Know about Tax Deductions : Definiton & Types

Nothing is certain except death and taxes. As long as you continue earning, either through salary, business, or investments, you’ll have to pay taxes to the government. In India, the Income Tax Act came into existence in 1961. It is a comprehensive statute focusing on various rules and regulations that govern taxes in the country.According to the IT Act, individuals and companies with income beyond a certain threshold must pay income tax every year. The income tax is one of the most significant sources of revenue for the government. The tax money is used by the government for public services, defence spending, infrastructure development, offering subsidies, and more.But the IT Act also has several provisions to help the taxpayers reduce their tax liabilities . For instance, taxpayers can claim tax deductions to reduce their taxable income for the financial year. For someone who has recently started earning, it is essential to understand the basics of these deductions to take maximum advantage of available provisions.Here’s everything you should know about tax deductions, their types, and more-

As mentioned above, tax deductions help taxpayers reduce their taxable income and ultimately lower their tax liabilities. As per the provisions of the IT Act, there are certain investments and expenditures that are eligible for tax deductions under various sections of the statute. These deductions help offset the Gross Annual Income while filing ITR .The government has introduced these deductions to inculcate a habit of disciplined saving and investing to help the taxpayers secure their financial future while also enabling them to reduce their tax liabilities.

Both tax deductions and tax exemptions help taxpayers reduce their tax liabilities. However, there are some significant differences between the two. Tax deductions are available for certain expenses and investments to help offset the tax liability. On the other hand, tax exemptions are specific incomes that are exempt from taxes and not included while calculating the tax liability of a taxpayer.In most cases, tax deductions do not mean complete relief from taxes. They generally help reduce the taxable income to a certain extent. For instance, you can claim deductions to a certain extent on the premiums paid towards a health insurance policy under section 80D of the IT Act .But tax exemptions can include complete relief from taxes, lower tax rates, and taxes on only a certain portion of income. For instance, donations to tax-exempted institutions and charities are eligible for tax exemptions under Section 80G.

The income tax department has introduced TDS or Tax Collected at Source to streamline tax collection in the country. The indirect tax collection mechanism ensures that tax is collected from the taxpayers directly through their source of income. The income received by the taxpayers is already adjusted for the applicable income tax.Authorized institutions and personnel are allowed to collect these taxes and deposit the same with the tax department. In return, the taxpayers receive a TDS certificate that confirms that they have paid applicable taxes. TDS is applicable on salaries, fixed deposit interests, commissions, professional fees, brokerage, royalties, contract payments, etc.

The obvious advantage of claiming tax deductions is their impact on your taxable income. By claiming the deductions you are eligible for, you can lower your taxable income and reduce your tax liability. The money saved on taxes can boost your savings and provide you with additional funds that can be invested for financial prosperity.Moreover, as the deductions are available for a comprehensive range of investments and expenses, like health insurance, life insurance, home loan, etc., most people can claim at least a few deductions to maximize their tax savings.

Here are some of the most popular tax deductions you can take advantage of-

1. Tax Deductions Under Section 80C

Under Section 80C of the IT Act, individual taxpayers and HUFs (Hindu Undivided Families) can claim tax deductions of up to Rs. 1.5 lakhs in a financial year on certain payments. The deduction limit also includes the deductions available under subsections of 80C, like 80CC and 80CCD. These are the payments eligible under Section 80C-

• Life insurance premiums (self, spouse, parents)
• Provident fund /superannuation payments
• Tuition fees for education up to two children
• Fixed deposit investments for a tenure of 5 years and more
• Payment towards purchase or construction of a residential property
• ELSS (Equity-Linked Savings Scheme) mutual fund investments
• SCSS (Senior Citizen Savings Scheme) investments
• Stamp duty and registration charges paid for property transfer
• Principal repayment of home loan

-Subsections Under 80C Section 80C also has a comprehensive list of subsections that are eligible for tax deductions. Here are some of the most common ones-

• Section 80CC- Individual investors investing in pension funds of any insurer
• Section 80CCD- Investments in pension schemes backed by the government
• Section 80CCF- Individual and HUF investments in long-term infrastructure bonds backed by the government are eligible for a maximum deduction of up to Rs. 20,000

