (Equity Linked Savings Schemes, PPF (Public Provident Fund), EPF (Employee Provident Fund), ULIPs (Unit Linked Investment Plans) and NPS (National Pension Scheme).

You can also explore our blog on 5 things to know about section 80C while filing ITR.

2. Section 80CCC – (Deduction for Premium Paid for Annuity Plan of LIC or Other Insurer)

This section provides a deduction for an amount paid by an individual towards an annuity plan by a life insurance company. However, the payment has to be to a fund mentioned in Section 10(23AAB). Proceeds from the policy in the form of pension from annuity or surrender of annuity are taxed. Interest and bonus received on the same are also taxed.

3. Section 80CCD (Deduction for Contribution to Pension Account)

• Section 80CCD(1)- Employee Contribution

Tax deductions can be availed on amounts deposited in pension accounts. The maximum deduction that you can claim will be the lesser of 10% of salary (if you are an employee) or 20% of gross total income (if you are self-employed) or Rs. 1.5 Lakhss.

• Section 80CCD(1B) - Self Contribution

This new section has been introduced to provide an added deduction of upto Rs. 50,000 for a deposit made to the NPS (National Pension Scheme) or your Atal Pension Yojana account.

• Section 80CCD(2) - Employer’s Contribution

You can claim an additional deduction on your employer’s contribution to your pension account for up to 10% of salary. There is no monetary deduction limit applicable.

4. Section 80D (Deduction on premium paid for Medical Insurance)

If you have taken out a health insurance policy for yourself, your husband/wife and dependent children, you can claim deductions of Rs. 25,000.

For parents under 60 years of age: An additional deduction upto Rs. 25,000 is available

For parents above 60 years of age: In Budget 2018, the deduction limit was raised to Rs. 50,000 (from the earlier Rs. 30,000)

For both taxpayers and parents aged above 60: The deduction limit is Rs.1 Lakhs.

An additional deduction on health insurance upto Rs. 5, 000 can be claimed on health check-ups of all family members (spouse, kids and parents).

5. Section 80DD (Deduction for Rehabilitation of Handicapped Dependent Relative)

If you are a resident individual or HUF, you can avail this on:

1. Medical expenses including nursing, training and rehabilitation of handicapped relative dependent on you

2. Amount paid to a specified scheme towards caretaking of handicapped relative dependent on you

Deductions:

1. Rs. 75,000 for 40%-80% disability

2. Rs. 1,25,000 for disability that is severe (80% or more)

You will need to procure a disability certificate from the concerned medical authority, for this deduction to be applicable.

6. Section 80DDB (Deduction for Medical Expenditure on Self or Dependent Relative)

1. If you are an individual below the age of 60, you can claim a deduction of up to Rs. 40,000 upon expenses paid for treatment of specified medical conditions for yourself or your dependents. The deduction is also applicable for all members of the HUF below 60 years of age.

1. Individuals or HUFs can claim a deduction upto Rs.1 Lakhs if the expenses are paid for a senior citizen.

Till FY 2017-18, the applicable deductions for a senior citizen was Rs. 60,000 and that for a super senior citizen was Rs. 80,000. Now, there is a common limit of Rs.1 Lakhs for both.

1. Medical expenses paid for by an insurer or employer will be reduced before applying the deductions.

You should keep handy a prescription from your medical specialist to make this claim.

7. Section 80TTA (Deduction from Gross Total Income for Interest on Savings Bank Account)

Did you know that the interest you earn from a savings account can also be used to claim deductions? Individuals or HUFs can claim deductions of upto Rs. 10,000 on the interest earned from a savings account. This account could be maintained with a bank, co-operative society, or post office. Remember to list interest from savings bank accounts under other income.

Note that this section does not provide for deduction on interest from recurring deposits, fixed deposits, or corporate bonds.

8. Section 80GG (Deduction for House Rent Paid Where HRA is not Received)

If you, your spouse, or minor child do not own residential accommodation at your place of work, you can claim deduction on rent paid if HRA (House Rent Allowance is not paid for by your employer. However, you must not have self-occupied residential property in any other place, and must be living on rent and paying rent.

