Legal Ways Of Tax Deductions To Keep You Out Of Jail

1 Aug 2022  Read 354 Views

We’ve all heard that with great power comes great responsibilities. But when it comes to taxes, with great responsibility comes great power! This power comes in the form of reduced tax liability and is known as a tax deduction. Interesting right? Let's walk you through this “power training course”.

Everybody likes a good deal or a discount. Just like a discount reduces the price of a product helping you save money, a tax deduction reduces the individual's taxable income. This enables individuals to reduce their tax burden. After the gross income is calculated by adding various incomes from all the five heads, net income is computed by subtracting certain sums as flat rates (standard deduction) or according to the different expenses (itemised deductions).  

Types of Tax Deductions

Tax deductions are, in simple terms, expenses or investments available as concessions by the income tax department. These deductions aim to develop a healthy saving habit and encourage investments in the public. The Income Tax Act 1961 offers many provisions, so let's find out which one is the most suitable for you!

Deductions under Section 80C

The maximum exemption limit in this section is ₹1.5 lakh. This is one of the most important sections under the income tax law as individuals can claim deductions through different avenues.

a. Public Provident Fund (PPF)-  PPF is a government-mandated long-term investment with a mandatory 15-year lock-in period. It is an excellent opportunity for risk-averse investors who want high returns with a low threat to their capital. 

b. Life Insurance Premiums-  When you pay a premium amount of your life insurance for your spouse, children or yourself, such amount paid and the proceeds received on maturity are tax deductible, subject to the terms and conditions of your policy. 

c. National Savings Certificate (NSC)-  NSC is one of India's most secure modes of investment, and the amount invested is eligible for a tax deduction. However, the interest is taxable under this cumulative scheme. 

d. Retirement Savings Plan-  Under National Pension Scheme (NPS), an individual regularly invests a certain amount in the pension account during their employment. After retirement, a part of this corpus can be withdrawn, and the rest is received as a monthly pension. Deductions are available for the employee’s or employer’s contribution for such. Deductions are also available for investments in retirement plans offered by LIC or other insurance providers.

e. Deposits-  Fixed deposits at banks and Time deposits at the Post office (POTD) are both tax deductible for a tenure of 5 years. However, interest accrued on the same is taxable.

f. Equity Linked Saving Scheme (ELSS) mutual funds-  These equity-oriented investments typically have a lock-in period of 3 years and are eligible for tax deductions.

g. Home Loan EMI-  These are monthly instalments to repay your home loan's principal amount. 

h. Tuition Fees-  It is eligible for tax deduction provided this fee is paid towards the full-time education in an Indian school, college or university of maximum of 2 children. Payments made as donations or development fees are not to be included. 

Other Deductions

80C is not the only section of the income tax law under which taxpayers can claim deductions. Following is a list of additional deductions to further reduce your tax liability.

a. Section 80CCC- The maximum deduction available under this section is ₹1.5 lakh, and it includes the contributions made to the annuity plan of a life insurance provider for obtaining a pension from the fund.

b. Section 80CCD- This includes the contribution to the Atal Pension Yojana and allows a deduction of up to 10% of the total salary of salaried employees and 20% of gross income of the non-salaried. 

c. Section 80D- This includes health insurance premium paid for spouse, children or self by individual or HUF. The maximum deduction allowed is ₹25000 for people below the age of 60 years and ₹50000 for people above 60 years. If both taxpayer and parents are above 60 years, then the maximum deduction amount is ₹1 lakh. This section also includes an amount of up to ₹5000 paid as a preventive medical checkup of the individual or his family members.

d. Section 80DD- This is eligible for treatment of dependents with a 40% disability. The max amount that can be claimed is ₹75000, or ₹1.25 lakh in case of severe disability. 

e. Section 80DDB- This includes medical expenditure on self or dependent relatives towards the treatment of specified critical ailments. 

f. Section 80E- Any amount paid as interest on education loan taken for self, spouse, children or for whom you are legal guardian is eligible for deduction. However, principal repayment of loan cannot be included. 

g. Section 80EE/ Section 80EEA- This is available to first-time homeowners paying interest on a home loan. The individual must not own any other residential property under his name. 

h. Section 80G- This includes all contributions to charitable institutions and relief funds. The contribution should be made through cheque, cash or draft before 31st December each year.

i. Section 80GG- This section is eligible for those employees or their spouses who neither have the ownership of a residential house nor receive a House Rent Allowance. The deduction is available on rent paid.

j. Section 80TTA- It allows a deduction of ₹10,000 from the total gross income of individuals or HUF. It is allowed for the interest earned on the deposits made in a bank, cooperative society or post office savings account. 

k. Section 80U- This section allows deductions to physically or mentally challenged individuals. 

Tax Deduction vs Tax Exemption

So far, we have understood the meaning and types of tax deductions, but how to not confuse these with exemptions? In contrast to tax deductions which can be claimed on gross total income, tax exemptions are provided on particular sources of income and not total income. Although both these terms represent tax benefits, tax exemption may additionally include complete relief from taxes. Simply put, you do not have to pay any tax coming from that income. For example, agricultural income is not taxable. 

When an employee gains House Rent Allowance, this income may be excluded from the total income altogether and, therefore, an exemption. Whereas the same employee may want to decrease his gross salary by claiming a standard deduction. 

The Bottom Line

There are different benefits available to taxpayers. You too, can become proficient in figuring out which of these benefits is the most beneficial for you by simply being diligent and aware of your finances. 

Just like every good deed has a rippling effect, your one expense or investment can lead to many other positive transactions. So make wise investments, claim those deductions and save your coin!

About the Author: Yashi Ojha | 5 Post(s)

Yashi is currently pursuing Chartered Global Management Accounting. Her creative, artsy heart but number-crunching mind has led her to financial content writing. She would prefer to be the observer & the listener in the room so she can soak in all the knowledge from the rest, but wouldn’t compromise on being the funniest.

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