Income Tax Deductions & Exemptions – A Comprehensive Guide

Salaried employees make up a big part of taxpayers, and their tax contributions matter. Income tax deductions provide various chances for them to save money on taxes. By using these income tax deductions and exemptions, you can significantly lower your tax liability.

Let’s look at the different income tax deductions and exemptions available that can be utilized to save money on your income tax liability.

Income Tax Deductions & Exemptions - A Comprehensive Guide

Old Tax Regime:

The old tax regime in India is the traditional system where you get higher tax slabs but can claim various income tax deductions and exemptions to reduce your taxable income. These income tax deductions cover things like investments, medical expenses, and house rent allowance. This can significantly lower your tax bill if you have these expenses.

Below are claimable Exemptions Under Old tax regime:

House Rent Allowance

House Rent Allowance (HRA) is an allowance provided by your employer, included in your CTC, to assist in covering the expenses of living in a rented home.

House Rent Allowance (HRA) is an allowance provided by your employer, included in your CTC, to assist in covering the expenses of living in a rented home.

Imagine HRA exemption as a discount on your taxable income for paying rent. The government wants to help offset your housing costs.

You may claim the least of the following as an HRA exemption

  1. Total HRA received from your employer
  2. Rent paid less than 10% of basic salary +DA
  3. 40% of salary (Basic salary + DA) for non-metros and 50% of salary (Basic salary + DA) for metro cities (Delhi, Mumbai, Kolkata & Chennai)

Please note that if the annual rent payment exceeds 1 lakh, employees are required to provide the PAN details of the landlord.

Common FAQ’s

Is it possible to claim both HRA and a deduction on home loan interest?

Absolutely, you can claim both HRA exemption and deduction on home loan interest.

There can be two situations where you are living in a rented house while owning a house.

  1. Both the rented and owned houses are situated in the same city: To prove why you are not living in your own house, you could say that your office is far from your home. So, you must stay closer to work, which means you can claim both HRA and home loan benefits. But remember, you need to meet the rules for getting these benefits.
  2. The rented and owned houses are situated in different cities : You qualify for tax benefits if you had to move to a different city because of your job.

How to Claim HRA When Living with Parents?

  1. You can pay rent to your parents if you live with them.
  2. Make the payments by transferring money to their bank account or through a cheque to ensure proper documentation for claiming HRA deduction.
  3. The property must be owned by your parents for you to pay them rent. It could be owned by one or both of your parents.
  4. If the property is jointly owned, deposit the rent to either parent’s account, or to the one who is the legal owner.
  5. Your parents need to declare this rental income in their Income Tax Return (ITR) and pay taxes based on the applicable slab rates.
  6. Remember, you cannot claim tax exemption on rent paid to yourself if you are an owner or co-owner of the property.

Leave Travel Allowance (LTA) or Leave Travel Concession (LTC)

You might be eligible for a tax exemption called LTA/LTC. This exemption is for travel expenses you have during your vacations. But it does not cover things like shopping, food, or entertainment costs. You can claim this exemption twice in a four-year period. If you do not use it during one four-year period, you can carry it over to the next one.

    Points to be noted:

    1. LTA/LTC only applies to domestic travel; it doesn’t cover the cost of international trips. When you travel, you must use either railways, air travel, or public transport via the shortest route to your destination.
    2. The travel exemption applies to the employee individually or with their family. ‘Family’ in this context includes the employee’s spouse, children, and parents, as well as siblings who are mainly dependent on the employee.

    Children Allowances

    If your employer includes an education allowance for your children in your salary package, it is typically tax-exempt. However, there is a maximum exemption limit of Rs. 100 per month or Rs. 1,200 per year that the employee can claim. This exemption is applicable for up to two children.

    Children’s Hostel Allowances

    The employer may provide children hostel allowance as a part of the salary. Employees can claim a maximum of Rs. 300 per month per child up to a maximum of two children.

    Below are allowable Income Tax deductions Under Old Tax Regime:

    Section 80C, 80CCC and 80CCD (1)

    Section 80C is a widely used income tax deductions by Individuals and Hindu Undivided Families (HUFs). Certain investments eligible for a deduction under Section 80C, 80CCC, and 80CCD (1) with a maximum limit of Rs. 1.5 lakh.

    The Indian government promotes saving and investing for retirement through tax-saving instruments like Life insurance premium, Contribution to PPF Account, Employee Provident Fund (EPF), National Pension Scheme (NPS), Sukanya Samriddhi Yojana Account (SSY), Equity Linked Savings Scheme (ELSS), Principal payment on home loans, Tuition fees for children, NSC (National Saving Certificate), Tax saving Fixed Deposit

    However, expenses or investments under Section 80C cannot be deducted from income derived from capital gains alone.

    Section 80CCD (1B)

    Contributing to a National pension fund scheme offers income tax deductions under below sections:

    1. Section 80CCE: Up to Rs 1.5 lakh. This is part of Section 80C. Remember, the limit under Section 80CCD (1) is included in the overall Rs 1.5 lakh limit for deductions across Sections 80C, 80CCD (1), and 80CCC.
    2. Section 80CCD(1B): You can claim an extra Rs 50,000 deduction under this section. It is an additional benefit over and above 80CCE.