The maximum deduction you can claim will be the lesser of the following items:

1. Rent minus 10% of adjusted gross total income

2. Rs. 5,000 per month

3. 25% of adjusted total income

Adjusted Gross Total Income is basically Gross Total Income adjusted for specific deductions, exemption, LTCG, and income related to NRIs and foreign companies.

9. Section 80E – (Deduction for Interest on Education Loan for Higher Studies)

If you have taken a higher education loan for yourself, your spouse, children, or legal ward, you can claim a deduction on interest paid for such a loan. There is no monetary upper limit on the deductions that can be claimed under this section. However the deduction can be claimed for the lesser of the two:

1. 8 years from the year or beginning of loan repayment

2. Until the entire interest is paid off

10. Section 80EE (Deductions on Home Loan Interest for First Time Home Owners)

A deduction of upto Rs. 50, 000 can be claimed on home loan interest if you are a first-time home buyer.

Introduced in FY 2013-14, this section offered a deduction of upto Rs. 1 Lakhs for FY 2013-14 and FY 2014-15. In FY 2016-17, it was reintroduced with a slashed maximum limit of deduction.

11. Section 80CCG - (Deductions on Rajiv Gandhi Equity Saving Scheme)

If you are a resident individual with a gross total income of less than Rs. 12 Lakhs, you can claim a deduction under this section subject to the following conditions

• You are a new retail investor as per the notified scheme requirements.

• The investment is in a listed investor as per notified scheme requirements.

• The investment should be made in a scheme with a maximum lock-in period of 3 years from the date of acquisition as per notified scheme.

The deduction amount will be the lower of

• 50% of investment in equity shares

• Rs. 25,000 for 3 successive Assessment Years

Taxpayers should note that since 2017 onwards, this scheme is in the process of being phased out.

12. Section 80U (Deduction for Person suffering from Physical Disability)

If you are a resident individual and suffer from a physical disability, which includes blindness or mental retardation, you can claim a deduction up to Rs. 75,000. For severe disability, the deduction limit is raised to Rs. 1.25 Lakhss.

Prior to FY 2015-16, these deduction limits were Rs. 50,000 and Rs. 1 Lakhs, respectively.

13. Section 80G – (Deduction for donations towards Social Causes)

The donations specified under this section are deductible upto 100% or 50%. In order to avail this deduction for FY 2017-18, you should ensure that any sums above Rs. 2,000 are made in modes other cash, since cash deductions of over Rs. 2,000 will not be eligible for deductions.

Here’s a handy list of the organisations you can donate to avail either 50 or 100% deductions:

a. Donations with 100% deduction with no qualifying limit

• National Defence Fund by the Government of India

• Prime Minister’s National Relief Fund

• National Foundation for Communal Harmony

• A nationally eminent, approved university or educational institution

• Zila Saksharta Samiti formed under the chairmanship of district Collector

• State Government fund for the medical expenses of the poor

• National Illness Assistance Fund

• National Blood Transfusion Council

• Any State Blood Transfusion Council

• National Trust for Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities

• National Sports Fund

• National Cultural Fund

• Fund for Technology Development and Application

• National Children’s Fund

• Chief Minister’s Relief Fund (for a state)

• Lieutenant Governor’s Relief Fund (for a Union Territory)

• Army Central Welfare Fund

• Indian Naval Benevolent Fund

• Air Force Central Welfare Fund

• Andhra Pradesh Chief Minister’s Cyclone Relief Fund, 1996

• The Maharashtra Chief Minister’s Relief Fund during October 1, 1993 and October 6,1993

• Chief Minister’s Earthquake Relief Fund, Maharashtra

• Any Gujarat State Government fund formulated exclusively for relief to the Gujarat earthquake victims

• Any earthquake relief fund for the victims of Gujarat earthquake under Section 80G(5C). Contribution payment should be made from January 26, 2001 and September 30, 2001.

