So, government has given us a few options where we can invest or spend. These expenditures can be then used as deductibles from our income so that our net income reduces. When the taxable income reduces, the tax we have to pay also reduces. So, why does the government do this? Don’t they know that people will utilize this option to max extent possible and pay less tax? Well, they do. In fact, they want you to. They want you to use your income at right places that can help you and eventually help the government.
What are these deductions? This is where the taxing starts getting interesting. Going forward, we will discuss all the major deductions that we can use to reduce our tax.
Note: Do not get demotivated and lose your track of understanding taxes if you miss the plot. Read it slowly, at your own pace and move forward. One step at a time.
Best way to understand this whole tax deductions is to absorb only what is relevant to you and ignore everything else. For example, if you are 25 years old, unmarried and have not yet bought a house, you can ignore deductions that are relevant to senior citizens, schemes for children like Sukanya Samriddhi, Home Loan deductions etc.
Just absorbing what is relevant to just you and ignoring everything else makes the whole content base smaller and understandable.
Your Total Taxable Income = Your total income – Deductions
All tax deductibles are subdivided into a few sections. We will discuss all the important ones starting with Section 80C.
1. Deduction under Section 80C (Deduction Limit 1.5 Lakhs)
Under Section 80C, all your investments made into any of the below mentioned streams collectively up to 1.5Lakhs can be used to claim tax deductions.
Eligible investments to claim deductions under 80C are
Salary Components
- Provident Fund (PFs) - Public Provident Fund (PPF)/ General Provident Fund (GPF)
- Employee Provident Fund (EPF)
Insurance Components
- Life Insurance Premium
- Unit Linked Insurance Plan (ULIP)
Investment Components
- National Pension Scheme (NPS)
- National Savings Certificate (NSC)
- ELSS Mutual Funds
- Senior Citizen Savings Scheme (SCSS)
- Tax Saving FD for 5 Years
- Post Office Time Deposit (POTD) for a period of more than 5 years
House Loan Components
- Home Loan Principal Amount paid during the year
- Stamp Duty and Registration Charges for purchase of property
Children Components
- Sukanya Samriddhi Yojana (SSY)
- Tuition fees for upto 2 children
Bond Components
- Infrastructure Bonds
- Investments in NABARD Rural Bonds
80C is one of the first choices for claiming tax deductions. The biggest advantage here is you are not losing your money to any expenditure. Rather, you are putting your money into good use by investing it. Hence, most people prefer to avail this option as much as possible (up to 1.5 Lakhs). Now the choice for us is to choose products among these. One of the disadvantages with these products is they come with lock-in periods. Once you make an investment here, you can not withdraw it until its maturity. I have detailed out lock-ins and average interest rates for each of these products below.
Based on your risk profile, your duration ability to hold on to the investment, you can choose one of these. My most preferred option would be ELSS as I have a higher risk-taking ability and also have the funds available for further use just after 3 years.
Another option that most prefer and a very important financial instrument is Life Insurance. If you have purchased and paid for life insurance for yourself, your children, your spouse, or dependent parents, the premiums you have paid will be eligible for claiming deductions under 80C.
2. Deduction related to Medical Condition
Note: If you are a completely healthy person with out any chronic disease, ignore this section and move to point no. 3.
2.1. 80DD - MEDICAL EXPENDITURE FOR A HANDICAPPED RELATIVE (QUALIFIED AMOUNT: 125000 INR)
Note: If its not applicable to you – move to next section 2.2 😊
The following are the expenses that are exempted for income tax under section 80DD:
Any expenses incurred for medical treatment which includes nursing, training as well as rehabilitation of dependent that is disabled.
The amount paid towards Life Insurance Corporation (LIC), Unit Trust of India or any of the other insurers for the sole purpose of buying specified schemes or insurance policies to help in the maintenance of a dependent with disabilities.
Who is Defined as Disabled Dependent According to Income Tax laws?
If a person, falls under the following circumstances, he or she is eligible to be called a disabled dependent under section 80DD and hence the person’s caretaker can avail the income deductions:
Individuals, or a spouse, son or daughter (or any child), parents as well as brother or sister i.e. any siblings can be considered as your disabled dependant.
It is essential that the disabled individual be wholly or mostly dependent on the taxed for their support as well as maintenance.
He or she should also not claim the deduction under section 80U.
2.2. 80DDB - MEDICAL EXPENDITURE ON SELF OR DEPENDENT RELATIVE FOR TREATING SEVERE DISEASES (QUALIFIED AMOUNT: 40,000 for below the age of 60 and Rs. 1,00,000 for Senior Citizens)
Note: Check the list of diseases. If its not applicable to you – move Section 2.3 😊
Section 80DDB speaks of deductions in respect of expenses incurred for medical treatment of specified diseases or ailments.
Section 80DDB provides that were an individual or a HUF has incurred medical expenses for treatment of specified disease or ailment such expense is allowed as a deduction, subject to such conditions and capped at such amount as specified, under Section 80DDB of Income Tax Act.
Here, the section speaks of medical expenses incurred on treatment of specified diseases or ailments and should not be confused with premium paid for health insurance bought covering such diseases or ailments. The payment for health insurance is covered under Section 80D of the Income Tax Act.
Following diseases or ailments can be considered for this purpose:
The certificate from the prescribed authority to be furnished.
1.1. 80U - MEDICAL EXPENDITURE ON SELF IN CASE OF PHYSICAL DISABILITY (QUALIFIED AMOUNT: 125000 INR)
Tax benefit is available to any resident individual who is certified as “a person with disability” by the “medical authority”.
For deduction under section 80U, individuals or persons with disability are categorized into two types:
Person with disability: A person with disability means the person is suffering from at least 40% of a disability. If an individual has at least 40% of a disability then he is eligible for a deduction of Rs. 75,000.
