The income tax filing season doesn’t usually come alone, it brings along a humongous amount of stress with it. Despite the fact that only less than 3% of India is paying the income tax, the number of ways you can lose your hard earned money in the name of income tax is overwhelming.
In this article, I’m going to walk you through all the legitimate ways you can claim income tax rebate and deductions.
Because every penny counts, doesn’t it?
The Ultimate Guide
The Income Tax Act, 1961 is the act which the Government of India follows for the collection and administration of income tax in India. Enacted in the year 1961, it is the complete guide for the Income Tax Dept. of India. It wouldn’t be an exaggeration if we call it the Torah of income tax.
It has a total of 298 sections under 23 chapters covering all the necessary things including income tax levying, collection, administration and income tax rebate.
Even though we don’t need to know about all of those 298 sections, there are some sections that favour a regular taxpayer. The following are the sections in the Income Tax Act, 1961 that enables income tax rebate and deductions.
For the salaried employees, I have included a dedicated subheading for income tax rebate in addition to what we are going to see below. If you are a salaried employee, you can make use of both of these to save income tax.
INCOME TAX DEDUCTIONS: SECTIONS
Along with the sections of chapter VI-A there are a couple of other sections from another chapter which provide a way to save a fortune on your next tax payment.
Let us see how to save taxes under the sections
mentioned in Chapter VI-A followed by thesections included in other chapters.
Since there is a long list of different sections in this chapter, it can be quite a mind-numbing task to understand and remember them all.
For a better and effective understanding of these sections, I have categorized them based on the nature of income tax deductions claimed. Let us see the categories list and about them in details below.
i) Deduction on Investments
ii) Deduction on Medical Care
iii) Deduction on Education Loan Interest
iv) Deduction on House Rent
v) Deduction on Donations
vi) Deduction on Savings A/c Interest
i) Deduction on Investments
The Income Tax Act, 1961 of India provides ways for income tax deductions for making investments in the instruments specified in the Income Tax Act. The following are the sections under which you can make investments to claim tax deductions or tax rebate.
- Investments Under 80C
- Pension Contribution
- Equity Savings Scheme
Investments Under 80C
Section 80C under Chapter VI-A is one of the most prominent sections when it comes to the income tax deductions. It includes a list of specific instruments to invest, with which you can claim deductions for income tax.
Under section 80C, there are some investment instruments that offer EEE status, that is, Exempt-Exempt-Exempt status. It means that the amount invested, the interest earned in a Financial Year and the income generated at maturity are all eligible to be exempted from tax.
Note: Under the section 80C, investments of up to only ₹1.5 lakhs a year can be claimed for income tax deduction.
Investment on PPF
The Public Provident Fund Act, 1968 by the Government of India allows any Indian citizen to open a PPF account with just an amount of ₹100. A minimum of ₹500 must be deposited in the PPF account every year. On the other hand, only a maximum of ₹1.5 lakhs can be deposited in a year.
- PPF offers an interest rate of 8% as on January 01, 2019 for the last quarter (January-March) of the financial year 2018-19.
- The interest rate is revised every quarterly by the Ministry of Finance.
- But, the interest is compounded annually at the end of every financial year.
- It has a minimum lock-in period of 15 years.
- The money invested in a PPF account is totally tax exempt under section 80C.
- The interest earned at the end of a financial year is also exempted from tax.
- The total amount earned on maturity is completely tax-free, since it has the EEE status. You may want to read about PPF in detail here: 10 Things You May Not Know about PPF.
Tax Saving Mutual Funds
Tax saving mutual funds are often called as Equity Linked Savings Scheme (ELSS). The major difference between ELSS and regular mutual funds is that it should be equity oriented.
- ELSS has a minimum lock-in period of 3 years.
- Income tax exemption can be claimed for investing up to ₹1.5 lakhs in ELSS.
- However, as per the budget 2018-19, the dividends received are levied a dividend distribution tax of 10%.The Long Term Capital Gain (LTCG) of up to ₹1 lakh on the sale of these equity mutual funds is also tax-free under section 80C.
- 10% LTCG tax will be levied for capital gains above ₹1 lakh.
Tax Saving Fixed Deposit
- The fixed deposits that have a maturity period of 5 years and designated for tax saving are called tax saving fixed deposits.
- A tax deduction is applicable for investments of up to ₹1.5lakhs, under section 80C.
