What is Deduction in Income Tax?
A deduction is a reduction in taxable income that lowers the amount of tax owed, typically through allowable expenses or contributions. Understand what a deduction is and the various provisions of income tax deduction in detail here.
Rahul Jaiswal25 Jul, 2024
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What is deduction in income tax : deduction in income tax refers to reducing the taxable income for individuals entitled to pay income tax to government authorities based on their annual income. The government has approved several provisions allowing taxpayers to avail themselves of tax deductions.
The purpose is to encourage people to invest their money in different schemes and programs to improve savings while reducing tax liabilities. In this article, we will discuss in detail the various ways and provisions approved by the government to allow individuals and companies to achieve tax deduction benefits.Income Tax Deduction Overview
Income tax is calculated based on an individual's annual income and the rules and regulations set by the government, which define the percentage of the taxable income to be given as income tax. To calculate the taxable income, the authorities consider certain investments made by the taxpayer during the previous financial year that are not included in taxable income. The income tax is calculated considering those investments are not part of taxable income, thus reducing the income tax amount to be paid. The portion of your income liable to tax is decreased when you claim an income tax deduction.Benefits of Deductions in Income Tax
The facilities for availing tax deductions eventually benefit individuals, organizations, and also the government in different ways. Some of the significant benefits of tax deductions are as follows:- You can save money on taxes by lowering your taxable income through tax deductions.
- Using the tax deduction facilities, you can save and invest more money through different schemes.
- You can deduct the amount of your income that you pay for education, medical treatment, insurance, and home loans.
- Tax deductions encourage companies to reinvest in the economy to boost productivity, innovation, and the creation of jobs.
- Tax deductions act as an incentive to encourage people to contribute to charitable and non-profit organizations.
Tax Deduction Vs Tax Exemption
Tax deductions are certain expenses or investments made by a taxpayer during a financial year, which are deducted from the total annual income of that person while calculating the income tax. Tax deductions are provisions that allow taxpayers to lower the amount of income that is subject to taxes. On the other hand, tax exemptions are part of the total annual income that is not considered while calculating the taxable income. The money earned from certain specific sources is exempted from income tax calculations.The Various Provisions of Tax Deductions in India
Several investment opportunities and expenditure options are considered for tax deduction to lower your taxable income. Salaried employees constitute a significant part of the taxpayers, and these provisions allow a deduction in salary that is considered taxable. Multiple provisions under the Indian Income Tax Act of 1961 are applicable for claiming a tax deduction. Some of these are listed below.Deduction for Income Tax Under Section 80C
One of the most well-known tax deduction options in India is Section 80C. Taxpayers may deduct up to ₹1.5 lakhs under this provision in a financial year. The following are a few tax deduction examples under section 80C:- Employee Provident Fund (EPF)
- Public Provident Fund (PPF)
- Equity-Linked Savings Scheme (ELSS)
- Unit Linked Insurance Plan (ULIP)
- National Savings Certificate (NSC)
- Senior Citizen Savings Scheme (SCSS)
- National Pension Scheme (NPS)
Deduction for Income Tax Under Section 80CCC
Individuals can claim tax deductions up to ₹1.5 lakh per year for contributions to specific pension plans provided by life insurance companies under section 80CCC of the Income Tax Act. Deduction for Income Tax Under Section 80CCD This provision includes a tax deduction for contributions to specific government-approved pension systems of up to 10% of salaried employees' gross income and 20% of non-salaried employees' gross income.Deduction for Income Tax Under Section 80CCF
This section provides tax deductions for investors in government-approved infrastructure bonds. The maximum deduction allowed under this provision is Rs. 20,000 for an assessment year.Deduction for Income Tax Under Section 80D
It allows for an income tax deduction for health insurance premiums paid for the individual, spouse, and children up to Rs. 25000 per year. If you claim a tax deduction under section 80D for health insurance premiums paid to senior citizens, the maximum limit is Rs. 50000 per year.Deduction for Income Tax Under Section 80DD
This section allows a tax deduction of up to ₹75,000 spent on medical care for dependents with a 40% disability. In the event of a severe impairment, this limit increases to ₹1,25,000.Deduction for Income Tax Under Section 80E
Taxpayers can avail of tax deductions for interest paid on education loans under this clause. These loans must be taken for the higher education of the taxpayer, their spouse, their kids, or a student for whom they are the legal guardian.Deduction for Income Tax Under Section 80EE
First-time homebuyers are eligible for a deduction of ₹50,000 from the interest paid on their home loan, which should be less than ₹35,000,000. In addition, the person should not be the owner of any other residential property under his name, and the house's worth cannot exceed ₹50 lakhs.Deduction for Income Tax Under Section 80EEA
Interest paid on home loans taken out to build or buy an affordable home is eligible for a tax deduction of up to ₹1.5 lakhs per financial year under the Indian Income Tax Act.Deduction for Income Tax Under Section 80EEB
This clause allows for the deduction of interest on loans (up to Rs.1.5 lakhs) taken out for purchasing electric vehicles, whether for personal or company use.Deduction for Income Tax Under Section 80G
Under this section, you can lower your taxable income by making contributions for charitable purposes. Depending on the kind of recipient organization, the deduction may vary from 50% to 100% of the total donation amount.Deduction for Income Tax Under Section 80GG
This tax deduction provision applies to those who do not own a residential property or do not receive a house rent allowance. The annual deduction amount is a maximum of ₹5000 per month (₹60000 per year) or 25% of the total yearly income, whichever is lower.Deduction for Income Tax Under Section 80GGC
It is a provision that permits people to contribute to electoral trusts or political parties and claim tax deductions. It provides financial support for the political system, increases election funding transparency, and lowers individual tax obligations.Deduction for Income Tax Under Section 80U
A deduction is permitted under this clause for people who are mentally or physically disabled. A deduction of up to ₹75,000 is available to anyone with at least 40% handicap (as verified by a medical authority). People who are severely disabled (at least 80% disabled) are eligible for a ₹1,25,000 deduction.Deduction for Income Tax Under Section 80TTA and 80TTB
Individuals can deduct income accrued from savings accounts up to ₹10,000 under section 80TTA. Senior citizens can avail of tax deductions for interest earned from savings accounts, fixed deposits, and recurring deposits up to ₹50,000 under section 80TTB.What is Deduction in Income Tax FAQs
Can a company avail of tax deduction benefits under section 80C?
No, companies are not eligible for tax deduction benefits under section 80C of the Income Tax Act. It applies to individuals only.
What is the maximum limit for tax deductions under section 80GGC?
The maximum tax deduction can be 100% for donations to political parties but can't exceed an individual's annual income.
What is the purpose of section 80EEB for allowing tax deductions?
The provision of tax deductions under section 80EEB aims to promote purchasing electric vehicles for personal and company uses.
Can a company claim tax deductions under section 80G?
Yes, a company can claim tax deductions under section 80G for contributions made to charitable organizations.
Are bank fixed deposits eligible for tax deductions?
The fixed deposits in registered banks for a locking period of 5 years are eligible under 80C of tax deduction.
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