The income tax filing seasons do not usually come alone.
It brings a lot of stress with it.
Even though only less than 5% of India is paying the income tax, the ways you can lose your hard-earned money to income tax is too many. Fortunately, most of them are legally avoidable with the help of the Income Tax Act, 1961.
In this article, we will find all the legitimate ways to claim income tax rebates and deductions.
Table of Contents:
- The Ultimate Guide
- Chapter VI-A
- Deduction on Investments
- Investments u/s 80C:
- Pension Contribution
- Deduction on Medical Care
- Deduction on Education Loan Interest
- Deduction on House Rent
- Deduction on Donations
- Deduction on Savings A/c Interest
The Ultimate Guide
The Govt. of India follows the Income Tax Act, 1961, for the collection and administration of income tax in India.
Enacted in 1961, it is the complete guide for the Income Tax Dept. of India. It will not be an exaggeration to call it the holy book of income tax.
It has 298 sections under 23 chapters covering the income tax levying, collection, administration and income tax rebate.
You do not need to know about all the 298 sections, but some can be real money savers.
For the salaried employees, there is a bonus section for an additional income tax rebate. If you are a salaried employee, you can benefit from both 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 that provides 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 detail 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 u/s80C:
- Pension Contribution
Section 80C under Chapter VI-A is one of the most prominent sections when it comes to 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 in PPF u/s 80C:
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, a maximum of only ₹1.5 lakhs can be deposited in a year.
The current interest rate is set at 7.10% for the third quarter (October-December) of the financial year 2022-23.The interest rate is revised every quarterly by the Ministry of Finance.
But, the interest is compounded only annually at the end of every financial year. Also, it has a minimum lock-in period of 15 years.
Investments to PPF account is tax-exempt under section 80C.
The interest earned at the end of a financial year is also exempted from tax.
The maturity amount from a PPF investment is completely tax-free since it has the EEE status. You may wa n tto read about PPF in detail here: 10 Things You may not Know about PPF.
ELSS: Tax Saving Mutual Funds u/s 80C:
Under section 80C, you can claim income tax exemption up to ₹1.5 lakhs by investing in an ELSS mutual fund scheme.
Tax saving mutual funds are called the Equity Linked Savings Scheme (ELSS). The major difference between the ELSS and other equity mutual funds is that it has specific restrictions prescribed by the Govt. of India givingthe tax benefit u/s 80C.
For example, investments in ELSS Mutual Funds have a minimum lock-in period of 3 years.
However, the returns from the ELSS mutual fund schemes are taxable like any other equity mutual fund scheme.
The ELSS Mutual Fund returns incur LTCG tax @ 10%—with an exemption for withdrawals up to ₹1 lakh in a financial year. Since ELSS mutual fund schemes have a mandatory 3-year lock-in period they do not attract any STCG tax.
For the dividend option, until 31 March 2020, all the dividend payments were tax-free in the hands of investors. It was the case until the Finance Act 2020came into effect.
Starting from 1 April 2020, the dividend income is added to the investor’s income and taxed as per their tax slab. The act also imposed TDS on dividend distribution @10% for dividend payments over and above ₹5000.
Tax Saving Fixed Deposit
The fixed deposits with a minimum lock-in period of 5 years are the tax-saving fixed deposits.
In these FDs, the tax deduction is applicable only for investments up to ₹1.5lakhs, under section 80C.
Though the principal amount can be exempted from the income tax, the interest earned is still taxable. The interest income in a financial year is added to the investor’s annual income and taxed as per their income tax slab.
Since these tax-saving FDs have a 5 year lock-in period, no premature withdrawals or loans are allowed.
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, the 80C tax deduction can be claimed on investments for only up to ₹1.5 lakhs.
The current interest rate on NSC for the third quarter of the FY 2022-23 is 6.8% p.a.
NSC investments have an EET status. It means that you can claim tax deduction only for the principal and the interest earned.
But, at the maturity of the investment, part of the maturity amount will be 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 earned 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 to claim exemption on withdrawals.
Although, the employee doesn’t need to be with the same employer throughout those 5 years.
Life Insurance Policy Premium
Insurance policy premium payments up to ₹1.5 lakhs p.a. are exemptfrom tax u/s 80C of Income Tax Act, 1961.
The life insurance policies also have the EEE status. However, tax exemption on withdrawals applies only to the endowment policies.
Taxation of Unit Linked Insurance Plans is explained in the section below.