    Note:

    If you invest the full Rs 1.5 lakh in NPS to claim tax benefits under Section 80CCD (1), you cannot use other tax benefits available under Section 80C, like ELSS, PPF, or five-year fixed deposits.

    The extra benefit from NPS in Section 80CCD (1B) is on top of the benefit from Section 80CCD (1), capped at Rs 50,000.

    Health Insurance Premium Section 80D

    Section 80D allows income tax deductions on medical expenses, enabling taxpayers to save on medical insurance premiums paid for themselves, their family, and dependent parents.

    ParticularsSelf, Spouse and Dependent ChildrenParentsIncome Tax Deduction
    Family Members Under 60 Years of AgeUp to ₹ 25,000₹ 25,000
    Up to ₹ 25,000Up to ₹ 25,000₹ 50,000
    Eldest in immediate family (you, spouse, children) under 60, with parents over 60Up to ₹ 25,000Up to ₹ 50,000₹ 75,000
    Eldest in immediate family (you, spouse, children) above 60, with parents over 60Up to ₹ 50,000Up to ₹ 50,000₹ 1 Lakh

    Section 80D allows for income tax deductions on expenses related to preventive health check-ups. The maximum income tax deduction limit is Rs. 5,000 per financial year. This income tax deduction is separate from deductions on medical insurance premiums and medical expenses for specific diseases, subject to an overall limit of Rs. 25,000 or Rs. 50,000. Valid proof, such as invoices, bills, or relevant documents, must be provided to claim this deduction.

    Section 24B of Income Tax Act

    Under Section 24(b) of the Income Tax Act, you can claim income tax deductions on the interest paid on your home loan. For a self-occupied house, you can get a maximum income tax deduction of Rs. 2 lakh per year from your gross income, but your house must be constructed or acquired within 5 years.

    If your house is self-occupied, the loan should be for buying or building it, not for repairs or renovations. If construction takes longer than 5 years, you can only claim up to Rs. 30,000 annually for interest on the loan

    For a let out your property, you can claim the full interest paid on your home loan for buying, building, repairing, or renovating it. There is no time limit for completing construction. However, you can only set off losses from property income against other income up to Rs. 2 lakh per year. Any leftover loss can be carried forward for set-off in future years as per tax rules.

    Income Tax deductions on interest paid for under construction property

    When you purchase an under-construction property and begin paying EMIs, you can claim interest on your housing loan as a deduction once construction is completed. According to the Income Tax Act, you can deduct both pre-construction period interest and post-construction period interest. Pre-construction period interest is deductible in five equal annual instalments, starting from the year when the property is acquired or constructed. Therefore, the total deduction available under Section 24(b) for interest comprises 1/5th of the pre-construction period interest (if any) plus the interest from the post-construction period (if any).

    Income Tax deductions for joint home loan

    When a home loan is taken jointly, each borrower can individually claim deductions on home loan interest up to Rs 2 lakh under Section 24(b) and tax deductions on principal repayment up to Rs 1.5 lakh under Section 80C. This effectively doubles the available deductions compared to a loan taken by a single applicant. However, it’s necessary that both applicants are co-owners of the property and both contribute towards servicing the EMIs.

    Section 80TTA & Section 80TTB of Income Tax Act

    ParticularsSection 80TTASection 80TTB
    Age LimitIndividuals & HUF’sFor Senior Citizens
    Type of Interest IncomeThis section is limited to interest income from savings accountInterest Incomes – Includes Savings Account, Fixed & Recurring Deposits.
    Income Tax DeductionsThe deduction limit u/s 80TTA is ₹ 10,000The deduction limit u/s 80TTB is ₹ 50,000

    Section 80E (Education Loan)

    Section 80E of the Income Tax Act permits taxpayers to claim income tax deductions for the interest paid on an education loan obtained from either a financial institution or an approved charitable institution. This deduction specifically applies to the interest component of the loan.

    1. Eligibility for education loan
    2. Period of section 80E deduction

    Taxpayers can begin claiming the deduction under Section 80E from the year they commence repaying the education loan, with a moratorium period of up to one year provided by tax authorities. The deduction is applicable for a maximum of 8 years, starting from the repayment commencement year or until the interest is fully cleared, whichever comes first. Repayment exceeding 8 years will not qualify for further tax benefits under Section 80E.

    Either the parent or the student can claim the tax benefit based on who repays the education loan. The deduction is applicable only for loans acquired from financial institutions, not from relatives or friends. Tax benefits are eligible for education loans taken for higher education of the taxpayer, their spouse, dependent children, or students for whom they are legal guardians.

    Donations Under Section 80G

    Donating to help others is a great thing to do, and it’s something the government supports too. They offer tax deductions under Section 80G for donations made to certain trusts, relief funds, and humanitarian organizations. Anyone, whether an individual or a business, can claim this deduction on their taxes.

