Income Tax Deductions and Exemptions

Income Tax Deductions and Exemptions

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. Currently, the maximum deduction one can get is Rs.1.5 lakh under section 80C. You can avail the deductions only if you have made tax-saving investments or incurred eligible expenses. Though there are a number of deductions available under various sections that will bring down your taxable income. With the help of these deductions and exemptions and, one could reduce his/her tax substantially.

What is Income Tax Deduction?

Tax deduction is a reduction in tax obligation from your gross taxable income. Tax deductions are deducted from taxable income which is also known as adjusted gross income. Tax deduction varies in amount as different incomes are treated differently under various sections of income tax act. For the current year, an additional deduction of Rs.1.5 lakhs for interest on home loan is provided for the purchase of affordable houses of upto Rs. 40 lakhs till March 2020.

Taxable and Non-taxable Components of Your Salary

Basic Salary: Your basic salary accounts for 40%-50% of your salary and is entirely taxable.

House Rent Allowance: A tax deduction of up to 40% is available for non-metro residents and up to 50% for metro residents. 

Conveyance and Transport Allowance: Conveyance and transport allowance granted by your employer pays for your commute from home to office. You can avail tax benefits of up to Rs.1,600 with this allowance. 

Child Education Allowance: It covers your child’s educational expenses. You can get tax benefits worth Rs.200 for education fees and Rs.300 for hostel fees of maximum 2 children. 

Medical Reimbursement: You can avail reimbursement on expenses incurred for medical emergencies on submitting all relevant bills. This comes with tax exemptions of up to Rs.15,000 in a financial year. 

Leave Travel Concession: Leave Travel Concession (LTA) can be claimed on the money spent on travel while on a leave. You can avail tax exemptions on 2 journeys in a span of 4 years. 

Food Coupons: Food coupons granted  by an employer cover the expenses for purchasing a meal. This comes with a tax benefit of up to Rs.50. 

Tax Deduction at Source: Tax Deduction at Source or TDS is deducted directly from your salary by the employer.TDS is a deduction that happens depending on the income tax slab and rates of the relevant financial year. 

Tax Exemptions vs Tax Deductions

Income Tax DeductionsIncome Tax Exemptions
A particular amount which is reduced from an individual’s total tax liability is called an income tax deduction.A particular income, which is exempt from tax and thus, not included in one’s total tax liability is called an income tax exemption.
Tax deductions are covered between the scope of Section 80C to 80U of the Income Tax ActTax exemptions are generally covered under Section 10 of the Income Tax Act.
To be eligible for tax deductions, you have to meet certain predetermined criteria.Any taxpayer in the country can qualify for income tax exemptions
Some examples of Income Tax deductions are: investments made in Equity Linked Savings Scheme (ELSS), Public Provident Fund (PPF), and National Pension Scheme (NPS).Some examples of Income Tax Exemptions are:House Rent Allowance, Leave Travel Allowance, Entertainment Allowance, Long Term Capital Gains on Equity Funds.

Income Tax Deductions Under Section 80

ITA SectionLimit for Tax DeductionType of investment, expense or incomeEligible claimants
80CMaximum Rs. 1.5 lakh (aggregate of 80C, 80CCC and 80CCD)PPF (Public Provident Fund), EPF (Employee Provident Fund), ULIPs (Unit Linked Investment Plans) NPS (National Pension Scheme), among othersIndividuals, HUFs
80CCCMaximum Rs. 1.5 lakh (aggregate of 80C, 80CCC and 80CCD)Pension funds (annuity plan by a life insurance company), as defined under Section 10(23AAB)Individuals

