We all know that tax evasion is illegal and whoever tries to avoid tax shall be penalized under the Income Tax Act. But there are few legitimate ways to reduce tax burden. Income Tax Act, 1961 of India provides certain deductions in respect to income and expenses in order to give some tax relief.
1. Chapter VI-A deductions
Chapter VI-A contains deductions are from gross total income. Important point to be noted here is that if there is no gross total income, then no deductions will be permissible.
For the Purpose of the deduction under chapter VI-A we have to remember that the deduction would not be allowed from Long term capital gain, short term capital gain on equity shares/equity mutual funds and winning income
The following are various important deductions available under Chapter VI-A:
i. Section 80C
Deduction in respect of investment/contributions. Section 80C provides for a deduction for savings in specified modes of investments. It includes Investment in Life insurance policy, Deposit in PPF/SPF/RPF, repayment of housing loan principal etc. The deduction under section 80C is available only to an individual or HUF. The maximum permissible deduction under section 80C is Rs 1,50,000.
ii. Section 80CCC
Deduction under this section is in respect to contribution made to annuity plans of LIC or any other insurer for receiving pension funds. Deduction of total amount deposited or ₹150,000 whichever is less is allowed. Interest earned on such contributions shall not be included in total deductible amount
iii. Section 80CCD
● Section 80CCD (1) provides a deduction for the amount paid or deposited by an employee in his pension account subject to a maximum of 10% of his salary. In the case of a self-employed, restriction is up-to 20% of his gross total income in the previous year
● Section 80CCD(1B) provides for an additional deduction of up to 50,000 in respect of the whole of the amount paid or deposited by an individual assessee under NPS in the previous year.
● Under Section 80CCD (2), contribution made by Central government or any other employer in previous year to the employee’s account is allowed as deduction while computing total income of the employee
iv. Section 80CCE
This section restricts the deduction under section 80C, 80CCC, 80CCD(1) to Rs.150,000 aggregate. Deduction under 80CCD(2) is outside the preview of the aggregate amount of ₹150,000
v. Section 80D
Deduction on health insurance premium is available for individuals and HUFs.
● Premium paid in respect of health of self, spouse and dependent children is deductible up to maximum of ₹25,000 in aggregate.
● Further deduction of ₹25,000 is allowed in case of premium paid for health insurance of parents . Increased deduction of ₹50,000 is allowed in case the persons mentioned are senior citizens i.e, above 60 years of age
● Deduction of ₹5,000 is allowed for preventive health checkup. However, it is within the limit of ₹25,000 or ₹50,000 as the case may be
● For HUFs, maximum deduction available would be ₹25,000 but in case any member of HUF is a senior citizen, maximum of ₹50,000 shall be allowed
● Deductions mentioned above shall be allowed only if the payments are made in any mode other than cash except for preventative health checkup which can be paid by the mode of cash
vi. Section 80G
An assessee is entitled to deduction under section 80G if any donation is made towards eligible funds or institutions. The deduction is limited to certain percentage as specified. For example
a. National Defense Fund by Central Government 100%
b. The Jawaharlal Nehru Memorial fund 50%
c. Prime Minister’s Drought Relief fund 50%
d. The National Children’s fund 100%
e. The National Illness assistance fund 100%
There are also other funds whose deductions are available in 80G. No deduction shall be allowed in respect of donation made of amount exceeding ₹2,000 unless such amount is paid in any mode other than cash.
vii. Section 80GG
Any assesses who is not in receipt of House Rent Allowance qualifying for deduction under section 10(13A), can avail this deduction.
● Expenses incurred on accommodation should not exceed 10% of his total income
● The accommodation should be occupied by the assessee only for residential purposes
viii. Section 80E
This section allows deduction in respect of any interest on loan paid in previous year. Such loan should be taken for the purpose of pursuing higher education of the assessee or his spouse or children. The loan should be taken from any financial institutions or approved charitable trust. The deduction is allowed up to seven years immediately succeeding initial assessment year or until the interest is paid fully, whichever is earlier
ix. Section 80EEB
● Under this section, interest on loan paid on purchase of an electric vehicle by the assessee.
● The loan should be sanctioned by specified financial institutions or banks
● The total deduction under this section shall not exceed ₹150000.
● The amount allowed as deduction under Section 80EEB shall not be allowed as deduction under any provision of the Act
x. Section 80DD
Section 80DD provides deduction to an assesse who is a resident of India for any amount incurred for medical treatment of a dependent person with a disability.
● The deduction is also allowed for expenses incurred to treat a person suffering from autism, cerebral palsy and many others
● Quantum of deduction is ₹75,000 and ₹125,000 for persons with severe disability (80% or above)
xi. Section 80DDB
This section provides deduction for any amount paid for medical treatment of such disease that is specified in the rules made by the Board
● The amount of deduction shall be equal to amount actually paid or ₹40000, whichever is less.
● In case the individual is a senior citizen i.e. above 60 years of age, the amount of deduction allowed is amount actually paid or ₹100000 whichever is less
xii. Section 80U
Deduction under this section is available to a resident individual with disability.
