Income Tax Deductions & Exemptions – Concept, Difference, Sections, Tax Slabs, FAQs & moreLast Updated Date: May 11, 2022
In the Union Budget of 2020, our Finance Minister, Nirmala Sitharaman introduced an all-new tax regime that eliminates the effect of availing various Income Tax Deductions and Exemptions.
However, the best part is the old tax regime is also applicable. Under the new tax regime where you cannot avail various deductions to pay tax at a lower rate, the old regime offers all the deductions in place.
However, in the old regime, the tax rates are higher than the new one.
When both are compared, most of us will be opting for the old one only for availing the deductions and the exemptions available. For the old one, the tax burden reduces more than under the new regime.
So, in this article, we will discuss the deductions and the exemptions which are so crucial for the taxpayers.
The article will cover all the important deductions under section 80 of the Income Tax Act, 1961 in India. Then we will also cover the exemptions available under the Act.
To distinguish between the deductions and exemptions, we will also include the difference between the exemptions and deductions.
Apart from these, the article will cover both old and new tax regime for understanding the effect of exemptions and deductions well.
About Income Tax Deductions and Exemptions
Tax Deductions are available for reducing your taxable income. For instance, on your investments, you can claim deductions.
While some of the investments, payments, expenses are partially available for deduction, there are few which can be fully exempted.
Here come the tax exemptions which means certain incomes are completely exempted from tax.
For example, if you earn less than or equal to Rs.2.5 lakh a year then you do not have to pay income tax.
It is because up to Rs.2.5 lakh of income in a fiscal year, the income is fully exempted from tax. However, there are certain exemptions which are like a percentage of certain payments.
These deductions and exemptions are deducted from the gross income in a fiscal year before filing the returns.
Once you file the return, the IT department verifies all the deductions and exemptions. Then, if everything is all right they approve the ITR.
Tax deductions help a lot especially the people who belong to the medium and the upper medium income group.
This helps in saving a lot using investment and tax savings at the same time. For the salaried people, tax deductions are like blessings.
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Difference between Tax Deductions and Tax Exemptions
Before we dig deeper into the individual tax deductions and exemptions, let us see the basic differences between these two –
Tax Deductions – It is the amount that is deducted from the total income of the taxpayer.
Tax Exceptions – It is certain incomes that are excluded or exempted from tax liability. They are not included in the income of the assessee only.
Section of IT Act
Tax Deductions – The deductions are written down in section 80 of the Income Tax Act, 1961. There are various sub-sections under this section for different types of deductions.
Tax Exceptions – The exemptions are mentioned in section 10 of the Income Tax Act.
Tax Deductions – To avail of these deductions, you have to fulfill certain criteria. The criteria are also mentioned in the sections of individual deduction.
Tax Exceptions – Anyone of us who pays tax and is a citizen of this country is eligible for these exemptions.
Tax Deductions – Deductions u/s 80C for investments in life insurance premium, PPF, u/s 80D for health insurance, etc.
Tax Exceptions – House Rent Allowance, Entertainment Allowances, and others.
Different Tax Deductions under Section 80 of Income Tax Act, 1961
There are different sections under the main section which is for deductions in IT Act, that is, section 80.
Here we will be discussing 16 crucial deductions that you can avail of and reduce your tax burden in the upcoming assessment years.
Let us begin with the evergreen 80C and the rest will follow –
Under this section, you can avail of deduction on the investments you make. For example, investment in PPF, ULIPs, or the EPF, Life insurance premium, ELSS, and others.
It is available for the individuals as well as the HUFs. Under this section (including all the sub-sections of 80C) the maximum allowable deduction limit is Rs.1.5 lakhs.
This section is for deductions pertaining to pension funds and mutual funds. Here the maximum deduction available is Rs.1.5 lakhs. It is available only for individual taxpayers.
It is available for individual taxpayers. It is for deductions related to pension funds schemes by the central government.
This is for investing in the Rajiv Gandhi Equity Saving Scheme (RGESS). Though it is not yet started.
However, once it starts you can get a deduction of 50% of the investment you make in the equity shares under this scheme or Rs.25000 for three consecutive assessment years.