- Though the principal amount can be exempted from the income tax, the interest earned is still taxable.
- No premature withdrawal or loans are allowed on tax saving FDs.
National Savings Certificate (NSC)
- Investments made on NSC can have a maturity period of either 5 years or 10 years.
- Even though there is no maximum limit on investing in NSC, tax deduction can be claimed only for up to ₹1.5 lakhs under section 80C as seen above.
- The NSC investment has an EET status; it means that only the principal and the interest earned can be claimed for tax deduction.
- But, at the maturity of the investment, part of the amount withdrawn is taxable.
Employee Provident Fund (EPF)
The employee provident fund is an investment instrument for salaried employees. Both the employee and the employer contribute to the EPF.
- Like PPF, EPF also has the EEE status.
- That is the monthly contribution from the salary, the interest gained and the total amount, at the time of withdrawal, are eligible for tax exemption under section 80C.
- However, an employee has to maintain the EPF account for a continuous period of 5 years.
- Although, it is not necessary for the employee to work for the same employer throughout those 5 years.
Life Insurance Policy Premium
- Investing in insurance policy premium is exemptible of tax under section 80C.
- The payment of life insurance policy premium also falls under the EEE category.
- Yet, like all other investment instruments under this section of Income Tax Act, 1961 the maximum non-taxable limit is ₹1.5 lakhs.
Housing Loan Repayment
- The repayment of the principal amount of housing loan is eligible to claim tax deduction under section 80C.
- Whereas there is no tax exemption under this section for the payment of interest.
- In spite of that, tax exemption can be claimed for the repayment of interest under a different section, which we will be seeing in the upcoming section later.
Investments in ULIP
- ULIP stands for Unit Linked Investment Plan.
- It is a combination of investment and insurance,
- A part of the investment is used to provide insurance, while the remaining is invested in stocks.
- In ULIP, both the amount invested and the withdrawal amount is eligible for tax deduction.
- There is no maximum limit on the amount to be invested.
- Yet, the maximum amount that can be claimed for tax deduction is the standard ₹1.5 lakhs mentioned in section 80C.
Post Office Time Deposit: 5 Years (POTD)
- The POTD is similar to the Fixed Deposits of a bank.
- Only the 5-year deposit of the POTD provides tax exemption under the 80C section.
- The interest rate for 5-year deposit account is 7.8% as on January 01, 2019 for the last quarter (January-March) of the financial year 2018-19.
- However, the interest is compounded annually at the end of every financial year.
The Income Tax Act, 1961 also allows tax rebate under the sections 80CCC and 80CCD. Let us see how income tax can be claimed under these sections.
Creating a pension fund is one of the primary ways to secure the retirement life, besides that it also helps in tax deductions. Under the section 80CCC of the Income Tax Act, 1961 the income tax deduction can be made for contributions to pension funds.
The 80CCC offers an income tax deduction of up to a maximum of ₹1.5 lakhs in a financial year for contributing to any annuity plan, which is not over and above investments under section 80C.
The overall limit of 80 C and 80 CCC put together is Rs.1.5 lakhs only.
The tax deduction for the contribution to the annuity plan of insurance companies is allowed under Section 80CCC. Whereas, the tax deduction for a contribution to other pension fund is allowed under Section 80CCD.
Income tax deductions can be claimed for contribution to the National Pension Scheme (NPS) of the Central Government under section 80CCD. Both the salaried employees and non-employees can invest in the NPS and claim tax deductions.
The sub-section 1B of 80CCD allows an additional exemption for up to ₹50,000 contributed towards NPS.
Combined with the section 80C, the section 80CCD 1B allows a total of ₹2 lakhs that can be deducted from the income tax.
Equity Savings Scheme Under Section 80CCG
The Equity Savings Scheme also called as Rajiv Gandhi Equity Savings Scheme (RGESS) is an investing scheme exclusively introduced for the first time investors below the income ceiling of ₹12 lakhs. It allows a tax deduction on the total income for investing in equities under section 80CCG.
The income tax deduction allowed under 80CCG is only 50% of the maximum eligible amount for the tax deduction. Although, there is no limit on how much can be invested.
That is, investment of up to ₹50,000 is eligible for 50% of tax deduction.
- If you are investing an amount of ₹40,000 under section 80CCG, you can claim tax deduction for ₹20,000 which is 50% of the total amount.
