As a general rule, everyone with an income has to pay income tax, unless they have certain deductions or exemptions. In this case, your taxable income is reduced, which in turn leads to lower tax liability. This tax is usually calculated as a percentage of a person’s total income and the rate of tax varies based on the amount of income earned. It helps the government to fund public services, programs and schemes, such as schools, hospitals and infrastructure projects, for the benefit of all society.
What Are Income Tax Deductions?
While calculating your income tax, the total income that you receive could be eligible for certain tax deductions. Such deductions are available to you to help offset some of the expenses incurred during the year. By subtracting these deductions from your taxable income, you can reduce your entire tax burden and pay less in taxes.
What Deductions Can You Claim On Income Tax?
Some of the major tax deductions are listed below:
1/ Sec 80C: Certain Investments up to ₹1,50,000
2/ Sec 80CCC: Insurance Premium
3/ Sec 80CCD: Pension Contribution
4/ Sec 80TTA: Interest on Savings Account
5/ Sec 80GG: House Rent Paid
6/ Sec 80E: Interest on Education Loan
7/ Sec 80EE: Interest on Home Loan
8/Sec 80D: Medical Insurance
9/ Sec 80DD: Disabled Dependent
10/ Sec 80DDB: Medical Expenditure
11/ Sec 80U: Physical Disability
12/ Sec 80G: Donations
13/ Sec 80GGC: Contribution to Political Parties
14/ Sec 80TTB: Interest Income
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How Do I Qualify For Tax Deductions?
To qualify for tax deductions, you as a salaried employee can avail of many deductions under the Income Tax Act. Tax deductions include those under section 80C, such as contributions to provident funds, life insurance premiums, and investments in tax-saving mutual funds. Section 80D allows deductions on the grounds of health insurance premiums. Section 80E is for deductions for interest on education loans.
What Are The Investments Under 80C?
Investments under section 80C of the Income Tax Act offer individuals and Hindu Undivided Families (HUFs) the opportunity to reduce their taxable income and save on taxes.
These investments include
1/ Public Provident Fund (PPF)
2/ Equity Linked Savings Scheme (ELSS)
3/ National Savings Certificate (NSC)
4/ Senior Citizen Savings Scheme (SCSS)
5/ Unit Linked Insurance Plan (ULIP)
6/ National Pension Scheme (NPS)
7/ Life insurance premiums, tuition fees, principal repayment of housing loans and more. The maximum deduction allowed under section 80C is ₹1,50,000 per year.
What Is The Threshold Limit For Deductions Under Section 80C, 80CCC And 80CCD(1)?
The threshold limit for deductions under sections 80C, 80CCC and 80CCD(1) is ₹2,00,000.
For 80C, you are allowed a maximum deduction of ₹1,50,000 per year.
For section 80CC, you are allowed a deduction for contributions to certain pension funds, with respect to the limit under section 80C.
And for 80CCD(1), an additional limit of ₹50,000 is added to the deduction for contributions to NPS. Hence, in all three sections combined, the threshold limit is subject to the ₹2,00,000 limit.
Can I Claim 80D For My In-Laws?
Section 80D of the Income Tax Act allows tax deductions on medical insurance premiums and preventive health check-ups. You can claim a deduction of up to ₹25,000 per year for non-senior citizens, and up to ₹50,000 for senior citizens aged 60 and above.
This deduction can be claimed for premiums paid for self, spouse, dependent children and own parents. So, it is not available for health premium payment for in-laws.
What Is 80GG Deduction?
Section 80GG allows taxpayers who do not receive House Rent Allowance (HRA) from their employers to claim a deduction for the rent paid towards their accommodation. To be eligible for this deduction, you must not own any residential property and the annual rent paid must exceed ₹60,000. The maximum deduction allowed under this section is ₹60,000 per financial year.
Can We Claim 80GG And Interest On A Home Loan?
Yes, you can claim both the deduction under section 80GG and the interest deduction on a home loan under section 80C simultaneously. However, if you are claiming HRA, you cannot opt for the deduction under section 80GG.
Who Can Claim Deduction Under 80TTA And 80TTB?
Section 80TTA applies to all individuals and HUFs. It allows a deduction of up to ₹10,000 on interest income from savings accounts, fixed deposits and recurring deposits.
Section 80TTB, on the other hand, is exclusively for senior citizens aged 60 years and above. This section allows a deduction of up to ₹50,000 on interest income from all types of bank and post office deposits.
What Is The 80E Exemption?
This exemption is for interest paid on education loans. According to section 80E, the deduction is allowed on the total interest amount of the EMI paid during the financial year, provided the loan is taken from a bank or approved financial institution for higher education.
How Do Tax Deductions Affect My Taxable Income?
Tax Deductions can save you a lot of money. Here’s an example to explain it.
Let’s say there’s a person who earns ₹12,00,000 per year.
Case 1: If he doesn’t claim any deductions, he is liable to pay a 30% income tax.
Case 2: If he claims the following deductions from the Gross Total Income (GTI):
Investment under section 80C- ₹1,50,000 (in PPF and life insurance)
NPS under section 80CCD(1)- ₹50,000 (in addition to 80C contributions)
Health insurance premium under section 80D- ₹25,000 (for himself and his family)
Interest on savings account under section 80TTA- ₹10,000
Total Deductions: ₹1,50,000 + ₹50,000 + ₹25,000 + ₹10,000 = ₹2,35,000
Now your taxable income is reduced to ₹9,65,000, on which only a tax of 20% is liable.
Note: This example is from the viewpoint of the old tax regime since the new tax regime does not allow many deductions.
How Does Tax Harvesting Help With Reducing Your Tax Burden?
Tax-loss Harvesting is an investment strategy to reduce your tax liability through the sale of investments that are facing losses. They can help you reduce your tax burden in many ways:
1/ Offsetting Capital Gains
Tax harvesting essentially works by offsetting capital gains with capital losses. When you sell an investment that has lost value, you can use the loss to offset any gains you have made from selling other investments at a profit.
2/ Deferring Taxes
Tax harvesting allows for the deferral of taxes. You effectively defer the tax liability to a future period by offsetting gains. This can be particularly advantageous if you expect to be in a lower tax bracket in the future.
3/ Improving Portfolio
While the primary goal of tax harvesting is to lower tax liabilities, it also provides an opportunity to reevaluate and rebalance your portfolio. If you are selling off underperforming assets, it can help you realign your investments with your financial goals and risk tolerance.
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