ITR: Filing tax returns is an annual affair. One should know every detail about the components in Form 16 and how one can get the maximum deductions and exemptions before filing the returns. Tax deductions refer to expenses that you can subtract from your total income, thus lowering the amount of income that is subject to taxation. Some common deductions in India include expenses related to health insurance, home loans, education loans, and donations to charitable organizations. By claiming these deductions, you can reduce your taxable income and potentially owe less in taxes.
On the other hand, tax exemptions are a predetermined amount that is excluded from your total income, leading to a lower taxable income. For example, in India, certain allowances such as house rent allowance (HRA), travel allowance, and leave travel allowance (LTA) are exempt from tax up to a certain limit. By utilizing these exemptions, you can further decrease the amount of income that is subject to taxation.
It’s important to note that deductions and exemptions have specific rules and limits set by the Income Tax Department. Therefore, it’s essential to understand these rules and regulations to maximize your tax savings and ensure compliance with the law. Consulting with a tax professional or using online tools can help you navigate the complexities of tax deductions and exemptions effectively.
Tax Deductions
Tax deductions help you save on the amount of income subject to taxation. Some common tax deductions under the Old Tax Regime are:
1. Section 80C Deductions: Recognized as one of the most prevalent deductions, Section 80C of the Income Tax Act allows taxpayers to claim deductions for various investments. These include Employee Provident Fund (EPF), Public Provident Fund (PPF), National Savings Certificate (NSC), and life insurance premiums, among others. Under this section, a deduction of up to Rs 1.5 lakh per financial year is permissible.
2. Home Loan Interest: Again flagged under the Old Tax Regime, if you have obtained a home loan, the interest payments on this loan may be deducted pursuant to Section 24(b) of the Income Tax Act. Under this provision, it is possible to claim deductions of up to Rs 2 lakh for the interest paid on a home loan.
3. Medical Insurance Premiums: Health insurance premiums, including those for family members, qualify for deductions under Section 80D of the Income Tax Act. The deduction limits are contingent upon the age of the insured individuals and the nature of the coverage provided. These are also under the Old Tax Regime.
Section 80 Deduction List
> Section 80C Investments.
> Section 80CCC Insurance Premium.
> Section 80CCD Pension Contribution.
> Section 80TTA Interest on Savings Account.
> Section 80GG House Rent Paid.
> Section 80E Interest on Education Loan.
> Section 80EE Interest on Home Loan.
> Section 80D Medical Insurance.
Tax Exemptions
Specific types of income exempt from taxation are granted to incentivize particular activities or investments, avoiding income tax liability.
House Rent Allowance: If you are entitled to a House Rent Allowance (HRA) as part of your salary package, you may be eligible to claim an exemption under Section 10(13A) of the Income Tax Act. The amount exempted will be the lesser of either the actual HRA received or the rent paid in excess of 10% of your salary.
Agricultural income: In India, agricultural income is exempt from income tax. If your primary source of income is agriculture, you do not have to pay tax on that income.
“Tax deduction and exemptions, both reduce the tax liability. So, it can get confusing as to what is the difference between the two. Let’s simplify it! Tax exemption is a part of your income that is not subject to tax. Thus, it is excluded from your total income for taxation purposes. Examples – House rent allowance, gift from relatives, gift received during weddings, long term capital gains on equities of Rs 1 lakh per year, agricultural income, etc,” said Jay Shah, Founder and CEO- Finwisor.
“On the other hand, tax deductions are certain expenses or investments that can be deducted from your gross total income for calculating your taxable income. There is also a standard deduction available on salary. Common deductions – ELSS (tax saving mutual funds), PPF, Life Insurance premiums, Mediclaim premiums, etc,” Shah added further.
Shah added deductions apply to a broad array of expenses and investments; in contrast, exemptions pertain specifically to certain categories of income. The limits for deductions are predetermined and differ depending on the specific provisions within the Income Tax Act, while exemptions operate under distinct criteria and limitations. Generally, deductions are designed to incentivise savings and investments, whereas exemptions aim to promote particular activities or offer relief in defined circumstances.