- However, if you invest more than the eligible amount, say ₹80,000, the tax deduction allowed is only ₹25,000 which is 50% of the eligible ₹50,000 limit.
This tax exemption of 50% can be claimed in addition to the tax deduction of ₹1.5 lakhs under section 80C.
The Rajiv Gandhi Equity Savings Scheme comes with a lock-in period of 3 years.
ii) Deduction on Medical Care
The Income Tax Act, 1961 allows income tax rebate for medical and other health-related expenses. These include Medical Insurance, Disability claim and treatment of certain specified diseases.
Medical Insurance Under Section 80D:
The section 80D allows a tax deduction for the payment of medical insurance premium. The tax deduction is allowed for any mode of payment except for cash payment.
In Case of No Senior Citizen:
The payment of medical insurance premium for self, spouse and dependent children allows an exemption of ₹25,000. In addition, the payment of medical insurance premium for dependent or non-dependent parents allows exemption of ₹25,000.
In total, ₹50,000 can be deducted on income tax if none of the family members is over 60 years of age under section 80D.
Only Parents above 60 Years of Age:
If only either one or both of the parents are above (whether dependent or independent) and the eldest member in your family is less than 60 years of age.
The payment of medical insurance premium for self, spouse and dependent children allows an exemption of ₹25,000. The payment of medical insurance along with the amount spent towards medical expenditure allows an exemption of ₹50,000.
In total, ₹75,000 can be deducted on income tax if either of the parents is above 60 years of age under section 80D.
|Health Insurance Policy Premium & Section 80D Tax benefits for FY 2018-19 / AY 2019-20|
|Scenarios||Health Insurance premium paid for & Maximum tax deducation limits||Total Deducation under Section 80D|
|Self, Spouse & Dependent Children||Parents|
(whether dependent or not)
|No one in your family has attained 60 years of age||upto Rs 25,000||upto Rs 25,000||Rs 50,000|
|The eldest member in Your family (Yourself,spouse and dedpendent children) is less than 60 years|
Your Parents (either mother or father) are above 60 years of age)
|upto Rs 25,000||upto Rs 50,000*||Rs 75,000|
|The eldest member in Your family (Yourself,spouse and dedpendent children) is less than 60 years|
Your Parents (either mother or father) are above 60 years of age)
|upto Rs 50,000*||upto Rs 50,000*||Rs 1,00,000|
|* Nature of Amount spent can be towards Medical Expenditure as well|
Eldest Member in Family & Parents above 60 Years of Age:
If the eldest member in your family (Yourself, Spouse & dependent Children) and either of the parent is above 60 years of age.
The payment of medical insurance premium for self, spouse and dependent children along with medical expenditure allows a maximum exemption of ₹50,000. In addition, as seen before, the payment of medical insurance premium along with the amount spent towards medical expenditure of senior citizen parent allows a maximum exemption of ₹50,000.
In total, a maximum of ₹1,00,000 can be deducted on income tax in this scenario under section 80D.
Besides the payment of medical insurance premium, section 80D also allows an exemption of ₹5000 for any preventive health check-up. It should be noted that this exemption is not exclusive of the said amount for the payment of medical insurance premium deduction mentioned above.
Of Payer Himself: Under Section 80U
If an individual is disabled, the section 80U of the Income Tax Act, 1961 allows income tax rebate based on the severity of the disability.
In case, if the disability is 40% or more one or more, a deduction of ₹75,000 per annum is allowed.
If the person is severely disabled, 80% or more, a deduction of ₹1.25 lakhs is allowed.
Of Dependent: Under Section 80DD
In case if any dependent family member of the individual is disabled, the section 80DD allows income tax deduction in a similar way.
The term dependent includes spouse, children, parents and siblings of the individual.
The Income Tax Act, 1961 has notified all the disabilities that allow tax deductions which comprise of both physical and mental disabilities.
Specified Disease Treatment Under Section 80DDB:
Under section 80DDB, of the Income Tax Act, 1961 income tax rebate is allowed for the treatment of specified diseases.
The deduction allowed is only for the treatment of specified disease, for the tax-payer or any dependent family member. The dependent family member includes spouse, children, parents and siblings.
The maximum amount allowed for the deduction of income tax is ₹40,000 under section 80DDB. However, in case of treatment for the senior citizen/ super senior citizen the limit is increased to ₹1 lakh as per Budget 2018.
