Is heavy tax bothering you? Don’t worry, income Tax Exemptions and deductions, give you plenty of opportunities to save tax. By using these exemptions and deductions wisely, you can reduce your tax substantially. In fact exemptions and deductions reduce the tax liability in lacs. In this post, I am listing the available exemptions, and deduction under income tax rules. Use these and enjoy the tax saving.
Must Read: 10 Types of Taxes in India
Exemptions on Allowances Under Section 10 of Income Tax Act
1. House Rent Allowance (HRA)
You may not have noticed but HRA tax exemption may give you maximum benefit. I am missing this deduction after the self employment. However, this exemption is a real necessity. It is justified and required.
You get a job and shift to another city. Because of your job, you live in a different place. You are forced to live in a rented accommodation. The rented flat is not by choice but because of the duty. Hence, the expense on rent is because of your job. You can’t avoid this, even if you wish. Therefore, government exempt the rent from income tax. However, you are not entitled to get this exemption automatically. Rather, your employer should pay the House rent allowance with the salary.
The HRA paid by the employer is considered for the exemption. I don’t get the HRA exemption because I don’t have an employer who can pay HRA. However, full HRA is not considered for income tax exemption. It is give according to the following formula.
HRA Exemption Formula
Exemption of HRA is a minimum of these three.
- Actual HRA received.
- Rent paid less 10% of salary.
- 40% of Salary (50% in case of Mumbai, Chennai, Kolkata, Delhi). In this case, salary is basic plus dearness allowance (basic+DA).
Leave Travel Allowance
If your employer also gives you an allowance for the vacations, It is also entitled for the income tax exemption. Employers give Leave travel allowance to its employees. you can claim LTA only if you have actually travelled. You must be on leave during this travel. Only travel fare is considered for the exemptions. Hotel stay and food is not entitled. You can claim income tax exemption only on the travel of yourself and family. The LTA can be claimed only twice in a three year block. You have to produce the proof of travelling.
The Exemption to this allowance was discontinued since 2018-19. It was announced in budget 2018. However, I have left this rule for the tax calculation of previous years.
You go to your office or workplace from you house. You also spend on the local transport. This expenditure is also forced upon you. Therefore, the government has exempted transport allowance from the income tax, provided your employer gives you the transport allowance. You don’t need to give any receipt of this local travel. However, the tax exemption is limited to Rs 1600/month.
Children Education Allowance
Children Education allowance is also exempted from income tax. Your employer must give this allowance for availing the tax exemptions. It is Rs. 100 per month per child up to a maximum of 2 children.
This is another tax exemption related to your child’s education. It is Rs. 300 per month per child up to a maximum of two children. Your employer must give this allowance.
Other Allowance Eligible For Income Tax exemptions
Uniform Allowance, Special Compensatory Allowance, High Altitude Allowance, allowances applicable to North East, Compensatory Field Area Allowance, Counter Insurgency Allowance, High Active Field Area Allowance, island duty allowance, tribal allowance etc. These allowances are tax-free, but you need to produce the proof of the actual expense in some cases.
Income Tax Exemption on Interest Paid on Housing Loan
This Exemption is also related to your accommodation because of the job. After shifting to a different place, you may opt for your own house instead of rented accommodation. If you take home loan for the house, the interest payment is tax exempted. You can get maximum exemption of Rs 2 lakh on housing loan interest. There are some conditions for this exemption.
The house should be self-occupied. You may get this exemption if your home is under construction. However the construction should complete within 3 years.
Tax Deductions Under Section 80C
The Government wants to encourage some certain types of investments and expenses. To achieve this goal it gives the benefit of tax deductions under section 80C. There are many investments and expenses under section 80C, 80CCC and 80CCD. However, the total deductions under this section are limited to Rs 1.5 lakh.
- Employee Provident Fund
- Pension/ Annuity Schemes
- Life insurance premium
- Tax Saving mutual fund (ELSS)
- Home loan principal payment
- Sukanya Samriddhi Account
- Tuition fees of children
- PPF Account Contribution
- National Saving Certificate
- Tax-saving fixed Deposit
- Post office time deposits
Section 80CCC: Deduction For Annuity Plan
You can also get a deduction for the annuity plan of insurance companies. There are some limitations on this deduction.
- You can’t contribute more than 10% of your salary or gross income.
- You can’t enjoy the deduction of more than Rs 1 lakh in a year.