    But not all donations qualify for this tax benefit. Only donations made to specific trusts are eligible for income tax deductions under Section 80G.

    Note:

    1. Not all donations qualify for full tax deductions; eligibility depends on the organization.
    2. Various taxpayers, including Indian corporations, partnership firms, and others, can claim deductions.
    3. Cash donations exceeding Rs 2,000 are not eligible for tax deductions.
    4. Contributions in kind, like clothing or food, do not qualify for tax benefits.
    5. The amount deductible depends on eligibility criteria. Section 80G allows deductions of either 100% or 50%, with or without restrictions.

    Section 80DD & Section 80U

    Resident individuals or Hindu Undivided Families (HUFs) can claim income tax deductions under Section 80DD of the Income Tax Act if they support and maintain a dependent who is differently-abled and wholly dependent on them.

    Section 80U provides tax benefits to individuals experiencing disabilities

    Maximum amount of income tax deductions allowed under Section 80DD & 80 U

    A deduction of Rs. 75,000 is allowed for at least 40% and less than 80% of disabilities, and Rs. 1,25,000 deductions with severe disability (i.e., more than 80% of disability).

    Income Tax Deductions Under New Tax Regime

    In the 2020 Budget, a new tax regime with revised tax slabs and concessional rates was introduced. However, opting for this regime meant forgoing various exemptions and deductions like HRA, LTA, 80C, 80D, and others, leading to limited adoption. To promote the new regime, the government introduced few key changes in the 2023 Budget, which remained unchanged in the FY 2024-2025 Interim Budget.

    a. The new tax regime now offers a higher tax rebate limit, granting a full tax rebate on income up to ₹7 lakhs. This is an increase from the previous threshold of ₹5 lakhs, ensuring that taxpayers earning up to ₹7 lakhs will not have to pay any tax at all.

    b. The tax exemption limit has been increased to ₹ 3 lakhs, and the new tax slabs are

    Total IncomeTax Rate
    up to ₹ 3,00,000Nil
    ₹ 3,00,001 – ₹ 6,00,0005%
    ₹ 6,00,001 – ₹ 9,00,00010%
    ₹ 9,00,001 – ₹ 12,00,00015%
    ₹ 12,00,001 – ₹ 15,00,00020%
    ₹ 15,00,001 and above30%

    c. The standard deduction of ₹50,000, previously exclusive to the old tax regime, is now applicable to the new tax regime as well. When combined with the rebate, this raises the tax-free income to ₹7.5 lakhs under the new regime.

    d. From FY 2023-24 onwards, the new income tax regime will be the default choice. If you prefer to stick with the old regime, you will need to submit your income tax return along with Form 10IEA before the due date. You will have the flexibility to switch between the two regimes annually to assess the tax benefits.

    Under the new tax regime, you cannot claim several income tax deductions and exemptions including the below:

    1. Income Tax Deductions under Section 80TTA/80TTB for savings interest
    2. Professional tax and entertainment allowance on salaries
    3. Leave Travel Allowance (LTA)
    4. House Rent Allowance (HRA)
    5. Various allowances like those for MPs/MLAs, minor child income, helper, children education, and special allowances
    6. Deductions for housing loan interest on self-occupied or vacant property (Section 24)
    7. Exemptions or deductions for other allowances or perquisites including food allowance
    8. Employee’s own contribution to NPS
    9. Donations to political parties/trust
    10. Standard deduction of Rs. 50,000 (allowed from FY 2023-24 onwards)

    Under the New tax regime, you can claim income tax deductions and exemptions including:

    1. Transport allowances for specially-abled individuals.
    2. Conveyance allowances for employment-related travel expenses.
    3. Compensation for travel costs during tours or transfers.
    4. Daily allowances for regular work-related expenses during absence from duty.
    5. Perquisites for official purposes.
    6. Exemptions for voluntary retirement, gratuity, and leave encashment.
    7. Gifts up to Rs 50,000.
    8. Deduction for employer’s contribution to NPS account (Section 80CCD (2))
    9. Standard deduction of Rs 50,000 introduced from FY 2023-24.

    Old tax regime Vs New tax regime: Which is better?

    Both the old and new tax regimes have their pros and cons. The old tax structure promotes saving habits among taxpayers, while the new system benefits employees with lower incomes and investments by offering fewer deductions and exemptions. The new regime is deemed safer and simpler, with fewer records and less potential for tax evasion. However, because individual deductions and exemptions vary, a detailed comparison of the two regimes is essential to determine the most suitable option for everyone.

    The decision between sticking with the old tax regime or embracing the new one holds significant weight for your financial future. While the old system may seem familiar and comfortable, it is crucial to explore the potential benefits and drawbacks of the new regime. Embracing the old & new tax regime, though requiring adaptability, could unlock avenues for optimizing your finances and maximizing your savings. Schedule a free consultation call today to explore old & new tax regime options so that you make the best choice for your financial well-being.



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