India has about eight crore personal tax-filers with the personal tax rates ranging from 5% to 42.74%. The basic tax exemption limit of INR 2.50 lakh also has not been revised for the past several years. As a result, it is important for the taxpayers to ensure that all permissible eligible tax deductions are analysed and claimed to optimize the tax outflow.
The Income Tax Act, 1961 (referred to as the “IT Act”) under chapter VI A provides some of the most popular and commonly availed deductions (such as deductions under Section 80C for specified investments, 80D for medical expenses or insurance premium and 80TTA for bank interest).
The IT Act provides for deductions for certain investments or expenditures incurred by a taxpayer or income earned by the taxpayer during the relevant tax period, subject to fulfilment of certain specified conditions. Here’s an overview of deductions that can be availed by individual taxpayers under chapter VI-A.
Deduction For Specified Investments Under Section 80C
Section 80C of the IT Act is one of the most popular deductions availed by individual taxpayers as it offers a bucket of investment options wherein an individual can claim deductions for the amount invested/expended during the previous year.
Some of the investment options under the said section include:
- Life insurance premium
- Employee’s contribution to recognized provident fund
- Contribution to public provident fund (PPF)
- National savings certificates (NSC)
- 5-years’ bank term deposits
- Equity-linked savings schemes (ELSS)
- Sukanya samriddhi yojana.
- Housing loan principal repayment and stamp duty or registration charges paid for acquisition of house property
- Tuition fees paid for children’s education in India
The maximum deduction that an individual or Hindu undivided family (HUF) is eligible to avail under Section 80C is cumulatively restricted at INR 1.5 lakh for a particular financial year.
Some of the popular alternatives for Investment under Section 80C of the IT Act are as follows:
Deduction For Specified Investments For Contribution To Certain Pension Funds
Section 80CCC of the IT Act
As per the provisions of Section 80CCC of the IT Act, an individual can claim deduction of premium paid towards annuity plans of pension funds such as Life Insurance Corporation of India (LIC) or any other insurer provided the Individual taxpayer must have paid the sum for renewal or purchase of a life insurance policy from their taxable income. The maximum quantum of deduction available under this section along with Section 80C and Section 80CCD(1) is subject to the threshold limit of Rs. 1.5 lakh.
Section 80CCD(1) of the IT Act
According to the provisions of Section 80CCD(1) of the IT Act, contributions made by an employee (government or private) or even other individual taxpayer to National Pension Scheme (NPS) or Atal Pension Yojana (APY) are eligible for tax deductions.
The amount of deduction that an individual employed with Central Government or any other private employer can claim in a financial year is lower of the following:
- i) For employees: 10% of the salary (Salary = Basic + Dearness Allowance); or
ii) For Others: 20% of the gross total income
- Amount of Actual Contribution
- INR 1.5 lakh
Section 80CCE of the IT Act
As per the provisions of section 80CCE, the overall/combined/aggregate deduction that an individual can claim under Section 80C, 80CCC and 80CCD(1) cannot exceed INR 1,50,000.
Additional Deduction on Investment in Pension Scheme Under Section 80CCD(1B)
In addition to Section 80CCD(1) above, section 80CCD(1B) provides the taxpayers with an opportunity to claim additional deduction of INR 50,000 over and above the limit of INR 1,50,000 as prescribed u/s 80CCD(1) for every financial year if they contribute to NPS or APY.
In order to optimize their taxes, individuals may first claim deduction under this section and balance, if any, may be claimed under Section 80CCD(1), since Section 80CCD(1) provides an umbrella threshold limit as aforementioned.
Deduction for Contribution by Employer in Pension Plan
Akin to Section 80CCD(1B), Section 80CCD(2) of the IT Act enables salaried individuals to enjoy additional benefit of their employer’s contribution to their pension schemes, such as NPS.
Such contribution made by the employer to the NPS shall be allowed a deduction in the computation of total, subject to a limit of 10% of the Salary or 14% in case of Central or State government employees (where salary would constitute as basic salary and dearness allowance).
