Deductions and Exemptions

Deductions and Exemptions: Understanding the Basics and Optimizing Tax Planning
Deductions and Exemptions play a crucial role in reducing your taxable income and ultimately helping you save on taxes. While they serve the same purpose, it’s essential to understand their distinct meanings and implications.

Explaining Deductions:
Deductions refer to subtracting a specific amount from your total income, considering the various sources of income you have. These deductions are available for specific investments and expenses made during a financial year. For instance, if you invest in the Public Provident Fund (PPF), pay for health insurance premiums, or repay an education loan, you can claim deductions. These deductions fall under different sections of the Income Tax Act, such as Section 80C, 80D, and 80E. The maximum deduction amount you can claim depends on the section and the type of investment or expense.

Understanding Exemptions:
On the other hand, exemptions involve the complete exclusion of certain types of income or allowances from taxation. These exemptions apply to particular sources of income or allowances received as part of your salary. For instance, income from agriculture is entirely exempt from tax. Additionally, allowances like House Rent Allowance (HRA), Leave Travel Allowance (LTA), and others also enjoy exemption, subject to specific conditions and limits. You can claim exemptions under Section 10 of the Income Tax Act.

How Deductions and Exemptions Affect Tax Liability:
Deductions and exemptions impact your tax liability differently. Deductions work by reducing your gross total income, which includes income from all sources. On the other hand, exemptions directly reduce the income from a specific source or head. To illustrate, suppose you have a salary income of Rs. 10 lakh and receive HRA of Rs. 1 lakh. By claiming the HRA exemption (up to a certain limit) under Section 10, you can effectively reduce your salary income. Moreover, you can also claim a deduction for your PPF investment (up to Rs. 1.5 lakh) under Section 80C, further reducing your gross total income.

Steps to Claim Deductions and Exemptions in Your Income Tax Return

Step 1:Choosing the Right Income Tax Return Form
To begin the process of claiming deductions and exemptions in your income tax return, it’s crucial to select the appropriate income tax return form based on your sources of income. For salaried individuals, the commonly used forms are ITR-1 or ITR-2. By identifying the correct form, you ensure that you provide the necessary information accurately.

Step 2:Reporting Income from Various Sources
Once you have the correct form, you need to fill in the details of your income from different sources. This includes income from salary, house property, capital gains, business or profession, and other sources. Each source has a designated section in the form where you can enter the relevant information related to your earnings.

Step 3:Declaring Deductions under Different Sections
To avail deductions, you must disclose the details of your eligible investments and expenses in the relevant sections of the form. These deductions are specified under various sections of the Income Tax Act, such as Section 80C, 80D, and 80E. For each section, you need to mention the amount invested or expenses incurred and the eligible deduction amount.

Step 4:Mentioning Exemptions under Section 10
In addition to deductions, you may be eligible for exemptions under Section 10 of the Income Tax Act. These exemptions relate to allowances and specific types of income, such as House Rent Allowance (HRA), Leave Travel Allowance (LTA), and agricultural income. In the appropriate sections of the form, you need to provide the details of each allowance or income and the eligible exemption amount.

Step 5:Verification and Tax Calculation
After entering all the necessary details regarding your income, deductions, and exemptions, it’s essential to verify the accuracy of the information. The form will automatically compute your total income, taxable income, and tax liability, taking into account the deductions and exemptions you have claimed. Carefully review these calculations to ensure they are correct.

Step 6:Settling Tax Payments and Refunds
Based on the tax liability calculated by the form, you may need to pay any outstanding taxes due or claim a refund if you have excess tax paid. If you have a tax liability, ensure timely payment to avoid penalties. If you are eligible for a refund, follow the procedure to claim it.

Step 7:Filing Your Income Tax Return
The final step is to file your income tax return either online or offline before the due date. Online filing is convenient and preferred by most taxpayers. Make sure all the necessary attachments and supporting documents, if any, are submitted along with the return.