Here the lower of the two amounts will be deducted from the total income. The deduction will be available for the individuals whose income for the year is less than Rs.12 lakhs.
It is a deduction that individuals and HUFs can avail themselves for the medical treatment of their handicapped dependent relative. The amount of deduction can be up to Rs.75000.
In this case, the severity of the disability is between 40% and 80%. If the dependent person is more than 80% handicapped, then the amount would be Rs.1.25 lakhs.
Under this section, individuals and the HUFs can claim a deduction for medical expenses for self or relative. However, this is for specific diseases.
The amount that can be claimed is limited up to Rs.40 thousand. However, the amount can go up to Rs.1 lakh provided the age of the person being treated is above the age of 60 years.
If you have taken an education loan for yourself, your spouse, or your child, you can claim deduction under this section.
It is meant for individuals who are first-time homeowners. Yes, you can get a deduction in your tax liability of Rs.50000 if you have taken a home loan.
The deduction is available on the home loan interest amount payable.
If you have donated towards any social cause then you can claim the deduction. The deduction is available up to 50% to the full 100%. It is available for all – individuals, companies, HUFs, and firms.
This is again for donations in non-cash form by a company (Indian Companies only). The donation is for political parties.
Here 100% donation is deductible. The party must be registered under section 29A of the Representation of the People Act.
If an individual makes donations to political parties (non-cash) or electoral trusts. The amount depends on the quantum of the donation.
If you do not receive any HRA and pay house rent then you can claim the deduction. The amount can be the lower of these three –
- 25% of the total income
- Rent minus ten percent of the total income
Deduction is available up to Rs.3 lakhs on royalty income, if you earn any royalty income or from patents on your name/family – registered under Patents Act 1970.
Any resident Indian can avail of this deduction.
This deduction is on the interest you earn from your savings account with a bank or post office.
The maximum amount that will be deducted under this section is Rs.10000. It is available for both individuals and HUFs.
If you are a senior citizen and earn from your deposits then you can claim up to Rs.50000 as deductions from your taxable income.
If any amount is spent on individuals with disabilities including blindness, other physical or mental disabilities, then you can claim up to Rs.1 lakh of deduction.
Here are all the sections which are considered under Income Tax Deductions.
Different Types of Tax Exemptions
While the tax deductions have eligibility criteria, exemptions are more or less applicable for all taxpayers.
So, let us see how you can reduce your tax burden certainly with the tax exemptions available under section 10 of the IT Act.
HRA: The HRA or House Rent Allowance that your employer provides can be exempted to a certain limit and that is the minimum of the following –
- HRA received
- 50% of the income of the individuals (metro-cities), for non-metro cities, it is 40% of the income.
- Rent excluding 10% of the income
Transport Allowance: If you receive a transport allowance, then on an annual basis, Rs.19200 of the transport allowance can be exempted from tax.
Hostel Subsidy: If you have a maximum of two children living in the hostel, you can get an exemption on their hostel fees. The maximum amount of exemption is Rs.300 per month for each child.
Home Loan Interest: If you bought a house or constructing it (will be completed within three years) and have taken a loan, then you can avail of exemption of Rs.2 lakhs (maximum) on the interest you pay on the same.
Tax Exemptions available as per Tax Slabs
There is a constant fight between the accountants and the financial professionals about the new and the old tax regime to judge which one is more profiting for the taxpayers.
However, it is difficult or unanswerable that which is better! As both yields different result under different income amount.
Under both the old and new tax regime, the income which is exempted from tax is Rs.2.5 lakhs for the people who are under the age of 60 years.
While for the 60+ and 80 down aged people, the exemption is up to Rs.3 lakhs and Rs.5 lakhs for the people aged 80 years and above. So, there is no difference in this.
However, for availing of the new tax regime, you have to forego certain deductions under section 80.
So, now you have to calculate whether accepting the new regime with a lower tax rate (until Rs.15 lakhs of income) is viable for you or retaining the old one is good for you.
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Income Tax Deductions & Exemption – Conclusion
To conclude this, we can say, choose the tax regime wisely. Do not just go by the tax rates. Calculate the total tax liability under both tax regimes –old and new and then decide.