80CCD1: Employee Contribution: Maximum Rs. 1.5 lakhs or deduction up to 10% of salary (for employees) or 20% of gross total income (if you are self-employed)80CCD(1B): Self Contribution- Maximum Rs.50,000 for a deposit made to the NPS (National Pension Scheme) or your Atal Pension Yojana account80CCD(2): Employer’s Contribution-Additional deduction up to 10% of your salary
Pension fund initiated by central governmentIndividuals
80CCGThe deduction amount will be the lower of50% of investment in equity sharesRs. 25,000 for 3 successive Assessment Years
Rajiv Gandhi Equity Saving Scheme (RGESS) – In the process of being phased outIndividuals with income less than Rs. 12 lakhs
80DDMaximum Rs. 75,000 for those with 40%-80% disability, and Rs.1.25 lakh for severe disability (80% or more)Medical Expenses on Rehabilitation of Handicapped Dependent RelativeIndividuals and HUFs with a handicapped relative dependent on them
80DDBMaximum of Rs. 40,000 for individuals (under 60 years) and up to Rs. 1 lakh for senior citizens (above 60 years)Expenses for medical treatment of specific diseases for self or relative.Individuals and HUFs
80ELesser of the two:8 years from the year or beginning of loan repaymentUntil the entire interest is paid off
Interest paid on Education loan taken for self, child or spouseIndividuals
80EEMaximum Rs. 50,000Deductions on Home Loan Interest for First Time Home OwnersIndividuals
80GDeductible up to 100% 0r 50%Donations towards Social CausesIndividuals, HUF’s, Companies, Firms
80GGB100% of donations are eligible for deductionsNon-cash donations by a company to political parties registered under Section 29A of the Representation of People Act (REPA)Indian companies
80GGCDepends on quantum of donationNon-cash donations by a person to political parties or electoral trusts.Individuals
80GGRs. 5,000 per month, 25% of total income or rent minus 10% of adjusted gross total income, whichever is lessDeduction for House Rent Paid Where HRA is not ReceivedIndividuals not receiving HRA
80RRBMaximum Rs.3 lakhsIncome earned by way of royalty for a patent registered on or after 1st April, 2003 under the Patents Act 1970.Resident Indian
80TTAMaximum Rs. 10,000Interest earned on a savings account (bank, co-operative society, or post office)Individuals and HUFs
80TTBMaximum Rs. 50,000 can be claimedOn income from deposits.Senior Citizens (above 60 years)
80URs.75,000 for severe disabilities (including blindness and mental retardation) up to Rs. 1 lakhMedical expenses (nursing, training, rehabilitation,specified caretaking scheme)
Individuals with disabilities.

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 lakhs. 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).

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 lakhs.

  • 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 lakh.

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)

  • If you are an individual below the age of 60, you can claim a deduction of upto 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.
  • Individuals or HUFs can claim a deduction upto Rs.1 lakh 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 lakh for both.

  • 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 lakh 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 lakh, 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 lakhs.

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

In the case of royalty earned by writers (excluding the writer of textbooks), Rs.3,00,000 is the maximum income tax exemption provided. 

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

  • Interest Received on Post Office Savings Account Balances

Interest received on post office savings account balance is exempted under section 10(15)(i) of the Income-tax Act up to a certain limit. Interest received from the post office savings account was exempted from tax via a notification dated June 3, 2011 for up to Rs.3,500 in case of individual accounts and Rs.7,000 in case of joint accounts per financial year.

The exemption on post office savings accounts can be availed before arriving at the final figure of gross taxable income. Wadhwa says, “To avail this exemption, a taxpayer would be required to deduct the interest received from a post office savings account (as per the savings account held by them) from income under the head other sources before arriving at his/her gross taxable income.”

  • Gratuity Received from your Employer

If you receive gratuity from your employer, then the amount received by you will be exempt from tax as per specified limits. An employee is eligible to receive gratuity if he/she has worked for more than five years in an organisation. According to income tax laws, gratuity is tax-exempt up to Rs.20 lakh in a lifetime for non-government employees. For government employees, all gratuity received is tax-exempt, irrespective of the amount received by them.

  • Amount Received on Maturity of Life Insurance

The tax benefit on paying life insurance premiums to lower the tax liability under section 80C is not available in the new income tax slab structure. However, maturity proceeds received from a life insurance company continue to be exempted from tax under section 10(10D) in the new tax regime.

  • Employer’s Contribution to Your EPF/NPS Account

As per the Budget proposals, from FY 2020-21, contributions made by the employer to the employee’s EPF, NPS and/or superannuation account will be exempted from tax provided the annual contribution to all the accounts (with reference to employee) does not exceed Rs 7.5 lakh in a financial year. According to current income tax laws, an employer can contribute an amount equal to 12% of the employee’s basic monthly salary to his/her EPF account. Similarly, an employer can contribute an amount equal to 10% of the employee’s basic salary to the Tier-I account of NPS. In a superannuation account, an employer can contribute a maximum of Rs 1.5 lakh exempted from tax in a financial year.

The restriction on the amount of contribution to EPF and NPS account which will be tax-exempt is likely to impact those employees whose basic salary is more than Rs.60 lakh in a year. To explain this with an example, for someone earning Rs.80 lakh per annum as basic salary will cross the threshold level of Rs.7.5 lakh towards NPS contribution.

  • Interest Received up to 9.5% Per Annum from EPF

The interest received from EPF account continues to be exempted from tax in the new tax regime as well, provided it does not exceed 9.5%

  • Interest and Maturity Amount Received from PPF

Under the new tax regime, an individual cannot avail tax benefit under section 80C on the contribution made to his/her PPF account. However, any interest accrued or maturity amount received from the PPF account continues to be tax-exempt in the new tax structure as well.