Yet, like all other investment instruments under section 80C, the maximum non-taxable limit is ₹1.5 lakhs.
In the case of the Death Benefits, the benefit amount is completely exempt in the hands of nominee u/s 10(10D). It applies to all kinds of life insurance policies.
Investments in ULIP
ULIP stands for Unit Linked Insurance Plan.
It is a combination of investment and life insurance. A part of the investment is used to provide life cover, while the remaining is invested in stocks.
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 under section 80C.
ULIP policy withdrawals, on the other hand, are exempt from income tax only if the annual premium was less than ₹2.5 lakhs p.a.
If the annual premium is over and above ₹2.5 Lakhs, the tax treatment on withdrawals will be the same as an equity mutual fund. That is, withdrawals over and above ₹1 lakh in a financial year will incur LTCG tax @ 10%.
Housing Loan Repayment
The repayment of the principal amount of the 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.
Despite that, tax exemption can be claimed for the repayment of interest under a different section, which we will be seeing later in a different section.
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 offers tax exemption under the 80C section for investments up to ₹1.5 Lakhs.
The interest rate for the 5-year deposit account is 6.7% for the third quarter (October-December) of the financial year 2022-23.
However, the interest is compounded annually at the end of every financial year.
The Income Tax Act, 1961 also allows tax rebates under 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 your retirement life. Besides, it also helps in tax deductions.
Under section 80CCC of the Income Tax Act, 1961, contributions to pension funds allow income tax deduction.
The 80CCC offers an income tax deduction of up to ₹1.5 lakhs in a financial year for contributing to any annuity plan.It is applicable only if you have not exhausted your ₹1.5 lakh exemption limit u/s 80C.
That is, the 80CCC is not exclusive of the ₹1.5 lakh limit of section 80C.
Only the contribution to insurance annuity plan is allowed under Section 80CCC—whereas contribution to other pension funds is covered under Section 80CCD.
Contribution to the National Pension Scheme (NPS) of the Central Government is exempt under section 80CCD.
Both the salaried employees and non-employees can invest in the NPS and claim tax deductions.
Clause1B of 80CCD allows an additional exemption for up to ₹50,000 contributed towards NPS. This is exclusive of the ₹1.5 Lakhs exempted u/s 80C.
Combined with section 80C, section 80CCD (1B) allows a total of ₹2 lakhs income tax deductions.
ii) Deduction on Medical Care u/s 80D:
Section 80D allows a tax deduction for the payment of medical insurance premiums. 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 allow an exemption of ₹25,000. In addition, the payment of medical insurance premiums 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 allow 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 allow a maximum exemption of ₹50,000. In addition, as seen before, the payment of medical insurance premium along with the amount spent towards the medical expenditure of senior citizen parents 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 the 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 the medical insurance premium deduction mentioned above.
Of Payer Himself: Under Section 80U
If an individual is disabled, 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, 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 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 the 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 section 80DDB is exclusive of the tax deduction ₹1.5 lakhs claimed under section 80C.
iii) Deduction On Education Loan Interest Under Section 80E
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 the 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 loans 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 period of 8 years.
iv) Deduction On House Rent Under Section 80GG
Section 80GG of the IT act, 1961 allows income tax rebates for the payment of house rent. Both self-employed and salaried employees can claim income tax deductions under this section.
If you are a salaried employee, you can claim a 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,
- ₹60,000 per annum
- Rent paid (-) 10% of total income
- 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:
Donations to charities including some Government organizations like PM CARES, several NGOs, and trusts are eligible for income tax deduction under 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 are eligible for income tax deduction under section 80GGA.
Donations made under this section of the Income Tax Act, 1961 have 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 parties are allowed income tax rebates under 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.
Section 80CCG allows a 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 an income tax deduction.
vi) Deduction on Savings A/c Interest Under Section 80TTA
Section 80TTA allows an individual to claim an 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 a 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 a few other sections that allow income tax deduction, which is as follows.
vii) Deduction On Home Loan Interest Under Section 24
As we have seen above, section 80C allows an income tax deduction on the repayment of the principal amount for a housing loan. Section 24 of the Income Tax Act, 1961 allows an 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.
Section 54F is similar to section 54 seen above.
But unlike section 54, section 54F allows full income tax rebate on the long term capital gain from the sale of any property other than a residential house property.
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.
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 a taxpayer, there is a chance you are paying more 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.
While income tax deductions and rebates are good, careful tax planning can help you invest and grow your wealth.
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