Deductions and exemptions have a great role to play in our tax payment. Thus, foregoing any can be a crucial decision. So, always check which one is better for you.
If you are making investments, check whether it is tax-saving or not so that you can save tax as well apart from accumulating wealth.
Since there are so many deductions, make sure to put each one of them (which you are eligible for) in the ITR properly.
That is to declare all your investments on time to get the deductions in your tax return.
Income Tax Deductions FAQs
Ques: Can I claim 80C deductions at the time of filing ITR?
Answer: Yes, certainly you can file it with the ITR. However, if your employer deducts TDS or pay tax on your behalf, then it is easy to declare all your investments u/s 80C to the employer, then he or she can take the same into account.
Ques: Can I get tax exemption on the interest of the educational loan provided by my employer?
Answer: No, you cannot get the exemption for the same as it is not provided by any financial institution.
If the loan is provided by any financial institution, you can certainly get a deduction on the same.
Ques: Can I get a Income Tax Deductions for my mobile bill reimbursement?
Answer: Yes, you can get a deduction on reimbursement for the full bill or the mentioned amount by the employer (lower of the two) in your ITR.
Ques: Is there any upper limit on Income Tax Deductions under section 80E?
Answer: No, there is no upper limit under section 80E. You can claim a full deduction of the interest you pay towards the loan.
Ques: Can I get a tax deduction for the life insurance premium I pay to a privately held life insurance company?
Answer: Yes, you can get up to Rs.1.5 lakhs of Income Tax Deduction for the premium you pay towards your life insurance.
The IT department has made it mandatory that the insurance company must be registered under IRDAI. However, it doesn’t matter whether it is a privately held or publicly traded company.
Ques – What are exemptions and deductions in income tax?
Answer – Exemption and deductions have been playing a major role in India’s Tax scenario. When we talk about deduction on the tax we are talking about certain sections/subsections that provide a reduction on the taxable income or the gross total income. The exemption means that certain kinds of income type are entirely eliminated from the obligation to pay taxes.
Ques – What deductions are allowed for income tax?
Answer – There are several deductions for citizens when it comes to income tax, which are – Section 80C, section 80CCC, section 80CCD, Section CCG and as well as section 80DD.
Ques – What deductions can I claim without receipts?
Answer – Yes several types of deductions provide the taxpayers a luxury to claim them without having to show or produce receipts. One’s travel related meal and vehicle expenses are few of those things where the government does not expect any kind of receipt for the tax deduction.
Ques – What is the difference between Tax Deductions and Tax Exemptions?
Answer – The major difference between tax deduction and tax exemptions is that, tax deduction refers to a reduction in an individual’s tax while the tax exemptions means the individual does not have to pay any tax at all.
Ques – Can I claim 80C deductions at the time of filing ITR?
Answer – Yes, the taxpayers can very rightfully claim the deductions under section 80C while they are filing their return.
Ques – What are the major list of deductions and allowances in IT?
Answer – In the benefit of the salaried employees of the country the government have produced major sections to help them reduce their taxes. Counting from the exemption of house rent allowance to leave travel allowance, Mobile reimbursement to Section 80C, 80CCC and 80CCD(1), these are the prime tax reduction for common men.
Ques – What is Section 24 of the Indian Income Tax Act?
Answer – The section 24 of the income tax act talks very detailed about the interest which an individual has to pay for their home loans. It gives the citizens the benefit to claim tax exemption on the interest amount of their home loan.
Ques – What if expenses are more than income?
Answer – Salaried personals are highly encouraged by the government to use various sections and subsections to reduce their tax on their gross income, which in return helps the individuals who have greater expenses.
Ques – How many years can income tax go back in India?
Answer – When it comes to taking necessary measures the I-T officers can go back to as much a six years to revise the accounts of the concerned individuals. However given the current policy IT tax officers can now reopen tax cases which are up to 10 years old.
Ques – Can a company or a firm take the benefit of Section 80C?
Answer – The set benefits of the section 80C only apply to citizens i.e. individuals or to Hindu Undivided Family (HUF), thus companies and firms cannot seek benefit of the tax deductions that comes under section 80C.
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