Deduction in Respect of Health Insurance Premium
As per Section 80D of the IT Act, premium paid by an individual in respect of mediclaim premium for self, spouse or dependent children can be claimed as a deduction from tax for an amount equal to INR 25,000.
Apart from the above deduction, if an individual buys medical insurance in respect of the health of his/her parents, then additional deduction under this section is available to the extent of INR 25,000. Also, if the medical insurance is bought in respect of the health of any person who is a senior citizen, the limit of INR 25,000 is raised to a higher limit of INR 50,000.
Senior citizens above the age of 60 years who are not covered by health iInsurance, are allowed deduction of INR 50,000 towards actual medical expenditure. Also, deduction of INR 5,000 for any payments made towards preventive health check-ups can be availed within the overall limit of INR 25,000/INR 50,000.
The threshold limits for the purpose of claiming deduction u/s 80D are tabulated as follows:
Interest on Loan Taken for House Property under Section 80EEA
Section 80EEA of the Income Tax Act, 1961 provides an individual taxpayer deduction up to INR 1.5 lakh with respect to interest payable on loan taken from any financial institution for the purpose of acquisition of a residential house property provided the following conditions are satisfied:
- The loan has been sanctioned by the financial institution during the period beginning on the April, 1 2019 and March 31, 2022
- The stamp duty value of residential house property does not exceed INR 45 lakh; and
- The taxpayer does not own any residential house property on the date of sanction of loan.
For claiming deduction u/s 80EEA, the covered area of the residential flat is not relevant.
Under Section 24(b) there is a provision for claiming interest deduction up to INR 2 lakh per on housing loan for self-occupied property as well.
As such, in a situation where an individual is paying interest on a housing loan of say INR 325,000 per annum, they can claim a deduction of INR 1,25,000 under Section 80EEA and INR 2 lakh under Section 24(b).
Deduction on Interest of Higher Education Loan under Section 80E
Any Individual taxpayer may claim deduction for interest paid on education loan taken for self or spouse or children from any Financial Institution or approved charitable institution. The deduction could be claimed for a period of eight consecutive years beginning from the year in which the taxpayer first starts paying such interest.
Here higher education would mean any course of study pursued in India after passing the Senior Secondary Examination or its equivalent from any school, board or university recognised by the Central Government or State Government or local authority or by any other authority authorised by the Central Government or State Government or local authority to do so.
Deduction on Interest Payable on Loan Taken to Purchase an Electric Vehicle under Section 80EEB
Many individuals are now consciously trying to be more socially and environmentally responsible and thus, in order to curb pollution, individuals are now considering purchasing an electric vehicle instead of vehicles driven by fossil-non-renewable fuels, thus reducing pollution.
As a step to encourage individuals to buy electric vehicles, the finance act provides deduction under Section 80EEB wherein, an individual who has taken a loan for purchasing an electric vehicle can claim deduction of interest accrued thereon subject to fulfilment of following conditions:
- Loan should be sanctioned by a financial institution (i.e. bank or specified non-banking financial company) during the period between April 1, 2019 and March 31, 2023.
- The maximum amount of deduction that an individual can claim for a particular financial year is restricted to INR 1.5 lakh.
Donation to Certain Funds, Charitable Institution under Section 80G
Taxpayers making donations to certain funds or registered charitable institutions can claim such an amount either in full or in part as a deduction from tax under Section 80G of the IT Act. However, it is pertinent to note that donation in cash for an amount exceeding INR 2,000 shall not be allowed as deduction. Donations under this section are broadly classified under the following four categories:
Deduction With Respect to Rent Expenditure under Section 80GG
Individual staying in a rented property and is not in the receipt of House Rent Allowance (HRA) from his employer can claim deduction u/s 80GG of the IT Act subject to fulfilment of the following conditions:
- Individuals must not be in the receipt of HRA.
- Such an individual himself, his spouse, minor child or HUF does not own any residential house property at the place where he ordinarily resides or performs duties of his office or carries on his business or profession.
As per the said provisions, such individual can claim deduction of lower of the following:
- INR 5,000 per month.
- 25% of the adjusted total income.
