Deduction and Exemptions from Income Tax

Tax planning is essential for effectively managing your finances. Income tax laws offer several deductions and exemptions that not only minimise your tax liability but also promote sound financial decisions, such as securing your wealth, ensuring your health, and contributing to societal welfare.

In this blog, we will explore the most useful deductions and exemptions and how you can leverage them for efficient tax planning.

1. Section 80C:Deductions on Investments

Under this section, you can claim deductions up to ₹1.5 lakh on eligible investments and expenses. Here are some investment options for tax-saving under Section 80C:

• Life Insurance Premium: If you have paid the premium for a term life insurance policy to cover your own life, your spouse, or your child.
• Employee Provident Fund: An employee can claim a deduction of 12% of their salary and dearness allowance contributed to the EPF. 
• Public Provident Fund: Whether you are a salaried or non-salaried individual, investments made in PPF can be claimed as a deduction. This government-backed scheme offers tax benefits on both contributions and returns. Lock in period for PPF is 15 years.
• National Savings Certificates (NSC) and other government-notified savings schemes.
• Equity-Linked Saving Scheme (ELSS): Investments made in certain mutual funds that offer the combined benefit of equity market returns and tax deductions.  Lock in period for ELSS is 3 years.
• Unit-linked Insurance Plans (ULIPs): Investment made in plans that offer the combined benefits of both life insurance coverage and investment in equity or debt instruments. 

Note: ULIPS are tax-free on maturity if annual premium amount does not exceed ₹2.5 lakh.

• Housing Loan Repayments: Repayments of principal amounts on housing loans.
• Stamp Duty and Registration: Payment made to the registrar while purchasing a house.
• Tuition Fees: Fees paid to recognized institutions, including schools and colleges, for the full-time education of maximum 2 children.
• Five-Year Term Deposits: Only the principal portion out of investments made in a 5-year FD with scheduled banks qualifies for deduction. Interest earned on these deposits is taxable.  Lock in period for FD is 5 years.

2. House Rent Allowance (HRA)

A salaried individual living in rented accommodation can benefit from House Rent Allowance (HRA), which may be fully or partially exempt from income tax. However, HRA will be taxable if you are not residing in a rented accommodation but continue receiving the allowance.

If you were unable to submit rent receipts to your employer as proof to claim HRA, you can still claim the exemption while filing your income tax return. It’s important to keep rent receipts and evidence of any rent payments made.

You can claim the least of the following amounts as an HRA exemption:

1. Total HRA received from your employer
2. Rent paid minus 10% of (Basic salary + DA)
3. 40% of (Basic salary + DA) for non-metros, or 50% of (Basic salary + DA) for metros

HRA amount can be easily computed using the calculator available on 1 Finance website [https://1finance.co.in/calculator/hra-exemption].

3. Section 80CCD: National Pension Scheme (NPS)

3.1 Section 80CCD(1)

• Contribution Limits: Individuals can claim deductions up to 10% of salary (for employees) or 20% of gross income (for self-employed).
• Employer Contributions: Contributions by the Central or State Government as an employer are deductible up to 14% of salary, while contributions from other employers are currently deductible up to 10% of salary. However, from 1st April 2025, this limit will be extended to 14% for all employers.

These contributions provide significant tax benefits for both employees and employers.

3.2 Section 80CCD(1B)

It provides an extra deduction of ₹50,000 for self-contributions to NPS, which is over and above the ₹1.5 lakh limit of Section 80C.

Note: You can claim maximum deduction of ₹1.5 lakh in total across section 80C, 80CCC, and 80CCD in a financial year. 

4. Section 80D: Medical Insurance Premiums

Under this section, you can claim deduction on premiums paid for health insurance policies from recognized insurers, subject to specific limits. This includes premium paid for your health insurance, as well as that of your spouse, dependent children, and parents. Payment methods for insurance premiums must be digital (credit card, UPI, net banking), cash payments are not allowed as deduction except amount paid in cash for preventive health check-up under section 80D.

5. Leave Travel Allowance (LTA)

Income tax laws also provide an exemption for LTA to salaried employees, which is restricted to travel expenses incurred during their leave. However, the exemption does not cover the cost of expenses such as shopping, food, entertainment, and leisure activities.

You can claim LTA twice within a block of four years. If an individual does not use this exemption within the designated block, they can carry it forward to the next block.

Note: LTA can only be claimed for domestic travel expenses.

6. Section 80E: Education Loan Interest

• Eligible deduction: You can claim deduction of the interest amount paid towards loans taken for the higher education of self, spouse or children from a financial institution or a charitable institution approved by the government. 
• Duration: The deduction can be claimed for a maximum of 8 years, starting from the year in which the interest repayment begins.
• Limit on claims: There is no limit to how much interest you can claim. Whether you are paying ₹10k or ₹ 10 lakh as an interest, you can claim it all!
• Exclusion: The deduction cannot be claimed on the Principal amount.  

7. Section 80G: Donations

• Eligible deduction:  Section 80G of the Income Tax Act allows deductions for donations made to certain prescribed funds, charitable institutions, and relief funds set up by the Government of India.
• Limit on claims: Depending on the organisation, you can claim either 50% or 100% of the amount donated. 
• Payment Mode: Donations exceeding ₹2,000 should be made in non-cash mode to claim the deduction.

8. Section 80TTA and 80TTB: Interest on Savings

• Section 80TTA: Individuals can claim deduction of up to ₹10,000 on the interest earned from saving bank accounts under section 80TTA. This deduction is not available for interest earned on fixed deposits or recurring deposits.
• Section 80TTB: Senior Citizens can claim a deduction of up to ₹50,000 on the interest earned from savings bank accounts, fixed deposits, and recurring deposits under section 80TTB.

Conclusion

Utilising deductions and allowances under income tax rules can significantly enhance your tax-saving journey. From investments in retirement funds to securing health coverage for your family, these deductions are powerful tools to reduce your taxable income. It is crucial to maintain proper documentation for all investment proofs and understand the specific conditions and limits associated with each section to ensure accurate income tax return filing.

A qualified financial advisor can help you maximise the benefits available under the Income Tax Act for effective tax planning. To optimise your taxes, download the 1 Finance app and book a consultation with a qualified financial advisor for a seamless, hassle-free tax planning experience.