● Deduction of ₹75000 in respect of person with disability
● Deduction of ₹125000 in respect of individuals with severe disability (80% or above)
2. Exemption under Capital Gains
Under the head Income from Capital Gains, there are exemptions available. These are the exemptions under section 54, 54B, 54D, 54EC, 54EE, 54F
i. Section 54
The conditions for availing deduction under Section 54 are;
● The Capital Gain should be from sale of residential property
● Should be a long term capital asset
● Income from such house should be chargeable under the head “Income from house property”
● The amount of exemption shall be cost of new residential house(s) or long term capital gain whichever is less
● Where the amount of capital gain exceeds Rs. 2 crores, one residential house in India should be
i. Purchased 1 year before or 2 years after the date of transfer or
ii. Constructed within 3 years of date of transfer
● Where the capital gain does not exceed ₹ 2 crore the individual or HUF may
i. Purchase two residential houses 1 year before or 2 years after the date of transfer
ii. Construct two residential house property within 3 years of date of transfer
ii. Section 54B
To avail deduction under this section,
● There should be a sale of urban agricultural land
● The land should have been used for agricultural purposes for 2 years immediately preceding the date of transfer
● New agricultural land should be purchased within 2 years of transfer
● The exemption amount shall be the cost of new agricultural land or capital gains whichever is less
iii. Section 54D
● There must be compulsory acquisition of land and building, land or building forming part of an industrial undertaking.
● The land and building should have been used by the assessee for business purposes for 2 years preceding the date of transfer.
● The assessee must purchase any other land or building or construct any building within 3 years from the date of transfer.
● Cost of new asset or Capital gains whichever is less is exempt
iv. Section 54EC
● The transfer should be of long term capital asset- building or land or both
● The capital gain from such transfer should be invested in specified bonds, redeemable after 5 years, issued on or after 1.4.2018 by the National Highways Authority of India (NHAI) or the Rural Electrification Corporation Limited (RECL) or any other bond notified by the Central Government in this behalf.
● The security purchased shall not be transferred within 5 years of investment
● The amount of exemption shall be capital gain or amount invested in capital gains whichever is lower
v. Section 54EE
● Exemption of long-term capital gains on investment in notified units of specified fund as may be notified by government
● The units in which investment is made by the assessee should be issued before 1st April 2019 of such fund as notified by the Central Government
● The investment has to be made within 6 months after the date of transfer.
● The maximum investment in units of the specified fund in any financial year is Rs. 50 lakh
● Such investment made should not be transferred for a period of 3 years
vi. Section 54F
● There must be a transfer of long-term capital asset other than residential property
● The assessee must purchase 1 residential property within 1 year before the transfer or 2 years after, or; construct one residential building within 3 years of transfer
● The new residential property should not be transferred within 3 years of purchase. If transferred, the amount exempted earlier shall be charged as capital gain
3. Income exempt u/s 10
Section 10 of the Income tax Act provides certain exemptions. They are
i. Section 10(1)
● Any rent or revenue received from a land used for agricultural purposes are exempt
● The processes should be ordinarily employed not for sale in the market
● The agricultural land must be outside urban areas
ii. Section 10(2)
● Any amount of money received by an individual as a member of an HUF is exempt
iii. Section 10(5)
● Leave Travel Concession paid by the employer for employee's travel
● This can be availed only for 2 travel leave in 4 years
● The place of travel should be anywhere in India only
iv. Section 10(6)
● Exemption for income of an individual who is not a citizen of India
v. Section 10(7)
● Perquisites paid by Government of India to an Indian citizen is exempt
vi. Section 10(6A)
● Royalty received from a foreign company is exempt
vii. Section 10(10)
● Gratuity given to an employee as a compliment for his contribution to the organization
● The amount of gratuity is calculated differently for government and private employees and employees covered under Payment of Gratuity Act, 1972 and who are not
viii. Section 10(10A)
● Commutation of Pension in lump sum instead of periodical payments
● The commuted pension is fully exempt for Government employees
● For non government employees, if Gratuity is received, ⅓ rd of commuted pension is exempt. If Gratuity is not received, ½ of commute pension is exempt
ix. Section 10(10AA)
● Leave Encashment at the time of Retirement
● Fully exempt for government employees
● For non government employees, exemption is actual amount received, statutory limit of Rs. 300000, 10 months salary or Cash equivalent to earned leave- whichever is lower is exempt
x. Section 10(10CC)
● Tax on perquisites paid by employer on behalf of employee
xi. Section 10(10D)
● Sum received by an Insurance policy
● Exempt if re received on death of a person and
● Issued between 01-04-2003 to 31-03-2012 with premium payable not exceeding 20% of sum assured
● Issued after 01-04-2012 and premium payable does not exceed 10% of sum assured is exempt
xii. Section 10(13A)
● House Rent Allowance, subject to limit of;
● Actual amount received or 10% of salary or 50% of salary if the house is located in Metro, 40% if otherwise whichever is lower is exempt
These are few of the deductions and exemptions that can be availed by an assessee. Further there are exemptions available for Local authorities, News agencies, Professional and Research Associations etc. All these provisions provide some relief for assesses paying tax under Income Tax Act, 1961