Common Deductions and Exemptions: How to Claim Them in Your Income Tax Return

• House Rent Allowance (HRA)
  If you live in a rented house, you can claim an exemption for House Rent Allowance (HRA). This exemption is based on the least of three amounts: actual HRA received, rent paid minus 10% of basic salary + DA, or a specific percentage of your salary depending with different limits based on living in a metro or non-metro city. To claim this exemption, you need to provide rent receipts and your landlord’s PAN details.
• Standard Deduction
  You can claim a standard deduction of Rs. 50,000 from your salary income, regardless of your actual expenses. This deduction is available to all salaried individuals and does not require any supporting documents or bills.
• Leave Travel Allowance (LTA)
  If you go on leave and incur travel expenses for yourself and your family, you can claim an exemption for Leave Travel Allowance (LTA). This exemption is applicable for domestic travel by railway, air, or public transport. You can claim LTA twice in a block of four years, and you need to provide travel bills or tickets as proof.
• Mobile Reimbursement and Books/Periodicals
  For work-related expenses such as mobile usage and books/periodicals, you can claim reimbursements. The reimbursement amount is either the actual bill paid or the amount provided in your salary package, whichever is lower. You need to submit bills or receipts as evidence for these expenses.
• Deductions under Section 80C, 80D, 80TTA, and 80G
  To avail various deductions, you can invest in specified schemes or incur eligible expenses. Under Section 80C, you can claim deductions for investments like life insurance premiums, provident fund contributions, tuition fees, and home loan principal repayments. Deductions for health insurance premiums are also available under Section 80D. Section 80TTA provides deductions for interest income from savings bank accounts, while Section 80G allows deductions for donations made to charitable institutions. Each section has specific limits and requires appropriate proofs for claiming deductions.

• Reporting Deductions and Exemptions in Your Income Tax Return

To report these deductions and exemptions in your income tax return, you need to fill the relevant sections of the online ITR-1 form available on the income tax department’s e-filing website. For example, HRA exemption should be reported under the ‘Income from Salary’ section, standard deduction under ‘Deductions under Schedule VI-A,’ and interest income under ‘Income from Other Sources.’ Provide the necessary details and submit supporting documents as required.

Key Deductions Under the Income Tax Act

• Section 80C: Deductions for Investments and Expenses
  Section 80C offers deductions for investments and expenses such as life insurance premiums, provident fund contributions, tuition fees, and home loan principal repayment. The maximum deduction allowed under Section 80C is Rs. 1.5 lakh.
• Section 80CCC: Deductions for Pension Plans and Mutual Funds
  Under Section 80CCC, you can claim deductions of up to Rs. 1.5 lakh for payments made towards pension plans and mutual funds.
• Section 80CCD: Deductions for Government-Sponsored Plans
  Section 80CCD allows deductions for contributions to government-sponsored plans like the Atal Pension Yojana (APY) and the  National Pension System (NPS). There are three sub-sections:
• Section 80CCD (1): You can claim a deduction of up to 10% of your salary or 20% of your gross income (for self-employed), or Rs. 1.5 lakh, whichever is lower, for your NPS or APY contributions.
• Additional deduction: An additional deduction of up to Rs. 50,000 can be claimed under Section 80CCD (1B), in addition to the specified limit. 1.5 lakh under Section 80C and Section 80CCD (1) for your NPS or APY contributions.
• Section 80CCD (2): This allows you to claim a deduction for your employer’s contribution to NPS or APY, up to 10% of your salary or 14% for central government employees.
• Section 80D: Deductions for Health Insurance Premiums
  Section 80D provides deductions for health insurance premiums paid for yourself, spouse, children, and parents. For health insurance, a maximum deduction of Rs. 25,000 is allowed for self, spouse, and children, and an additional Rs. 25,000 for parents below 60 years of age or Rs. 50,000 for parents above 60 years of age.
• Section 80DD and 80DDB: Deductions for Medical Expenses
  Under Section 80DD, you can claim deductions for medical expenses incurred for a disabled dependent relative. The deduction amount ranges from Rs. 75,000 to Rs. 1.25 lakh, depending on the severity of the disability. Section 80DDB allows deductions for medical expenses related to specified diseases for yourself or a dependent relative.
• Section 80E: Deductions for Education Loan Interest
  Section 80E offers deductions for interest paid on education loans taken for higher studies. The deduction is available for up to eight years or until the interest is fully paid.
• Section 80EE: Deductions for First-Time Homebuyers
  First-time homebuyers can claim an extra deduction of up to Rs. 50,000 on home loan interest under Section 80EE, subject to specific conditions.
• Section 80G: Deductions for Donations
  Section 80G allows deductions for donations made to specified funds or charitable institutions. The deduction can be 50% or 100% of the donation amount, depending on the eligibility of the recipient.
• Section 80GG: Deductions for Rent Paid
  If you don’t receive House Rent Allowance (HRA) or own any house property, you can claim deductions for rent paid under Section 80GG. The deduction is calculated based on specific criteria.
• Section 80TTA and 80TTB: Deductions for Interest Income
  Section 80TTA provides deductions for interest income from savings bank accounts or post office savings accounts, up to Rs. 10,000. Senior citizens (above 60 years) can claim deductions for interest income from deposits under Section 80TTB, up to Rs. 50,000.
• Section 80U: Deductions for Physical Disability
  Section 80U offers deductions for individuals with physical disabilities. The deduction amount ranges from Rs. 75,000 to Rs. 1.25 lakh, depending on the extent of disability.
• Additional Deductions
  Apart from the mentioned sections, there are other deductions available under the Income Tax Act, such as Section 80GGB for company contributions to political parties, Section 80GGC for individual contributions to political parties, and Section 80RRB for royalty income from patents.

