Save income tax wherever law permits. The hard earned money is yours. The government has given certain provisions under which you can save tax lawfully. You can do so by applying tax exemptions and tax deductions. They both are applicable to individuals who draw salaries in India. Tax exemption is a monetary exemption that reduces the taxable income of an individual. Also, tax deductions are the reduction in total income that is subject to income taxes. This too decreases total taxable income and reduces the amount of income tax you would have otherwise paid.
Most of the salaried person in India involve in tax-related things from January to March, every financial year. March 31st is the official last filing date for income tax return for individuals. Besides, it is the tax-saving season too. And the majority of us focus on availing deduction mainly under Section 80C deductions. Section 80C gives benefits of the deduction up to Rs.1.5 lakh to the individual taxpayer.
Because of this, taxpayers miss out various other tax benefits provided under income tax act. This ends up paying higher taxes to the government. Income tax act, 1961 allows for certain allowances to salaried persons. Section 10 of the act covers such allowances. A person is exempt from paying taxes on these allowances to a certain limit. Similarly, a salaried person can also claim deductions under chapter VI-A of the act.
Most of us apply section 80 C to save income tax
Before going deep into the various provisions of exemptions and deductions let me briefly discuss section 80C. In order to encourage certain expenses and investments government of India allowed income tax exemptions. Section 80C along with sub-section 80CCC and 80CCD covers these exemptions. This is as per income tax department of the government of India. These investments and expenses include –
- Employee Provident Fund
- Home loan principal payment
- Life insurance premium
- National Saving Certificate
- PPF Account Contribution
- Pension/Annuity Schemes
- Post office time deposits
- Sukanya Samriddhi Account
- Tax Saving mutual fund (ELSS)
- Tax-saving fixed Deposit
- Tuition fees for children
Now let us look for the tax savings deductions and exemptions provided under the income tax act in some details.
Allowance exempted (section 10 of income tax act 1961)
Every year salaried employee gets various allowances from their employers. Allowances cover employes particular requirements. Requirements may be house rent, expenses on conveyance, uniform etc. Income Tax Act exempts these allowances to certain limits. The HR department of any organization first combine the allowance with salary and then deduct the allowed exemption.
Interest paid on loan taken for house purchase under section 24(b)
This expenditure is allowed under section 24(b) of the IT Act. This section also covers loan acquired from relatives. The loan must be for construction or purchase of a house. Then only such loan qualifies for the tax benefits. A taxpayer can claim the deduction for interest on borrowed money on an accrual basis. Under accrual basis, you can declare deductions even though you did not pay the original interest. So keep claiming your interest deductions on yearly basis. Even when you are not paying the interest or is due.
Interest income of let-out or a deemed to be let-out property also gets deductions under this section. You can claim up to Rs 2 lacs on such interest income from FY 2017-18. You can start availing this interest when the construction of your property is complete.
Deduction for rent paid (HRA) under section 80GG
Under Section 80GG of the Income-Tax Act, 1961, this is applicable when the taxpayer has paid the rent but HRA is not received from the employer. An individual is allowed for deduction in respect of rent paid by him for his own residence. The amount of deduction that can be claimed is the least of rent paid less 10% of his adjusted total income; 25% of his total income and Rs 5,000 per month.
Tuition fees paid up to two children under section 80C
This expenditure is mandatory for all parents for their children’s education. But the expenditure incurred can be claimed under section 80C up to two children. The fees you pay for the education of your kids at school, college or university can be claimed as a tax deduction under Section 80C at the time of filing a tax return.
Interest incurred on loan if taken for higher education under section 80E
This expenditure is deductible under Section 80E of the Income-tax Act with respect to interest paid towards loan taken for pursuing any course of study after clearing the senior secondary education. You can claim it for self or for your spouse, children or student for whom you are a legal garden.
Expenses incurred on treatment of specified diseases
This deduction is primarily for those who need to get treatment for dangerous diseases like Cancer, Aids etc. Under this section, the deduction shall be the amount actually spend on medical treatment or Rs.40000/60000/80000 whichever is lower depending on the age of the patient. In a normal individual, senior citizen or super senior citizen, the limit is 40000, 60000 and 80000 respectively. To claim this benefit, the taxpayer must obtain a prescription for such medical treatment from a neurologist, an oncologist, immunologist or such other specialist as may be prescribed.
Deduction in respect of donations to specified funds and charitable institutions under section 80G
Usually, the deduction under Section 80G of the Act is not available at the time of submitting investment proofs to one’s employer. Hence, “the individual tends to miss this deduction which is available on donations made by an individual to certain funds, charitable institutions and so on. The deduction available for certain donations by the taxpayer shall be either 100% or 50% (whichever is permitted) of the donation with or without the limitation. Donations without limitations are National defend fund set by Central Government (100%), Jawaharlal Nehru Memorial Fund (50%). Donations with limitations are a contribution to the government or association for promoting family planning (100%), an institution established for a charitable purpose (50%).
In case of donations without limitations, the deduction can be claimed full on 50% of the amount donated. However, in case of donations with limitations, deduction can be claimed as either 100% or 50% of 10% the Gross adjusted income of the individual
Gross Adjusted income for this purpose is calculated as Gross Total Income minus (i) all exempted incomes, (ii) long-term capital gains and, (iii) all deductions under section 80C to 80U except for 80G
Deduction for physically disabled persons under section 80U
Under Section 80U of the Act, a resident individual who is certified by the prescribed medical authority to be a person with a disability can claim a fixed deduction of Rs.75000 and in case the individual suffers from a severe disability, the amount of higher deduction that can claim is Rs.125000. It is important to note that this deduction can be claimed irrespective of the actual amount of expenditure incurred by the resident individual.
The disabilities for which deductions can be claimed are mental retardedness, low blindness, low-vision, leprosy-cured, hearing impairment etc.
Deduction allowed under chapter VIA
Chapter VIA is applicable while calculating gross total income. It covers two type of deductions- expense related deduction and income related deduction. To claim expense related deduction, some expense to be incurred to claim the deduction. In order to get an income-related deduction, it is the part of GTI and then some partial exemption is allowed. For example, saving bank interest is first added to GTI, then deduction up to Rs.10000 is allowed to the taxpayer.
Deduction on interest income from savings account under section 80TTA
Almost all taxpayers maintain one or more savings accounts in banks. These accounts generate income in the form of interest from deposits. Such interest income is also liable for the tax. And you are eligible for tax deduction up to Rs 10,000 or actual interest received, whichever is lower. You can claim the deduction on such interest income under Section 80TTA of the I-T Act.
Deduction for medical insurance under section 80D
A taxpayer can avail deduction for buying or paying a premium for medical insurance. When you are buying or paying for your spouse and dependent children, then also you are eligible for such deductions. For self, you can claim up to Rs.25000 for the same and another Rs.25000 for the family. This deduction can go up to Rs.30000 (instead of 25000) in case of a senior citizen. So the total deduction you get under Section 80D can go up to Rs.60000.
Exemption for reinvesting in residential house under section 54
Another not so famous tax deduction is the deduction available on long-term capital gains under section 54. When you sell your residential property, then you pay a higher tax on any such profit made. Currently, the tax rate for such gains is 20%. Such net profit figure is liable to long-term capital gains tax. However, the government is giving the benefit of claiming an exemption on such profits also. But you need to reinvest such income on another residential property to avail exemption. You must also keep in mind that it is applicable one year before or two years after the date of transfer. Even if you construct the new property within 3 years of the transfer, you can avail it.