Section 80CCD(1) : Contribution For Pension Plan
Similar to annuities, contribution in pension plans is also eligible for tax deduction. For example contribution to National Pension Scheme (NPS) will get deduction benefit under this rule.
It is also limited to 10% of salary or 20% of gross income (if not salaried).
Section 80CCD(2): Contribution To Pension Plan By employer
This section gives you extra tax saving opportunity. If your employer contributes into your pension plan, it would be also tax-free. This contribution does not come under the overall limit of 1.5 lakh.
You can ask your employer to contribute 10% of your salary into your pension plan. It will not affect your employer financially, but you would be able to save some more tax.
Deductions Under Chapter VIA of Income Tax Act
Section 80CCG: Rajiv Gandhi Equity Saving Scheme (RGESS)
This scheme also gives you the extra tax saving. To avail this benefit, you must be the first-time investor in the share market. Your annual income should not be more than Rs 10 lakh. You can invest up to Rs 50,000 under this scheme. However, the tax deduction would be available for the 50% of your investment. So, if you invest Rs 50,000, you will get the tax deduction of only Rs 25,000. There is some mutual fund scheme which is designed for RGESS. However, due to the complex rules, it could not become popular.
Section 80D: Medical Insurance Deduction
This scheme also gives you a chance to save tax over and above the 1.5 lakh. One must use this tax saving opportunity. In the budget 2015 the government does not change income tax slab, but it has increased the limit for section 80D. Section 80D can give you a tax deduction of up to Rs 65,000. Medical insurance of self, family and parents are eligible for tax deduction under section 80D.
Section 80DD: Deduction For Maintenance of Disable Dependent
Under this section, one can get extra tax deduction of Rs 50,000. To avail this deduction, you must fulfill some conditions.
1. A person with a disability must be dependent upon you. The disability may be physical or mental.
2. You must produce a certificate from the doctor.
3. You must incur the expense of treatment, rehabilitation, nursing and training.
If you deposit any amount in any scheme for the disabled, it would be also eligible for tax deduction.
If dependent person is with severe disability, you can claim deduction up to Rs 1,00,000.
Section 80DDB: Serious Illness Deduction
This deduction is for the treatment of serious illness. An assessee can get an income tax deduction of Rs 40,000 under this section.
- The deduction is for the expense of illness of self or dependent.
- The illness should be within the prescribed list.
- There should be real expense. Any reimbursements of insurance claims should be subtracted.
- You must give a certificate from the government doctor.
- For senior citizens this deduction limit is Rs 80,000.
Section 80E: Deduction on Loan for Higher Studies
Like the home loan interest, one can also claim income tax deduction for education loan interest.
- You must take education loan from a financial institution.
- You can avail this tax deduction maximum of 7 years.
- You can take the benefit of this deduction only for the higher education.
- You can take this benefit only for the education of self, spouse or children. If you are the legal guardian of a student, you can also take this benefit.
Section 80G: Deduction for Donations
The donations specified in Section 80G are eligible for deduction. The deduction may of 100% of donation or 50%, It depends upon the type of receiver.
Section 80GG: Deduction on House Rent Paid
This deduction is for those, who don’t get the house rent allowance from their employer. Such person can avail this deduction according the specified rules.
Deduction is the least of
- Rent paid less 10% of total income
- Rs. 5000/ month, i.e. Maximum Deduction available is 60,000.
- 25% of total income
There are some conditions for this benefit.
- Assessee or his spouse or minor child should not own residential accommodation at the place of employment.
- He should not get a house rent allowance (HRA).
- He should not have self occupied residential premises in any other place.
Section 80TTA: Saving Account Interest Deduction
Interest earned on a saving account is not added in taxable income, if it is less than Rs 10,000 in a financial year.
Section 80U: Deduction For Disabled
Under section 80U a person with disability gets extra deduction from his/her taxable income. Such person can deduct Rs 50,000 from the taxable income. In case the disability is severe, the deduction is up to Rs 1,00,000. To avail this deduction one should obtain a certificate from the government doctor.
Section 80GGA: donations for scientific research or rural development
Section 80GGC: Contribution to political parties
Section 80QQB: Royalty Income on patents. Maximum deduction Rs. 3,00,000.
Section 80RRB: Royalty Income to author of certain books other than textbooks. Maximum deduction Rs. 3,00,000.
I have listed all the available exemptions and deduction to a salaried person. However, your attention would be on traditional insurance schemes and tax saving mutual funds. However, I would advise that tax saving should not be an objective for an investment. Choose the investment on its merit and tax saving can be a side benefit.