Understanding Common Tax Exemptions in India

• House Rent Allowance (HRA) Exemption
  HRA is an allowance given by employers to employees who live in rented accommodation. You can claim an HRA exemption based on the least of the following: total HRA received from your employer, rent paid less than 10% of basic salary + DA, or 40% (for non-metros) or 50% (for metros) of your salary (basic salary + DA).
• Standard Deduction
  Standard deduction is a fixed deduction of Rs. 50,000 from your gross salary for FY 2022-23 and FY 2023-24. This deduction applies to both old and new tax regimes and is available regardless of your expenses or investments.
• Leave Travel Allowance (LTA) Exemption
  LTA is an allowance provided by employers to cover travel expenses during leaves. You can claim LTA exemption twice in a block of four years, subject to certain conditions. The exemption is limited to the actual travel cost by railway, air travel, or public transport.
• Mobile Reimbursement Exemption
  Employers sometimes reimburse employees for mobile and telephone expenses used at home. You can claim the actual bill amount paid or the amount provided in the salary package, whichever is lower, as a tax-free reimbursement.
• Books and Periodicals Reimbursement Exemption
  Employers can reimburse employees for expenses on books, periodicals, journals, newspapers,   and similar items.. You can claim the actual amount spent or the amount provided in the salary package, whichever is lower, as a tax-free reimbursement.
• Gratuity Exemption
  Gratuity is a lump sum payment given by employers to employees on retirement or death. The income tax exemption on gratuity received is determined by the least of the following: gratuity amount of Rs. 20 lakhs, last 15 days’ salary multiplied by the number of years of employment, or the actual gratuity received.
• Pension Exemption
  Pension is a regular payment provided by employers to employees after retirement. The income tax exemption on pension depends on whether it is commuted (received as a lump sum) or uncommuted (received periodically). Commuted pension received from the government or statutory bodies is fully exempt. Commuted pension received from other employers is partially exempt based on the gratuity status. Uncommuted pension is considered taxable as salary income.
• Leave Encashment Exemption
  Leave encashment refers to the payment given by employers to employees for unused leaves upon retirement or resignation. The income tax exemption on leave encashment depends on whether the employee is a government or non-government employee. For government employees, it is fully exempt. For non-government employees, it is exempt up to Rs. 25 lakh or the actual amount received, whichever is lower.
• Exploring Other Exemptions
  There are various other exemptions in India taxation that you can explore, including agricultural income, interest on housing loans, scholarships, awards and rewards, income of members of scheduled tribes or Ladakh residents, and subsidies from boards like the Tea Board. For more details, refer to Section 10 of the Income Tax Act, 1961.
  Understanding these tax exemptions can help you optimize your tax planning and reduce your taxable income.

