What is a Tax Write-Off and How it Works?

India follows a progressive tax system where the rate of tax increases as the total taxable income rises. So, the more you earn, the more taxes you’re likely to pay. To reduce the burden of steep taxation as your annual income increases, you can look for ways to write off your taxes. 

In this article, we’ll take a closer look at what a tax write-off is, how it works and what the common tax write-offs are. 

What is a Tax Write-Off? 

A tax write-off, also known as a tax deduction or a tax exemption, is something that has the effect of reducing the overall taxes you need to pay to the Indian government. These tax write-offs can be specified investments, certain expenses and even a particular part of the income you earn. 

For example, some common tax write-offs available for employees include deductions for the house rent allowance (HRA) or leave travel allowance (LTA) received as a part of the salary. Similarly, business expenses are tax write-offs for self-employed persons. Depending on the types of income you earn and the expenses or investments that make up your portfolio, you can create a plan about what you can write off on your taxes.

Understanding How Tax Write-Offs Work

Tax write-offs are, in essence, quite simple. Once you understand the meaning of tax write-offs and how they work, you can easily identify the deductions and exemptions applicable to you — and use them to reduce your tax liability. The fundamental principle behind tax write-offs is that they help reduce the tax payable by an assessee. 

This can be done in different ways, as outlined below: 

• Deductions from a Specific Head of Income 

Under the Income Tax Act, 1961, we have five heads of income — namely income from salaries, income from house property, profits and gains of business or profession, capital gains and other income. Some tax write-offs are essentially deductions made from any of these heads of income. For example, the standard deduction u/s 16(ia) of the Income Tax Act, 1961 is a tax write-off that is deducted from the gross salary. 

• Deductions from the Total Income

Some deductions are offered on the total income earned from the five different heads of income. One common example of these tax write-offs is the set of deductions u/s 80C of the Income Tax Act, which includes premium paid on life insurance, the principal amount repaid on home loans, investments in the Public Provident Fund (PPF), National Pension Scheme (NPS) and more. 

These deductions are not made from the individual heads of income but rather subtracted from the total income to arrive at the total taxable income. The net effect of such a deduction is reduced tax liability. 

• Exempted Income

Some types of income are directly exempt from tax. So, these tax write-offs, while not explicitly deducted from the income, are rather not included in it at all. This also effectively reduces the total tax liability. 

For instance, certain allowances that are a part of the salary (like house rent allowance, conveyance allowance or leave travel allowance) are totally or partially exempt from the salary income. 

Tax Write-Offs for Self-Employed Assessees 

The primary income earned by self-employed assessees is business income, which is typically classified under the ‘profits and gains of business or profession’ category. If you belong to this category of taxpayers, you can write off your business expenses from your taxes. 

Here are some common expenses that can be used as tax write-offs to reduce your tax liability. 

• Rent paid for your office premises 
• Cost of purchasing office supplies 
• Expenses incurred to repair or renovate your office premises
• Conveyance and transport costs incurred in the course of business
• Regular utility bills incurred for your premises, like water, electricity, etc. 

Tax Write-Offs in the New and the Old Tax Regimes

The new tax regime was introduced in Budget 2020. Thereafter, in Budget 2023, this tax regime was made the default option. As of FY24, however, taxpayers can still choose between the old and the new tax regimes. Depending on which option you choose, the tax write-offs available to you may vary. 

The broad difference between these two regimes is the extent of deductions available and the rates of tax applicable. The old tax regime offers more comprehensive tax write-offs but has higher tax rates. The new tax regime has fewer deductions to offer but comes with lower tax rates. 

Nevertheless, some of the common deductions or tax write-offs available in both tax regimes include the following: 

• Transport allowance
• Conveyance allowance 
• Daily allowance 
• Perquisites offered for official purposes
• Gratuity and leave encashment benefits
• Interest paid on home loan taken for a let-out property 
• Investment in the National Pension Scheme 

Conclusion

This sums up the meaning of tax write-offs in the Income Tax Act, 1961. If you are earning income that puts you in the high tax bracket, you need to begin your tax planning exercise and identify what you can write off on your taxes. It is also crucial to choose the right alternative between the old and the new tax regimes, so you minimise your tax liability as much as possible. 

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