Budget: Decoding India’s Income Tax Deductions And Exemptions

In India, a taxpayer gets several income tax deductions and exemptions. The last day for filing an Income Tax return for Financial Year 2023-24 is July 31, 2024. Krishnanand decodes the Income Tax deductions and exemptions.

New Delhi:India’s Income Tax Act is a fairly complex law as it offers not only two regimes to calculate a taxpayer's liability to pay income tax under the old income tax regime and also the new income tax regime but it also offers several deductions, exemptions and a standard deduction that can be availed by taxpayers as per their income and investment behaviour to bring down their tax payment liability.

The new income tax regime, which was announced by the government in the 2020 budget, was aimed at reducing the number of deductions and exemptions available to taxpayers. It was aimed at reducing the complexity and making it simple to administer and collect the tax.

The government also amended the provisions of Section 115-BAC vide the Finance Act of 2023 to make the new tax regime the default tax regime from FY 2023-24 (AY 2024-25). As such the new income tax regime has become the default tax regime for assesses being an Individual, Hindu Undivided Family (HUF), and Association of Persons (AOP), excluding cooperative societies, and Artificial Juridical Person.

Though the new tax regime has become the default regime from the current assessment year, an eligible taxpayer has the option to opt out of the new tax regime and choose to be taxed under the old tax regime. The old tax regime refers to the system of income tax calculation and slabs that existed before the introduction of the new tax regime. In the old tax regime, taxpayers have the option to claim various tax deductions and exemptions.

Standard Deduction

A standard deduction of Rs 50,000 is available to taxpayers both under the old tax regime and new tax regime. It is being seen as a huge relief for middle-class taxpayers as an amount of Rs 50,000 is straightaway deducted from taxable income without any conditions.

Deductions available under the old tax regime

There are certain investments, payments and incomes on which a taxpayer can avail tax benefit under Section 24(b) of the Income Tax Act of 1961. For example deduction from Income from House Property on interest paid on housing loan and housing improvement loan.

In the case of self-occupied property, the upper limit for deduction of interest paid on housing loan is Rs two lakh in a financial year. However, this deduction is not available for a taxpayer who opts for the New Tax Regime. It is applicable on loans taken after April 1, 1999. If the owner lets out the property then he or she can claim the deduction of the actual interest paid on the housing loan without any limit. In this case, there is also no requirement for the housing loan to be of after April 1, 1999 and this option is available for loans borrowed anytime in the past.

Deductions under Section 80C, 80CCC, 80CCD(1)

Under these sections, a taxpayer can avail a combined deduction of upto Rs 1.5 lakh from income in a financial year. Section 80C covers the payments made to Life Insurance Corporation (LIC) Premiums, Provident Fund, Subscription to certain equity shares, Tuition Fees, National Savings Certificate, Housing Loan Principal and some other items.

While Section 80CCC covers the payments made towards the annuity plan of LIC or other insurer towards Pension Scheme, Section 80CCD(1) allows deductions for payments made to the Pension Scheme of Central Government.

Section 80CCD(1B) allows a maximum deduction of Rs 50,000 from taxable income towards payments made to the Pension Scheme of the Central Government, excluding the deduction claimed under 80CCD (1).

Similarly, under Section 80CCD(2), a deduction equal to 10 per cent of the salary of an employee of a PSU or corporate is available if contribution is made by the employer to the pension scheme of the central government. It will be 14 per cent of the salary of the employee if the employer is central or state government. Under Section 80CCH, the deduction of the total amount of contribution made to the Agnipath Corpus Fund under the Agnipath Scheme is available. This deduction is available on the contributions made by both the individual taxpayers and the government.

Section 80D

This section deals with deductions for healthcare, including preventive healthcare and on the payment of premium for health insurance. One can claim a deduction of up to Rs 50,000 from income for the health expenditure for self, spouse and dependent children and additional deduction of Rs 50,000 for parents as per the specified conditions.

Section 80DD

Under this Section, a taxpayer can claim a deduction of Rs 75,000 from income for the expenses incurred on disabled persons and a deduction of Rs 1,25,000 if the disability is severe (more than 80 per cent).

Section 80E

A deduction of Rs 40,000 is available for payments made towards one’s own medical treatment or for treatment of a dependent for specified diseases, the limit goes to Rs 1,00,000 if they are senior citizens.

Section 80E

One can avail deduction for payment of interest on a loan taken for higher education for oneself or a relative. This covers the actual amount of interest paid on such loans.

Section 80G

A taxpayer can avail deduction towards donations made to prescribed funds, and charitable institutions. In some cases, a 100 per cent donation is eligible for deduction while in some other cases, it is 50 per cent. In addition to these deductions, several other deductions are available to taxpayers and it is advisable to consult a qualified tax consultant or tax return preparer (TRP) before filing the income tax return.