Understanding Tax Deductions and Exemptions for Companies

• Section 32: Depreciation Deduction
  Companies can claim depreciation on their tangible and intangible assets, such as buildings, machinery, furniture, patents, and trademarks. Depreciation can be calculated based on the actual cost of the asset or the written down value, depending on the asset type and the chosen method.
• Section 35: Scientific Research Expenditure Deduction
  Companies can claim deductions for expenses incurred on scientific research activities, including in-house research and development or contributions to approved research associations or universities. The deduction amount can range from 100% to 200% of the expenditure, depending on the nature and purpose of the research.
• Section 35AD: Deduction for Specified Business Expenditure
  Companies can claim a 100% deduction for capital expenditure on specified businesses, such as cold chain facilities, agricultural warehousing, and affordable housing projects. The deduction is available if the business is started within a specified period and meets certain conditions.
• Section 35CCC: Deduction for Agricultural Extension Projects
  Companies can claim a 150% deduction for expenditure incurred on approved agricultural extension projects. This includes providing training, education, and guidance to farmers. The deduction is subject to approval by the prescribed authority and certain conditions.
• Section 80G: Charitable Donations Deduction
  Companies can claim deductions for donations made to specified funds or charitable institutions. The deduction can be either 50% or 100% of the donated amount, depending on the eligibility of the recipient.
• Section 80GGB: Political Contributions Deduction
  Companies can claim a 100% deduction for contributions made to political parties or electoral trusts. The deduction is available for contributions made through non-cash modes.
• Section 80IA: Infrastructure Development Projects Deduction
  Companies engaged in infrastructure development projects, such as roads, bridges, airports, and ports, can claim deductions for profits and gains. The deduction is available for a specified period, subject to conditions and limits.
• Section 80IAB: Special Economic Zone (SEZ) Deduction
  Companies developing or operating and maintaining a special economic zone (SEZ) can claim deductions for profits and gains. The deduction is available for a specified period, subject to conditions and limits.
• Section 80IBA: Affordable Housing Project Deduction
  Companies involved in developing affordable housing projects can claim deductions for profits and gains. The deduction is available for a specific period following project completion, subject to conditions and limits.
• Exploring Other Deductions
  Apart from the mentioned deductions, there are other provisions available for companies, such as Section 80JJAA for employment of new employees, Section 80M for dividends received from domestic companies, and Section 115BAA or Section 115BAB for opting for lower tax rates without claiming certain deductions or exemptions. It is important to consult tax professionals or refer to the Income Tax Act for comprehensive details on eligibility and requirements for each deduction.
  Understanding these tax deductions and exemptions can help companies optimize their tax planning and minimize taxable income.

Understanding Limitations on Claiming Tax Deductions and Exemptions

• Opting for the New Tax Regime
  If you choose to go with the new tax regime introduced in Budget 2020, which offers lower tax rates but with fewer deductions and exemptions, there are certain major deductions and exemptions you won’t be able to claim. These include Section 80C, Section 80D, Section 80E, Section 80EE, Section 80EEA, Section 80G, Section 80TTA, Section 80TTB, House Rent Allowance (HRA), Leave Travel Allowance (LTA), Standard Deduction, and more.
• Failure to Submit Proofs to Your Employer
  Some deductions and exemptions require you to submit proofs to your employer to claim them. These may include HRA, LTA, medical reimbursements, and others. If you forget to provide these proofs to your employer, you won’t be able to claim these exemptions when filing your income tax return. It is essential to submit the necessary proofs through your employer to claim these exemptions.
• Not Meeting Conditions or Limits
  Certain deductions and exemptions have specific conditions or limits that must be met in order to claim them. For instance, to claim a deduction under Section 80EEA for interest on a housing loan, the loan must be sanctioned between 01/04/2019 and 31/03/2020, and the stamp value of the property should not exceed Rs.45 lakhs. Failing to meet these conditions will make you ineligible to claim this deduction.
  It’s crucial to understand the limitations and restrictions when it comes to claiming deductions and exemptions in Indian taxation. If you opt for the new tax regime, fail to provide proofs to your employer, or do not meet the specified conditions or limits, you may not be able to avail certain deductions and exemptions. 

Conclusion: Deductions and exemptions are essential tools for reducing taxable income and optimizing tax planning. Deductions involve subtracting specific amounts from total income, while exemptions exclude certain types of income or allowances from taxation. Understanding the distinctions and implications of deductions and exemptions can help individuals and companies effectively manage their tax liability. 
By following the steps to claim deductions and exemptions in income tax returns and exploring the various sections under the Income Tax Act, individuals can make the most of available deductions and exemptions.
Additionally, being aware of common tax exemptions, such as HRA, standard deduction, LTA, and others, can further contribute to tax savings. Similarly, companies can leverage deductions like depreciation and scientific research expenditure to reduce their tax burden. With a comprehensive understanding of deductions and exemptions, individuals and companies can navigate the tax landscape with confidence and optimize their financial planning.

FAQs about Deductions and Exemptions