• Prime Minister’s Armenia Earthquake Relief Fund

• Africa (Public Contributions- India) Fund

• Swachh Bharat Kosh (valid from FY 2014-15)

• Clean Ganga Fund (valid from FY 2014-15)

• National Fund for Control of Drug Abuse (valid from FY 2015-16)

b. Donations with 50% deduction with no qualifying limit

• Jawaharlal Nehru Memorial Fund

• Prime Minister’s Drought Relief Fund

• Indira Gandhi Memorial Trust

• The Rajiv Gandhi Foundation

c. Donations with 100% deduction subject to 10% of gross total income (adjusted)

• Donations to be utilized for promotion of family planning by government, any approved local authority, association, or institution

• Company donation to the Indian Olympic Association or any other notified Indian association or institution for development of sports infrastructure or sports and games sponsorship in India

d. Donations eligible for 50% deduction subject to 10% of gross total income (adjusted)

• Any other fund or institution that fulfils conditions mentioned in Section 80G(5)

• Government or any local authority to be used for charitable purposes other than the promotion of family planning

• Any Indian authority constituted for housing accommodation or planning, improvement or development of cities, towns, villages or both

• Any corporation mentioned in Section 10(26BB) that works towards the interests of minority communities

• Repairs or renovation of any notified temple, mosque, gurudwara, church or other Places

14. Section 80GGB (Deduction on contributions given by companies to Political Parties)

Deduction can be claimed by an Indian company for contributions made via any mode other than cash to a political party registered under Section 29A of the Representation of People Act (REPA) or electoral trust. Companies can claim 100% of their contributions as deductions.

15. Section 80GGC (Deduction on contributions given by any person to Political Parties)

An individual can claim deduction on contribution made via any mode other than cash to a political party or electoral trust. Companies, artificial juridical persons or local authorities funded wholly or partly by the government are not eligible to avail this deduction.

16. Section 80RRB (Deduction with respect to any Income by way of Royalty of a Patent)

17. Section 80TTB (Deduction of Interest on Deposits for Senior Citizens)

This section was introduced in Budget 2018. Deductions up to Rs. 50,000 can be claimed by senior citizens on income from deposits.

Tax Exemptions

One sure-fire way to reduce tax liability is to be aware of income tax exemptions available under the Income Tax Act. Under Section 10, you can avail tax exemptions on allowance for your house rent, transport, and your child’s education.

• House Rent Allowance: Exemptions received on HRA (House Rent Allowance) will be the minimum of:
  i) Total HRA received be one’s employer
  ii) 50% of income of individuals living in metro cities, or 40% for those living in non-metro cities; and
  iii) Rent less than 10% of income

• Transport Allowance: Transport Allowances of Rs. 19,200 per annum and Rs. 1,600 per month can be exempt from taxation.

• Child Education Allowance: Exemptions on Child Education Allowance of maximum Rs. 100 per month for up to 2 children only can be availed by employees.

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

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

Some additional allowances that might also qualify for income tax exemptions are High Active Field Area Allowance, Special Compensatory Allowance, Tribal Allowance, High Altitude Allowance, among others. 

New regime for income tax

The new income tax regime removes around 70 deductions and exemptions, including standard deductions, 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. The new regime, however, has not removed around 50 exemptions and deductions. Some of the exemptions and deductions that can be claimed under the new tax regime are:

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

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

• Income from life insurance, provided the insurance coverage is 10 times the annual premiums

• Agricultural income with zero specified limit

• Retrenchment compensation up to a maximum of Rs 5 Lakhs.

• Proceeds from Voluntary Retirement for Service (VRS) up to a limit of Rs 5 Lakhs.

• Leave encashment on retirement : No limit for government employees, with a ceiling of Rs 3 Lakhs for private employees.

Now let’s have a look at the new income tax slabs for the financial year 2020-2021

You must, however, remember that the new tax regime is optional, and you can continue with the old tax slabs and rates. Here is a look at the old tax slabs:

• Income Tax Slabs & Rates for Individual Taxpayers & HUF (Less Than 60 Years Old)

• Income Tax Slabs for Senior Citizens (60 Years Old or More but Less than 80 Years Old)

• Income Tax Slabs for Super Senior Citizens (80 Years Old or More)

New tax regime vs old : Which one to choose?

The new tax regime has provided for lower income tax rates, especially for income slab less than Rs 15 Lakhs. But, for availing a lower tax slab rate, you are required to forego a wide array of tax exemptions and deductions. There is no one answer for the question: which tax regime is better? You can choose either of the tax regimes on the basis of calculating the tax-free components from your salary along with assessing the total deductions that you claim. Once you calculate the total 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. 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 future financial security. A robust insurance and investment portfolio should compliment the selection of your tax regime.