What Are Income Tax Deductions?
Income tax deductions are expenses or investments that can be subtracted from your total taxable income so as to minimise your tax liability. These deductions are intended to encourage you to increase your savings and use them to fulfil your financial goals like education, healthcare, and retirement savings.
You can also look at income tax deductions as little rewards for making good financial decisions that benefit both you and the society. By making use of these deductions, you can reduce your tax burden and retain more of your income. So, if you’re trying to save some money on taxes, keep reading to learn more about the types of tax deductions.
Standard Deduction vs Itemised Tax Deduction: What’s the Difference?
A standard deduction is a fixed amount that is allowed as a deduction from the total income of a salaried individual. Currently, in India, the standard deduction for salaried individuals is Rs. 50,000 per financial year. This means that an individual can claim a standard deduction of up to Rs. 50,000 from their taxable income to reduce their tax liability.
Itemised deductions are deductions that are allowed on specific expenses incurred within the fiscal year. These deductions can be claimed under various sections like 80C, 80D, 80G, etc. The expenses that can be claimed as deductions are predefined under each section, and you are required to provide bills and supporting details for each of the expenses while filing the tax return. However, certain sections have predetermined limits. For instance, in a financial year, the maximum tax deduction you can claim under Section 80C is 1.5 lakh.
Types of Tax Deductions
1) Public Provident Fund (PPF)
Under Section 80C, you can get tax deductions for your PPF contribution for up to Rs. 1.5 lakh in a financial year.
Read more about How to start contributing to PPF
2) Life insurance premiums
Premium paid towards life insurance policies for self, spouse and children is also eligible for income tax deductions under Section 80C. Not just that, the amount received on maturity of all life insurance policies (other than ULIPs) issued after 1st April 2023, whose annual premium is up to Rs. 5 lakh, are tax-free.
3) National Saving Certificate (NSC)
Another investment option to get tax deductions under 80C is the highly secured National Saving Certificate. While the investment amount is eligible for a tax deduction, the interest earned from NSC is taxable.
4) Fixed deposits
By investing in a tax-saving fixed deposit, which has a minimum tenure of 5 years, you can claim a tax deduction on the investment under Section 80C. The overall deduction under the section is capped at Rs. 1.5 lakh. Similar to NSC, the interest accrued on FDs is taxable.
5) Senior Citizen Savings Scheme (SCSS)
Senior Citizen Savings Scheme (SCSS) is an investment option eligible for tax deduction under Section 80C, specifically for senior citizens. Even in this case, the interest earned is entirely taxable. The deposit amount is eligible for a tax deduction of up to Rs. 1.5 lakh.
6) Post Office Time Deposit (POTD)
A 5-year POTD is another investment option under Section 80C to claim a tax deduction, but the interest earned will be taxable.
7) Unit-linked Insurance Plans (ULIP)
Under Section 80C, you can claim tax deductions by investing in ULIPs for self, your spouse, and your children.
8) Home loan EMIs
EMI paid towards the repayment of the principal amount of your home loan is also eligible for income tax deductions under Section 80C.
9) Equity Linked Saving Scheme (ELSS)
Another popular option for claiming tax deductions under 80C is investing in mutual funds and equity-linked saving schemes. Again, the investment is eligible for deductions, but the returns are taxable.
Read more about the Benefits of Equity Linked Saving Scheme (ELSS)
10) Registration charges and stamp duty for house
The registration fee and stamp duty paid for transferring property are also entitled to income tax deduction under Section 80C.
11) National Pension System
By investing in National Pension System (NPS), you can get tax deductions of up to Rs. 1,50,000 lakh per annum under Section 80CCE and Section 80CCD(1) . Furthermore, under Section 80CCD (1B), you can get an additional deduction of up to Rs. 50,000 above the limit of Rs. 1,50,000.
12) Tuition fees
Tuition fees paid for your children’s education are also eligible for income tax deduction under Section 80C. However, it is necessary that the fees be paid for full-time education in an Indian university, college or school for any two children.
13) Medical insurance premiums
Health insurance premiums paid for self, spouse, and children qualify for income tax deduction under Section 80D. For senior citizens, it is Rs. 50,000, and for others, it is Rs. 25,000.
14) Charitable contribution
If you make charitable contributions, you can qualify for tax deductions under Section 80G. However, to claim these deductions, it’s important to report your contributions before 31st December each year. Depending on the nature of the charity organisation/fund, the maximum tax deduction under this section is 50% or 100% of the donated amount.
15) Treatment of disabled dependents
You can claim income tax deductions for medical expenses incurred in the treatment of any disabled dependents under Section 80DD. For disabled dependents, the maximum amount that can be claimed under this section is Rs. 75,000. However, the limit goes up to Rs. 1,25,000 for severe disability.
16) Preventive health check-ups
Up to Rs. 5,000 can be claimed for preventive health check-ups of self or family members under Section 80D.
17) Interest paid on education loan
Interest paid on an education loan for self, spouse, children, or a student to whom you’re a legal guardian is eligible for tax deduction under Section 80E. There is no specific limit for tax deductions under this section. However, the deduction is only applicable for a maximum of 8 years or until the interest is fully paid, whichever is earlier.
18) Deduction on house rent paid
Under Section 80GG, you can claim a tax deduction for the house rent paid, provided you are not receiving house rent allowance (HRA) from your employer and do not own residential property at their place of employment. Under this section, you can receive a maximum of Rs. 5,000 per month or 25% of your total income, whichever amount is lower.
To Wrap Up
The above are just some of the popular types of tax deductions. However, you should always pick the tax deductions that match your individual financial situation and tax circumstances. Choosing the right type of income tax deduction can significantly impact your tax liability.
You can also reach out to a financial consultant to make a more informed decision. Keep in mind that maximising your tax deductions will allow you to keep more of your hard-earned money while also lowering your overall tax burden.
Are tax deductions and tax exemptions the same?
No, tax deductions are expenses that can be deducted from your total income in order to minimise the amount of tax owed, whereas tax exemptions are income that is not taxed at all.
Are tax deductions the same for everyone?
No, tax deductions differ depending on your filing status, income level, and other criteria. You can find out the deductions you are eligible for by visiting a tax professional or by using a trusted tax calculator online.
How much tax can I save through deductions?
The amount of tax you can save through deductions is dependent on your total taxable income, tax bracket, and specific deductions claimed.
Are tax deductions subject to any limitations?
Yes, depending on the type of deduction claimed, there are tax deduction limits. For PPF, ELSS, and life insurance premiums, the maximum deduction allowed under Section 80C is Rs. 1,50,000 per financial year.
How can I claim tax deductions?
When filing your income tax return, you can claim tax deductions by presenting proof of expenses, such as receipts or bills.
What is the standard deduction?
The standard deduction is a fixed amount allowed as a deduction from the total income of a salaried individual. Currently, the standard deduction for salaried individuals is Rs. 50,000 per financial year.