  • Interest and Payment Received from Sukanya Samriddhi Yojana

Individuals investing in Sukanya Samriddhi Yojana for their girl child will continue to receive tax-exempted interest in the account under the new tax regime. Further, the payment proceeds received from the scheme’s account will remain exempted from tax. However, investment under this scheme will not be available for tax-break under section 80C under the new tax regime.

  • Payment Received from NPS Account

The lump sum amount received at the time of maturity of one’s NPS account will remain tax-free in the new tax regime as well.

According to tax rules, a maximum of 60 percent of the accumulated corpus can be withdrawn tax-free from the Tier- I NPS account on maturity. The remaining 40 percent of the accumulated corpus has to be mandatorily used for buying annuity plans on maturity of NPS accounts. Further, any partial withdrawal made from the Tier-I NPS account continues to remain tax-exempt in the new tax regime. According to current income tax laws, an individual can withdraw a maximum of 25 percent of his own contribution from the NPS account which is exempted from tax.

In the existing/old tax regime, an employee can get a tax-break of Rs 1.5 lakh under section 80CCD (1) and an additional Rs 50,000 under section 80CCD (1B) on his/her self-contribution to the NPS account. The contribution to Tier-I NPS account maximum of Rs 1.5 lakh comes under the overall limit of section 80C.

  • Gift from Employer

Though various tax exemptions and deductions received from the employer have been removed under the new tax regime, no changes have been made in the taxation of gifts received from an employer.

  • Food Coupons

The explanatory memorandum to the budget document states: “It is also proposed to amend rule 3 of the Rules subsequently, so as to remove exemption in respect of free food and beverage through vouchers provided to the employee, being the person exercising option under the proposed section, by the employer. However, as currently there are no amendments regarding food coupons in the Finance Bill, therefore receiving food coupons from their employers will remain tax-exempt to an extent of Rs 50 per meal for 2 meals a day under the proposed tax regime. It appears that some clarification is needed on this matter from the government.

  • Commutation of Pension

Commutation of pension refers to receiving part of pension as lump sum payment in lieu of future periodic payments. For non-government employees, one-third of the commuted pension received is exempted from tax under the current income tax laws, if gratuity is received. However, if an employee has not received gratuity, then half of the commuted pension received will be exempted from tax. Even if the taxpayer opts for the new regime, the taxation of commuted pension remains the same.

  • Leave Encashment on Retirement

At the time of retirement, many companies offer payment in lieu of leaves that are not taken. Leave encashment received by non-government employees is exempt from tax up to Rs.3 lakh. If the employee has opted for the new tax regime, then leave encashment received at the time of retirement will continue to remain tax-exempt in the new tax regime.

  • VRS Amount

Monetary benefit received at the time of taking voluntary retirement is exempted from tax under the new regime. Monetary benefit received by an employee due to opting for a voluntary retirement scheme from his employer will remain exempt from tax for maximum up to Rs.5 lakh in both – new and existing tax regime.

Frequently Asked Questions (FAQs)

Q.How does the Income Tax Exemption work?

A.Tax exemption is the fiscal exclusion, which lowers the taxable income. A wholesome relief from deceased tax rates or tax can be availed or the tax will be levied for a particular portion. Hence, tax exemption is more important to a general rule than the absence of taxation in some conditions. People are given tax exemptions as it boosts some economic activities.

Q. What is Section 80G of the Income Tax Act, 1961?

A.Section 80G of the Income Tax Act, 1961 covers the contributions made by an individual to some charitable institutions or organisations, NOGs, NPOs, etc. Nevertheless, not all the donations you make are eligible under Section 80G.

Q. What are the benefits of Tax Exemption?

A.Tax Exemption Act was revised and was effective April 1, 2017. According to this revision, donations exceeding Rs. 500 to an NGO will be eligible for tax exemption of 50% under Section 80G of the Income Tax Act,1961. If you contribute to an NGO, you’ll offer aid to feed school kids and also aid yourself with a benefit of a tax deduction. You can calculate exemption by subtracting the donated sum from your taxable income. For example, if your taxable salary is Rs.200, 000 per year and you donate Rs.5,000, your net taxable salary will be Rs.197, 500. Your tax will be evaluated on the new sum depending on the prevailing tax rates.

Q. What is the minimum sum that I can donate to avail tax exemption?

A.You need to donate at least Rs. 500 in order to avail tax exemption under Section 80G of the IT Act, 1961.

Q.Do NGOs issue tax receipts?

A.Yes, on making a donation, the charitable organisation gives you a receipt for the same.

Q. Can I avail tax exemption on cash donation also?

A.Yes, you can avail tax exemption on cash donations below Rs.2,000. Cash donations exceeding Rs. 2, 000 are not applicable to the 80G certificate.

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