The income tax deduction mention under this section 80DDB is exclusive of the tax deduction ₹1.5 lakhs claimed under section 80C.
iii) Deduction On Education Loan Interest Under Section 80E
The section 80E under chapter VI-A allows income tax rebate for the payment of interest in the education loan. It should be noted that the deduction that can be claimed is only for the repayment of interest and not for the principal amount.
The deduction under section 80E covers interest for the education loan taken for higher education for self or spouse or children or students to whom the payer is a legal guardian.
This deduction on repayment of interest on education loan is exclusive of the income tax exemptions claimed under section 80C.
Even though there is no maximum limit on the amount of interest repaid, the Income Tax Act allows deductions to be claimed only for a maximum time period of 8 years.
iv) Deduction On House Rent Under Section 80GG
The section 80GG of the IT act, 1961 allows income tax rebate for the payment of house rent. Both self-employed and the salaried employees can claim income tax deduction under this section.
If you are a salaried employee, you can claim deduction under 80GG only if you have not claimed the HRA exemption under section 10(13A).
The limit on deduction allowed is chosen from three options and the least amount of the three is chosen to be the deductible amount.
The three options to calculate and chose exemption are,
- i)₹60,000 per annum
ii)Rent paid (-) 10% of total income
iii)25% of the total income
Among these three, the one which comes up to be the least is deducted under the section 80GG of the Income Tax Act, 1961.
v) Deduction On Donations
Donation Made To Charities Under Section 80G:
Donation to charities including some Government organisations, several NGOs and trusts are eligible for income tax deduction under the section 80G.
Based on the type of institution or charity the donation is made, the maximum limit for deduction varies from no maximum limit to 10% of the total income.
This deduction allowed is exclusive of the income tax exemptions claimed under section 80C.
Donations Under Section 80GGA:
The donations made for the purpose of Scientific Research and Rural Development is eligible for income tax deduction under section 80GGA.
Donations made under this section of the Income Tax Act, 1961 has no maximum limit. That is, the donation made is 100% exempted from income tax.
It should be noted that the research institute to which the donation is made should be a Government approved body.
Donations to Political Parties Under Section 80GGC:
The donations made to political partied are allowed income tax rebate under the section 80GGC.
The political party to which the donation is made should be registered with the Election Commission of India to be eligible for deductions.
The section 80CCG allows 100% tax deduction on the donations made. But, the transaction is required to be made in any form other than cash for it to be eligible for income tax deduction.
vi) Deduction on Savings A/c Interest Under Section 80TTA
The section 80TTA allows an individual to claim income tax deduction on the interest received from the savings account. If you are receiving interest from your savings account, it is regarded as income from other sources.
Though only a maximum of ₹10,000 is allowed to be deducted from income tax, of the interest earned through savings account.
These are the income tax rebate that can be claimed under different sections of Chapter VI-A of the Income Tax Act, 1961. Besides these sections, there are few other sections that allow income tax deduction, which are as follows.
vii) Deduction On Home Loan Interest Under Section 24
As we have seen above, the section 80C allows income tax deduction on the repayment of the principal amount for a housing loan. Section 24 of the Income Tax Act, 1961 allows income tax deduction of up to ₹2 lakhs on the repayment of interest on the housing loan.
viii) Deduction On LTCG
The Long Term Capital Gain (LTCG) is the profit that comes from the sale of a real estate property. A real estate property is considered a long term capital asset only after owning it for a continuous period of 2 years or more.
The profit that earned through LTCG is eligible for income tax rebate under the conditions mentioned in the following sections.
The Long Term Capital Gain arising from the sale of residential property is allowed income tax deduction, if the profit is again invested.
The profit is eligible for tax deduction if another residential property is purchased within 2 years after the sale of the original property.
Otherwise, the tax deduction is allowed only if there is a construction of a residential house within 3 years of the sale of the original property.
The profit gained can be deducted of the income tax if the same is invested again in any specified long term capital gain bonds. These long term capital gain bonds must be specified by the Government and should be invested for a minimum period of 5 years.
I recommend you to read this article about how to save the tax by investing in long term capital gain bonds.
The section 54F is similar to section 54 seen above. Unlike section 54, section 54F allows full income tax rebate on the long term capital gain from the sale of ‘any long term asset’.
