Exploring Deductions and Exemptions in Direct Taxation

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Income tax deductions and exemptions mitigate your tax liabilities during a financial year. They imply that the investments you made during the year offset against your gross annual income when you e-file your income tax return. The government offers these benefits to inculcate a habit of saving among citizens and build a stable financial future. 

In the following sections, we will explore a few tax deductions and exemptions you may benefit from.

Benefits of Tax Deductions and Exemptions

Tax deductions and exemptions have multiple advantages to offer, including the following:

  • They reduce a considerable amount from your taxable income, diminishing your tax liabilities. 
  • Investing in various plans to reduce tax liabilities inculcates a habit of saving money. 
  • Income Tax deductions prevent the income from entering a higher tax bracket. Hence, you can claim deductions for the amount spent on education, medical, and charitable expenses.

Various Tax Deductions and Exemptions in India

While e-filing income tax return is necessary for all, you can avoid tax payments through proper tax planning. The various options to reduce tax liabilities include the following:

  • Bank Fixed Deposits (FDs): The Section 80C offers a tax deduction of up to Rs. 1.5 Lakh if you invest in a tax-saving FD for a period of five years. The tax-saving FD option is available in almost all Indian banks. However, the interest earned on these FDs is taxable.
  • Public Provident Fund (PPF): Section 80C of the Income Tax Act 1961 provides tax deductions of up to Rs. 1.5 Lakh on your contributions to a PPF account.
  • National Saving Certificate (NSC): NSC investments are eligible for income tax deductions under Section 80C of the IT Act, 1961. Although the interest amount you earn from NSC is taxable, it qualifies for a tax deduction after reinvestment.
  • Life Insurance: Life insurance premiums for yourself, your spouse, or children provide tax deductions under Section 80C of the Income Tax Act. The amount you receive at the policy’s maturity is free from tax liabilities. However, the final exemption is subject to the terms and conditions mentioned in the insurance policy.
  • Medical Insurance: Medical insurance premiums paid for yourself, children, parents, or spouse qualify for tax deductions of up to Rs. 25,000 under Section 80D and Rs. 50,000 if the insured parent is over 60 years of age. 
  • Treatment of Disabled Dependents: Under Section 80DD, you may claim a deduction of up to Rs. 75,000 for the treatment of a disabled dependent and up to Rs. 1.25 Lakh for the treatment of a severely disabled dependent.
  • Retirement Savings Plan: LIC and other insurance companies offer several retirement plans eligible for income tax deductions. For instance, contributions to the NPS are eligible for tax deductions up to Rs. 2 Lakh under Sections 80CCD (1) and 80CCD (1B).
  • Post Office Time Deposit (POTD): Investments in POTD for 5-year periods get tax deductions of up to Rs. 1.5 Lakh under Section 80C of the Income Tax Act, 1961. However, the interest earned on the investment amount is taxable.
  • Senior Citizen Savings Scheme (SCSS): Several banks offer SCSS schemes to senior citizens. They are eligible for tax exemptions under Section 80C of the Income Tax Act. However, the interest earned is taxable.
  • Home Loans: The Home Loan EMIs payable for principal repayment are tax deductible up to Rs. 1.5 Lakh under Section 80C of the IT Act, 1961. Section 24(B) also offers tax deductions of up to Rs. 2 Lakh on the interest amount.
  • Mutual Funds and ELSS: If you invest in mutual funds and ELSS, you claim a tax deduction of up to Rs. 1.5 Lakh under Section 80C of the IT Act, 1961.
  • Charitable Contributions: Section 80G of the Income Tax Act provides a tax deduction of 50% to 100% on the amount donated to eligible funds and institutions. However, ensure declaring the contribution before 31st December of the fiscal year.

Now that you understand the direct tax meaning and know the various tax deductions and exemptions available, you must plan your taxation accordingly and claim appropriate deductions when you e-file income tax returns. When choosing an option, consider your savings and investment goals to safeguard your financial future and build a strong investment portfolio.

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