In India, it is mandatory for any individual with a source of income to file their income tax. However, only individuals earning above a particular amount in a year have to pay income tax. Taxes are financial charges that a government imposes on an individual for the sole purpose of funding expenses carried out by the public and income tax is a type of direct tax. These taxes help the Government carryout their day to day functions and operations smoothly and reduces their financial constraints. In order to save tax, the Indian Income Tax Act offers a host of tax exemptions or deductions to persons who pay taxes on a regular basis.
Tax deductions can be termed as exemptions offered by the Government to tax payers that help them reduce a portion of their tax liability and save on tax. With the help of these tax deductions, tax payers may be able to save a significant sum of money. The Income Tax Department of India is run and operated by the Central Board for Direct Taxes (CBDT) which is a part of Department of Revenue managed by the Indian Revenue Services under Government of India’s Ministry of Finance. However, there are certain sections only on which the Government of India imposes direct tax in the form of Income Tax. These sections are as follows:
- Hindu Undivided Families.
- Co-operative societies.
- Other artificial persons.
These deductions are available to the tax payers for amounts up to Rs. 1.5 lac per year under Section 80C. They are basically used for certain expenses like investments, insurance premium payments, repayment of the principal amount of the home loans, provident funds etc. Individuals as well as Hindu Undivided Families are eligible to avail these tax deductions. This tax exemption supports a number of sections under them. This deduction form also supports a number of extra exemptions like mutual fund investments, savings schemes for senior citizens, amount paid for buying NABARD bonds etc. The main investment made by the tax payers which are eligible for tax deductions under Section 80C are as follows:
- Amount paid by the tax payers for fixed deposits with a minimum term of 5 years.
- Payment made by the tax payer for either constructing or buying a new residential property.
- Tuition fees paid for the education of children (max 2 children).
- Amount paid by the tax payer towards either a provident fund or superannuation.
- Payment made by the tax payer towards the life insurance policies of partner, self and even children.
The Income Tax deductions under section 80C are commonly known by their sub-sections. These sub-sections are as follows:
- Section 80CC- Section 80CC under Section 80C is applicable on investments made by tax payers in several pension funds. A maximum amount of Rs. 1.5 lacs can be availed by the tax payer under this sub section and the pension fund can be from any available insurer. But one limitation of this sub section is that the exemption that it offers can only be claimed by an individual tax payer.
- Section 80CCD- this tax deduction is available only to individual tax payers. This section helps tax payers inculcate a savings habit in them. There are various pension schemes available to the tax payers that are recognised by the Central Government. This section offers incentives and benefits to the tax payers who invest their money in those pension schemes. Financial contributions made by both the individual tax payer as well as his employer is taken into consideration for the purpose of tax deductions but those exemptions should not be more than 10% of the total salary of the person.
- Section 80CCF- there are a number of long-term infrastructure bonds that are Government notified and are available to the general tax payers. Thus, sub section 80 CCF offers tax exemptions to individuals as well as Hindu Undivided Families for subscribing to those bonds. A maximum amount of Rs. 20,000 can be treated as exempted under this section.
- Section 80CCG- under section 80CCG, only individual Indian residents that fit specific criteria are eligible for tax exemptions. An investment made by the tax payers in equity savings schemes that has been notified by the Central Government is only exempted in this section of tax deduction. These investments are subjected to a maximum limit of 50% of the investment amount of the tax payer. A maximum deduction of only up to Rs. 25,000 is made permissible to the tax payer by the Income Tax Act.
Tax deductions under Section 80D are made available to both individuals as well as Hindu Undivided Families as per government mandate. These exemptions are made in any mode other than cash. Amount of money spent by the tax payer on premium health insurance policy or any Central Government health plan of self, partner, parents and even children is eligible for income tax exemptions. In case of insurance taken out for partner, children or self, a maximum amount of Rs. 15,000 can be claimed by the Government for tax deduction. Again, if the person for whom the insurance is taken out is above 60 years of age, a maximum amount of Rs. 20,000 can be claimed as deduction. Section 80 D is again sub-divided into two main sub-sections. These sub-sections are as follows:
Section 80DD- the deductions available under this sub section are for severe as well as normal disability of the tax payer. For, normal disability, a maximum amount of Rs. 75,000 can be claimed and for severe disability, the maximum permitted deduction amount is Rs. 1.2 lacs. This type of deduction can be claimed on the amount of money spent by the tax payer for treating a dependant person for disability and for the amount of premium paid by the tax payer if he either buys or maintains an insurance policy of a dependant individual. This tax deduction is available to both resident individuals as well as Hindu Undivided Families and the dependants are basically partner, children or parents of the tax payer.
- Section 80DDB- when tax payers makes expenditures on various medical treatments of certain diseases, they become eligible for tax exemptions under this section. Both resident individuals as well as Hindu Undivided Families are eligible to claim income tax deductions under this section. The total permissible limit of Rs. 40,000 is available to the tax payer and if the tax payer is a senior citizen above the age of 60 years, the maximum limit increases to Rs. 60,000.
The Income Tax Deductions under Section 80E are available to the tax payer on the complete amount of interest paid by him for loan taken out for the purpose of higher education of dependant like partner, children or any other family member. These deductions makes it a point that if any family member of the tax payer is willing to opt for higher education and he takes loan for the same, then that loan should not be a reason of burden for the tax payer. This deduction can be enjoyed either by the tax payer himself or he has the liberty to sponsor the education of any of him family member. This deduction is applicable only to resident individuals with the amount of loan taken from only permitted charitable as well as financial institutions that are allowed benefits on tax. The subsection under Section 80 E is as follows:
- Section 80EE - the maximum amount of deduction permissible under Section 80EE is Rs. 3 lakhs and only resident individuals are eligible to avail this income tax exemption. The deductions are applicable on the amount of interest on a loan that is repaid by the tax payer in order to buy a new residential property that qualifies for income tax deductions.