Under section 54F the conditions to be satisfied are the same as the conditions mentioned in section 54.
EXCLUSIVE EXEMPTIONS FOR SALARIED EMPLOYEES
If you are a salaried employee, in addition to the income tax deductions we have seen above there are several exemptions you are allowed to claim during your payment of income tax. But before doing that, you need to notify your employer about claiming these exemptions.
Since these exemptions are one of the most effective ways to save taxes, it is advised to claim these exemptions, whichever is applicable.
The tax on the exemptions we are going to see below are levied and collected at the source of your income, i.e. from your employer. The employer in turn deducts an equivalent amount from your salary every month. Hence, it is called TDS (Tax Deducted at Source).
i) HRA Exemption Under Section 10(13A)
The House Rent Allowance (HRA) received is exempt under section 10(13A). One must note that once the HRA exemption is claimed, you cannot claim the income tax deduction on house rent under section 80GG.
The tax exemption limit is calculated with conditions mentioned under section 10(13A) for HRA exemption.
ii) Perquisites Exemption
Perquisites, commonly called as perks, are the facilities provided by the employers to the employees, such as Car, Rent Free Accommodation, Laptop, etc.
The income tax levied on such perquisites can be requested for exemption from the employer. The employer will do a TDS for the same and then the tax on the perquisites can be exempted.
iii) LTA Exemption Under Secion 10(5)
The income tax exemption of Leave Travel Allowance (LTA) is allowed under section 10(5) for travel in India. A part of this LTA amount is exempted from tax, only when the employee furnishes the bills while claiming the exemptions.
Also, a tax-payer can claim LTA exemption for any two journeys in a block of 4 years specified by the Income Tax Dept.
iv) Allowances Exemption Under Section 10(14)
Apart from the House Rent Allowance (HRA) and the Leave Travel Allowance (LTA), there are several special allowances that can be exempted from income tax.
These allowances are listed under sections 10(14)(i) and 10(14)(ii); which includes Travel allowance, Academic allowance, Conveyance allowance, etc.
Under sections 10(14)(i) and 10(14)(ii), the maximum amount exempted from the income tax will be the least of either the allowance received or the amount spent for that purpose.
v) Leave Encashment Exemption Under Sectoin 10(10AA)
The leave encashment can be claimed at the time of retirement from the service. Section 10(10AA) of the Income Tax Act, 1961 allows exemption of the amount received based on the nature of the employment.
That is, for the Govt. employees the amount received under leave encashment is fully exempt from the income tax. For other employees, tax exemption is allowed for the minimum amount calculated from the conditions mentioned under section 10(10AA).
vi) Gratuity Exemption Under Section 4(3)
For the Govt. employees, the gratuity paid is totally exempt of income tax regardless of the amount paid.
For employees covered under the Payment of Gratuity Act, 1972 the maximum income tax exemption that can be claimed for gratuity is ₹20 lakhs.
While for other employees, the maximum amount of gratuity exemption under section 4(3) is ₹10 lakhs.
vii) VRS Exemption Under Section 10(10C)
If an employee is retiring voluntarily through the VRS (i.e. Voluntary Retirement Scheme) before the actual retirement age; the employee is entitled to receive an amount of money through the Golden Handshake Scheme.
An employee is eligible to apply for VRS only if a minimum of 10 years of service is completed or if the employee is above 40 years of age.
The section 10(10C) of the Income Tax Act, 1961 allows tax exemption of up to Rs.5 lakhs received through the Golden Handshake Scheme.
viii) Pension Income Exemption Under Section 10(10A)
Finally, on the retirement of an employee, an employer usually pays the employee a pension.
A pension can be either received as a whole at the time of retirement or at periodic intervals in instalments. This is called commuted and Un-commuted pension respectively.
In the case of commuted pension: For Govt. employees, the pension amount received is fully exempt of income tax under section 10(10A).
However, for a Non-Govt. employee if the employee had not received gratuity, 50% of the amount of pension is exempt from income tax. Otherwise, one-third of the pension is exempt from income tax.
Whether you are a salaried employee or self-employed, if you are one of the income-tax paying citizens of India, there is a chance you are paying more money than necessary as income tax.
The sections discussed of the Income Tax Act, 1961 also allows you to minimize the amount you are paying as income tax every financial year. You can make use of these tax-payer favouring sections and facilities to save more on tax.