- Actual rent paid in excess of 10% of the adjusted total income.
Donation for Scientific Research or Rural Development under Section 80GGA
Many individuals tend to provide financial assistance by way of donation for scientific research or rural development. No deduction would be allowed in the case an assessee derived income from “profits and gains of business and profession”.
Such individuals can only avail the benefit of deduction under section 80GGA without any upper limit, for the actual amount donated in Institutions which carries out projects or schemes approved under certain specified sections such S. 35(1)(ii), Section 35CCA, etc.
Deduction for Maintenance of a Dependant Who is a Person with Disability under Section 80DD
Every Indian resident individual can claim deduction Section 80DD of the IT Act with respect to expenditure incurred for medical treatment or maintenance of a handicapped dependant (which includes spouse, children, siblings and parents).
The amount of deduction as available in case of normal disability would be INR 75,000 and in case of severe disability, the same would be INR 1,25,000.
Deduction for Medical Treatment of Specified Disease under Section 80DDB
Individual taxpayers may claim deduction under section 80DDB for any amount actually paid for the medical treatment of specified disease or ailment (diseases specified in Rule 11DD include certain Neurological Diseases, Dementia, Parkinson’s, etc.) for themselves or any of their dependents.
The amount of deduction would be restricted to INR 40,000 and such threshold would be enhanced to INR 1 lakh in case of senior citizen patients. Further, the amount actually incurred would be reduced by the amount received, if any, under insurance claim.
The amount of deduction can be tabulated as follows:
Deduction in Case of a Person With Disability under Section 80U
Every resident individual classified as a person with disability by the medical authority shall, under section 80U of the IT Act can claim deduction of an amount of INR 75,000 provided such individual is an Indian resident. For people suffering with severe disabilities, the deduction limit is INR 1,25,000 per financial year.
However, it should be noted that if the taxpayer is already claiming tax under Section 80U, then Section 80DD would not be applicable. Further, similar to Section 80DD, such individuals will also be under an obligation to furnish the certificate issued by the medical authority in the prescribed form and manner along with the ITR.
Deductions With Respect To Income
Deduction With Respect to Interest Received on Deposits with Banks/Post Office under Section 80TTA and TTB
Section 80TTA allows individuals and HUFs to claim a deduction up to Rs. 10,000 for each financial year, who earns interest on savings accounts maintained either with a bank, co-operative society or a post office.
To give additional benefit to resident senior citizens (aged 60 years or more), Section 80TTB enhances the maximum limit of deduction to INR 50,000 per year and also allows interest received on time/fixed deposits as eligible for deduction under this section.
Deduction With Respect of Royalty Income from Certain Books
Any resident taxpayer, being author or joint author may claim deduction u/s 80QQB of the IT Act up to INR 3 lakh per annum. The eligible royalty may be received by way of lump sum consideration. In case the same is received otherwise than by way of lump sum consideration, the royalty would be computed as 15% of the value of books sold during the year.
This deduction would only be applicable in case of certain books such as work of literary, artistic or scientific nature and would not be applicable in case of royalties from brochures, commentaries, magazines, etc.
Limitations For Deductions Under Income Tax
At present, individual tax-filers have an option to be governed by the old tax regime or the new concessional tax regime. This option can be exercised each year at the time of furnishing the tax return. An individual opting for the concessional tax regime would not be eligible for claiming deduction under chapter VI A (except Section 80CCD(2) where an employer makes a contribution to NPS).
Apart from the above, it may be noted that the quantum of the deductions under Chapter VIA would be restricted to taxable income (before the deductions) and excess deduction, if any, would not be liable to be carried forward.
Such deduction cannot be claimed against long-term capital gains as well as capital gains subjected to special rates of tax under Section 112A or 111A of the IT Act.
Deductions once claimed under Chapter VI-A under the heading “C-deductions in respect of certain incomes” are not allowed to be claimed as deductions under any other provision of the IT Act.
Chapter VIA provides for several tax deductions and in view of the low basic exemption limit and high personal tax rates, it would be useful to carefully analyse, evaluate and avail the deductions available.