2. Tax Deductions Under Section 80D

Individuals and HUFs can claim a tax deduction on the premiums paid towards health insurance policy under Section 80D. The deduction is available for policies purchased for self, spouse, dependent children, and parents. A deduction of up to Rs. 25,000 can be claimed on premiums paid for policies purchased for self, spouse, and dependent children.Additional deduction of up to Rs 50,000 can be claimed on premiums paid for a policy purchased for senior parents above 60 years. The deduction under Section 80D is also available for critical illness and top-up health insurance plans. -Subsections Under 80D Section 80D is divided into two sections- 80DD and 80DDB. Take a look at the deductions available under these subsections-

• Section 80DD- Payments made towards the treatment of any dependant (spouse, children, parent, sibling) with a disability or health insurance premium of the disabled dependent are eligible for tax deductions of up to Rs. 75,000 in case of normal disability and up to Rs. 1.25 lakhs in case of severe disability
• Section 80DDB- Expenses incurred from treatment of specific medical conditions for self or dependent up to Rs. 40,000, or up to Rs. 1 lakh for super-senior citizens above 80 years.

3. Tax Deductions Under Section 80E'

Individuals can claim a tax deduction on the interest paid towards repaying an education loan taken for self or ward/child. There is no upper limit on the eligible deduction under Section 80E. -Subsection Under 80E Section 80E also has a subsection 80EE to help taxpayers reduce their tax liability further. Here’s a quick overview of Section 80EE-

• Section 80EE- Individual taxpayers repaying a home loan can claim a tax deduction of up to Rs. 50,000 in a financial year on the interest component of the loan

4. Tax Deductions Under Section 80G

Section 80G encourages donations to charitable institutions and offers handsome deductions on the same. There are a few factors that determine the percentage of donation that is eligible for a tax deduction. Take a look-

• 100% deductions without any limit on donations made to National Illness Assistance Fund, Prime Minister’s Relief Fund, National Defence Fund, etc.
• 100% deductions with qualifying limits on donations made to local associations, authorities, or institutes involved in developing sports or promoting family planning
• 50% deductions without any limit on contributions made towards Rajiv Gandhi Foundation, PM’s Drought Relief Fund, etc.
• 50% deductions with a qualifying limit on donations to charitable institutes or local authorities not involved in family planning or religious organizations

-Subsections Under 80G Section 80G has four subsections for additional tax savings. Here’s what they mean-

• Section 80GG- House rent paid by individuals who do not receive house rent allowance (HRA) can claim a deduction of actual rent paid minus 10% of the adjusted total income or 25% of the total adjusted income or Rs. 5,000 per month, whichever is lower
• Section 80GGA- Taxpayers who do not have any income from business or profession can claim tax deductions on donations made towards rural development and scientific research
• Section 80GGB- Companies can claim deductions on the amount donated to electoral trust or political parties
• Section 80GGC- Individual contributions to the electoral trust or political parties are eligible for deductions under 80GGC

5. Tax Deductions Under Section 24

Section 24 of the IT Act allows home loan borrowers to claim a deduction of up to Rs. 2 lakhs on the interest component of their home loan repayment every financial year until the loan is fully repaid.The limit of Rs. 2 lakhs is applicable if the owner or their family resides in the residential property for which the loan is taken. However, if the house is let out on rent, the entire interest paid in a financial year can be waived off.

6. Tax Deductions Under Section 80TTA

Individual taxpayers and HUFs can claim tax deductions up to Rs. 10,000 in a financial year on the interest earned from a savings bank account.

7. Tax Deductions Under Section 80U

Resident individual taxpayers with a “Person With Disability” certificate from recognized medical authorities can claim a deduction of up to Rs. 75,000 in a financial year. Resident individuals with severe disabilities can claim a deduction of up to Rs. 1.25 lakhs in a financial year.As this post mostly focuses on individual taxpayers, the deductions listed above are mainly applicable to individuals. Companies and other entities are also eligible for several deductions under various sections such as Section 80IA, Section 80IB, Section 80ID, Section 80IE, Section 80JJA, Section JJAA, Section 80LA, Section 80P, and more.