Income tax collection in India is governed by the Income Tax Act of 1961, under which each individual and entity is required to pay a tax on their earnings during a financial year.
In order to encourage more citizens to file their returns, the Income Tax Act has several sections in place that offer deductions. To help you avail of these benefits, here is everything you need to know about the income tax exemptions and deductions:
What are the Different Tax Slabs?
In the budget session of 2021, new income tax slabs were introduced. Taxpayers were given two conditions:
- To pay income tax at lower rates under the new tax regime but forgo specific deductions and exemptions, or
- To pay income tax under the existing tax regime and avail deductions, exemptions, and rebate.
Here are both the existing and new slab rates:
|Income Tax Slab(INR)||Existing Regime Slab Rates for FY 19-20 and FY 20-21||New Regime Slab Rates for FY 20-21|
|Resident Individuals & HUF < 60 years of age & NRIs||Resident Individuals & HUF > 60 to < 80 years||Resident Individuals & HUF > 80 years||Applicable for All Individuals & HUF|
|0.0 – 2.5 Lakhs||NIL||NIL||NIL||NIL|
|2.5 – 3.00 Lakhs||5% (tax rebate u/s 87a is available)||NIL||NIL||5% (tax rebate u/s 87a is available)|
|3.00- 5.00 Lakhs||5% (tax rebate u/s 87a is available)||NIL|
|5.00 – 7.5 Lakhs||20%||20%||20%||10%|
|7.5 – 10.00 Lakhs||20%||20%||20%||15%|
|10.00 – 12.50 Lakhs||30%||30%||30%||20%|
|12.5 – 15.00 Lakhs||30%||30%||30%||25%|
|> 15 Lakhs||30%||30%||30%||30%|
What are the Key Deductions to Look Out for?
Under section 80C, you are eligible to claim a deduction of INR 1.5 lakhs on your total taxable income. This section is only applicable to individuals and Hindu Undivided Families. Any investment made in provident funds or payment made towards life insurance premiums or equity-linked saving schemes (to name a few) can be used to claim deduction under section 80C.
Section 80CCC & 80CCD
Under section 80CCC, an individual can claim a deduction for any amount he/she has deposited or paid in an annuity plan of LIC or any other insurer.
The section 80CCD is further subdivided into three subsections, namely- 80CCD (1), 80CCD (1B), and 80CCD (2). Where 80CCD (1) provides a deduction for an employee’s contribution to his/her pension account, 80CCD (1B) provides an additional deduction of INR 50,000 for contribution to the NPS account. Lastly, 80CCD (2) provides a deduction on the employer’s contribution to the NPS account.
Deductions under section 80D are available on a medical insurance premium that is paid for self, spouse or dependent children, up to a maximum limit of INR 25,000.
However, an additional deduction of INR 25,000 can be availed if the medical insurance premium is paid for parents (if they are less than 60 years old). In case both, the parents as well as policyholder are above the age of 60, then the additional deduction would increase to INR 50,000 for each.
This deduction is available only on the following conditions:
- The expenditure incurred should be for the medical treatment, rehabilitation and training of a handicapped dependent relative.
- Deposit or payment must be made for the maintenance of a handicapped dependent relative.
The amount of deduction would be decided on the following conditions:
- If the disability is more than 40% but less than 80%, then the deduction would be capped at INR 75,000.
- If the disability is more than 80%, then the deduction would be capped at INR 1,25,000.
To avail of this deduction, a certificate of disability would be required from a prescribed medical authority.
This section provides a deduction for medical expenditure incurred on self or a dependent relative. In case the individual or HUF is below the age of 60, then a deduction of INR 40,000 can be availed. In case the expenditure is incurred on a dependent relative who is a senior or super senior citizen, then the deduction would be increased to INR 1 lakh.
This section of the Income Tax Act states that the interest paid on a home loan can be used by an individual to claim deductions. The maximum deduction one can claim under this section is INR 1.5 lakh.
This section can be used to claim a deduction for payment of interest on an education loan. However, the loan must be taken for higher education and must be taken for self, children, or the spouse. Moreover, it can be availed for a maximum period of 8 years.
Under the section of 80EE, an individual can claim a deduction for payment of home loan interest. But this is only available to first-time homeowners, and the home loan must be less than INR 35 lakh. Another condition is the value of the property must be less than INR 50 lakh.
Section 80G provides deductions to individuals for donations towards social causes. However, only those donations would be eligible for deductions that are mentioned in this section. For example, donations made towards the Prime Minister’s National Relief Fund and National Sports Fund (to name a few) would be eligible for deduction under section 80G.
Section TTA provides a deduction of INR 10,000 on interest income and is available to every individual and HUF. The interest here refers to interest earned from a savings bank account with either a bank, a post office, or a cooperative society conducting the business of banking.
To reduce your tax liability, you should look into utilising the sections mentioned above. By using a combination of these sections, you would be able to reduce your total tax liability.
The Income Tax Act of 1961 gives the taxpayers a lot of opportunities to reduce their tax liability. By using these deduction sections ideally, one can lower his/her tax liability to a great extent.