Important Income tax deductions and exemptions in India to reduce tax.

Income tax deductions and exemptions are an important part of the Indian tax system. They help reduce an individual’s taxable income, thereby lowering their overall tax liability. In this article, we will discuss various income tax deductions and exemptions available in India with examples.

Deductions available under Section 80C: Section 80C of the Income Tax Act provides for deductions up to Rs 1.5 lakhs on certain investments and expenses. Some of the eligible expenses include:

1. Employee Provident Fund (EPF): Employee Provident Fund is a contribution made by an employee and an employer towards a retirement savings plan. An individual can claim deductions for the EPF contributions made by them under Section 80C.
2. Public Provident Fund (PPF): PPF is a long-term savings scheme that offers tax benefits. Contributions made towards PPF can be claimed as a deduction under Section 80C.
3. Equity Linked Savings Scheme (ELSS): ELSS is a mutual fund that invests in equity and offers tax benefits. Investments in ELSS can be claimed as a deduction under Section 80C.
4. Life Insurance Premiums: Premiums paid towards life insurance policies can be claimed as a deduction under Section 80C.
5. National Pension System (NPS): NPS is a retirement savings plan that offers tax benefits. Contributions made towards NPS can be claimed as a deduction under Section 80C.
6. Home Loan Principal Repayment: Repayment of home loan principal can be claimed as a deduction under Section 80C.

Deductions available under Section 80D: Section 80D of the Income Tax Act provides for deductions on the premium paid towards medical insurance. Some of the eligible expenses include:

1. Self and Family: An individual can claim deductions for medical insurance premium paid for themselves and their family members.
2. Senior Citizens: Senior citizens can claim higher deductions for medical insurance premiums paid.
3. Preventive Health Checkups: An individual can claim deductions for preventive health checkups up to a certain limit.

Deductions available under Section 80E: Section 80E of the Income Tax Act provides for deductions on the interest paid towards education loan. An individual can claim deductions on the interest paid towards education loan for themselves, their spouse, or their children.

For example, if an individual takes an education loan of Rs. 10 lakhs and pays an interest of Rs. 1 lakh per year, he/she can claim a deduction of Rs. 1 lakh under Section 80E.

Deductions available under Section 80G: Section 80G of the Income Tax Act provides for deductions on donations made towards charitable institutions. Some of the eligible institutions include:

1. Prime Minister’s National Relief Fund
2. National Defence Fund
3. Swachh Bharat Kosh
4. Clean Ganga Fund
5. National Trust

The amount of deduction available under Section 80G depends on the type of institution and the amount of donation made.

Exemptions available under Section 10: Section 10 of the Income Tax Act provides for various exemptions that are not included in the taxable income. Some of the eligible expenses include:

1. House Rent Allowance (HRA): HRA is an allowance provided by the employer towards the rent paid by the employee. A certain portion of HRA is exempt from tax. House Rent Allowance (HRA) received by an employee from his employer is exempt from tax to the extent of the least of the following:
   • Actual HRA received
   • Rent paid minus 10% of salary
   • 50% of salary for those living in metro cities or 40% for those living in non-metro cities
2. Leave Travel Allowance (LTA): Leave Travel Concession (LTC) received by an employee from his employer for himself and his family is exempt from tax. This exemption is available twice in a block of four years. The exemption is limited to the actual travel cost incurred by the employee for himself and his family.
3. Gratuity: Gratuity received by an employee from his employer at the time of retirement or resignation is exempt from tax up to a certain limit. The limit of exemption is the least of the following:
   • Rs. 20 lakhs
   • Actual gratuity received
   • 15 days’ salary (based on the last drawn salary) for each completed year of service
4. Provident Fund (PF): Provident Fund is a retirement savings plan. The interest earned on PF is exempt from tax.
5. Long-Term Capital Gains on Equity Shares and Equity Mutual Funds: Long-term capital gains on the sale of equity shares and equity mutual funds are exempt from tax up to Rs. 1 lakh in a financial year. Gains above Rs. 1 lakh are taxed at the rate of 10%.

Deductions available under Section 24:

Section 24 of the Indian Income Tax Act allows taxpayers to claim deductions on the interest paid on a home loan. This section provides two types of deductions: one for self-occupied properties and another for let-out properties.

Deductions for Self-Occupied Properties: Under Section 24(b) of the Income Tax Act, taxpayers can claim a deduction of up to Rs. 2 lakhs on the interest paid on a home loan for a self-occupied property. The deduction is available for the interest paid on the loan taken for the purchase or construction of a residential property. The loan must be taken on or after April 1, 1999, and the construction or purchase must be completed within five years from the end of the financial year in which the loan was taken. If the property is jointly owned, both owners can claim a deduction of up to Rs. 2 lakhs each.

Deductions for Let-Out Properties: For let-out properties, taxpayers can claim a deduction on the entire interest paid on the home loan. There is no upper limit for the deduction, and it is allowed as a deduction from the rental income earned from the property. Any interest amount that is not claimed as a deduction in the current year can be carried forward for up to eight years and claimed as a deduction in the subsequent years.

It is important to note that if the construction of the property is not completed within five years from the end of the financial year in which the loan was taken, the deduction on interest paid on the home loan for self-occupied properties will be reduced to Rs. 30,000 instead of Rs. 2 lakhs.

In addition to the deduction on interest paid on home loans, taxpayers can also claim a deduction on the principal amount repaid under Section 80C of the Income Tax Act. The deduction is allowed for the principal amount repaid on a home loan taken for the purchase or construction of a residential property. The maximum amount that can be claimed under Section 80C is Rs. 1.5 lakhs.

Conclusion

It is essential to be aware of the Income Tax deductions and exemptions available under the Income Tax Act to save on taxes. Tax-saving investments under Section 80C, deductions on medical insurance premiums under Section 80D, interest paid on education loans under Section 80E, and donations made to charitable institutions under Section 80G can help reduce tax liability. Similarly, exemptions under Section 10 and Section 54 can also help save on taxes. Make sure to consult a tax expert to optimize your tax-saving investments and stay compliant with Income Tax laws.