Person with severe disability: A person with disability means the person who is suffering from at least 80% of a disability. If an individual has severe disability (i.e., 80% or more of a disability) then he is eligible for a deduction of Rs. 1,25,000.
3. 80 E- INTEREST PAID ON LOAN FOR HIGHER EDUCATION (QUALIFIED AMOUNT: NO LIMIT)
Note: If you do not have an education loan, skip the section 😊
You can claim a tax deduction under section 80E for interest paid on repayment of Education loan. The deduction can only be claimed on the interest paid on repayment of loan and not on the principal amount.
You can get an interest certificate from the bank to know the amount of interest paid in a particular year.
4. ADDITIONAL EXEMPTION UNDER NATIONAL PENSION SCHEME (NPS) U/S 80CCD (1B) (QUALIFIED AMOUNT: 50000 INR)
As per Income Tax Act, the maximum limit of Rs. 1.5 lakh is an aggregate of deduction that may be claimed under section 80C, 80CCC and 80CCD. However, an exclusive tax benefit is available for NPS subscribers under section 80CCD. As per income tax act, Tier 1 account holder gets an additional deduction for investment up to Rs. 50,000 in NPS. This deduction is over and above the deduction of Rs. 1.5 lakh available under section 80C of IT Act, 1961.
5. 80 EEB - DEDUCTION IN RESPECT OF PURCHASE OF ELECTRIC VEHICLE (QUALIFIED AMOUNT: 150000 INR)
The loan must be sanctioned anytime during the period starting from 1 April 2019 till 31 March 2023. Under this section, deduction of interest payment on loan taken to purchase Electric Vehicle shall be available whether for person or business purpose. The deduction under this section would be available till the repayment of loan. Deduction u/s 80EEB is available for 4 wheeled vehicles and also for 2 wheeled vehicles.
6. INTEREST ON DEPOSIT IN SAVING ACCOUNT - 80TT (QUALIFIED AMOUNT: 50000 INR):
As per the existing provisions of the section 80TTA there is a deduction up to Rs. 10,000 allowed to an assesses in respect to Interest Income from savings account (please note deductions is allowed only for interest on savings account and not for Fixed Deposits or Recurring Deposits).
7. House Rent Allowance (HRA):
Salaried individuals who stay at a rented house, can claim HRA as deduction. You can find the HRA component in your salary slip. This is your part of salary that your company gives as housing allowance. However, you can not use the entire amount from HRA component for deduction.
How is HRA Calculated?
The exemption is based on the least of the following options:
The actual amount allotted by the employer as the HRA.
Actual rent paid minus 10% of the basic salary.
50% of the basic salary, if the employee is staying in a metro city (40% for a non-metro city).
Let us assume your basic salary component is Rs. 25,000. The HRA component would hence be 12,500 (50% of your basic salary). So, this (your HRA component in salary slip) will be your first metric to consider.
Assuming you pay Rs. 8000 per month as rent and you stay in a metro city, your second metric would be actual rent paid minus (-) 10% of basic salary.
10% of basic salary = 10% of 25,000
= 2,500
Therefore, 8000 – 2500 = 5500
The least among the 3 would be your tax-deductible amount per month. Hence, 5500*12 can be considered for HRA deduction for the respective year. The remaining portion of your HRA component will be taxable.
Important points to consider for HRA:
You can take advantage of tax benefits of HRA along with a home loan.
If you are staying with your parents, you can pay rent to your parents and collect a receipt for HRA claim. However, the rules don't allow you to pay rent to your spouse.
The landlord's PAN card is mandatory for rent exceeding Rs.1,00,000 per year. The landlord can provide a self-declaration in case if he/she doesn't have a PAN card.
If your landlord is an NRI, you must deduct 30% tax from the rent amount that needs to be declared.
8. 80D – Medical Insurance for Self, Spouse, Parents and Dependent Children (QUALIFIED AMOUNT: 25,000 INR/ 1,00,000 INR)
You can claim a tax deduction under this section for the payment of medical insurance premium for self, spouse or any child. In addition, any amount paid for health check-up can also be claimed for tax deduction which shall not exceed to Rs. 5,000.
Maximum Exemption under this Section would be Rs. 1,00,000 if Self and Parents are Senior Citizens including Rs. 5,000 of health check-up.
9. Section 24 - House Property
First Home - Self Occupied
On Principal Repaid - Actual principal repaid subject to a maximum of Rs. 1,50,000 (Rs. 2 lakhs for senior citizens) can be claimed as investment eligible for tax deduction under section 80C.
On Interest Paid - Actual home loan interest paid subject to a maximum of Rs. 2 lakhs (Rs. 3 lakhs for senior citizens) if house construction completed within 5 years from the end of the financial year in which loan is taken
If construction of house not completed within five years, then Rs. 30,000 is tax exempt
First Home – Rented/ Vacant (deemed to be let out property)
On Principal Repaid - Upto Rs. 1,50,000 (Rs. 2 lakhs for senior citizens) eligible for tax deduction under Section 80 C. The deduction is available only if the property owner is staying in a different city for work.
On Interest Paid - Exemption on interest is capped at lower of two, a) Rs. 2,00,000 or b) actual interest paid for all properties owned by a taxpayer.
Second Home or Additional Property
On Principal Repaid - None
On Interest Paid - Exemption on interest is capped at lower of two, a) Rs. 2,00,000 or b) actual interest paid for all properties owned by a taxpayer
Under Construction Property
On Principal Repaid - None
On Interest Paid - The interest paid can be claimed in equal parts in five financial years post completion or handing over of property within the overall annual limit of Rs. 2 lakh.
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