The Income Tax Deduction under Section 80G is available on the amount of money contributed by the tax payer to various organisations that are involved in charitable works. They provide tax exemptions on various financial donations made by the tax payer. This encourages the taxpayer to donate more towards charitable causes. There is a certain limit on the amount of tax exemptions that are available in this section and every assessee is eligible to avail this deduction. They are only supposed to offer some sort of proof of the financial payment made as donations to charitable institutions. Key factors on which the tax deductions are based are as follows:
- 100% exemptions without limit - the funds that qualify for 100% exemption of income tax are National Defence Fund, Prime Minister’s Relief Fund, National Illness Assistance Fund etc.
- 100% deductions with certain limits - there are some deductions that hold certain amount of qualifying limits which is 10% of the gross total income of the tax payer as far as qualifying is concerned like money donated to local authorities, associations as well as institutions for family planning promotion, for development of sports etc.
- 50% exemptions without any limits- again, there are various funds are such qualify for 50% deductions. These include Prime Minister’s Drought Relief Fund, Rajiv Gandhi Foundation, etc.
- 50% deductions with certain limits- there are also certain funds like donations made to several organisations involved in religious services, other authorities that offer services other than family planning promotion, other institutions involved in charitable works, etc. that qualify for tax exemptions with some specific limits.
Subsections of Section 80G
Section 80G is further sub divided into four basic sub sections and they are as follows:
- Section 80GG- The maximum available deduction under this section is 25% of the total income of the tax payer or Rs. 2000 per month whichever is lower. Resident individuals who do not receive any kind of house rent allowance on the amount paid as rent by them are eligible to avail this type of deduction.
- Section 80GGA- all the profit, income or gains that an assessee has from a particular business or profession is eligible for income tax exemptions under this section. Also money donated by those persons towards National Urban Poverty Eradication Fund that will increase either the social, statistical or scientific status of others is also tax deductible under this section.
- Section 80GGB- when a particular Indian Company makes donations towards any political party or electoral trusts, they automatically becomes eligible for income tax deductions under this section.
- Section 80GGC- under this section, funds donated to political parties or electoral trusts qualify for tax deductions but those donations have to be made only by the individual assessee. However, no such qualification or eligibility is offered to local authorities or artificial judicial person making these donations.
Many taxpaying corporate assessee are involved in some kind of industrial activity like generation of power, telecommunication, SEZs, industrial parks etc. So the gains earned by them through these activities are eligible for income tax benefits under Section 80IA. This section has certain sub sections. They are as follows:
- Section 80 IAB- all the developers of SEZ who has received notification about tax deduction eligibility after 1/4/2005 are qualified to claim tax deductions on the profit gained by them through SEZ (Special Economic Zones).
- Section 80 IB- assesses who have received financial gains through hotels, ships, multiplexes, housing projects, convention centres, etc. are eligible for income tax deductions under this section.
- Section 80 IC- assesses that receives profits from special states like Assam, Mizoram, Meghalaya, Manipur, Nagaland, Tripura, Himanchal Pradesh, Arunanchal Pradesh, Uttaranchal etc are eligible for tax exemptions.
- Section 80 ID- when a particular establishment like hotels or convention centres of an assessee is located in a specific area such as a SEZ, then the profit from them becomes eligible for tax deductions under this section.
- Section 80 IE- when an assessee has a business based in North-Eastern India, then the profits earned by these enterprises become eligible for tax deductions but they are also subject to certain conditions.
Certain amendments were made under this section and as a result, two subsections of this section were introduced. They are as follows:
- Section 80 JJA- assesses who are involved in the business of processing and treating bio-degradable waste for the production of bio-fertilizers, pesticides etc, are qualified to earn tax deductions on the profit earned by them through this business. A maximum of 100% of their gains for 5 consecutive years since their business was established are eligible for tax deductions.
- Section 80 JJAA- Indian companies who earn gains for producing goods in factories are qualified for tax deductions under this section. An estimated 30% of the employee’s salary for 3 consecutive financial years is eligible for tax deductions. The returns under this section are computed by a chartered account in the form of a report.
Income Tax Deduction under Section 80 LA
Scheduled Banks who holds overseas banking enterprises in SEZs or offer International Financial Services Centres enterprises and also banks that are situated abroad and follow foreign rules are eligible for income tax benefits under this section. The maximum permitted deductions is 100% of the income for the initial 5 years and 50% of the income for the next 5 years subjected to land rules. The above mentioned entities should be allowable under SEBI Act, Banking Regulations Act or registration under any available laws.
Income Tax Deductions under Section 80P
Co-operative societies earning income through fishing, banking, cottage industry etc are eligible to claim tax deductions on their total 100% income. Co operative societies earning profits from different businesses like renting warehouses, securities or properties etc also qualify to earn tax deductions between Rs. 50,000 to 1lacs depending on the service involved.
Tax deduction under Section 80 QQB
Indian authors earning profits on royalty through literary, artistic and scientific book sale are eligible for tax exemptions to a total of Rs. 3 lacs.
Tax Deductions under Section 80 RRB
Indian individuals who earn profits through royalty of their patent rights qualify to earn tax deductions with a maximum limit of Rs 3 lacs. But here, the patent must be registered after the 1/3/2003 in order to qualify.
Tax Deductions under Section 80 TTA
Interest earned by individual tax payers as well as Hindu Undivided Families are eligible to earn income tax deductions to a maximum of Rs 10,000 under this section.
Tax Deductions under Section 80 U
Resident Indian tax payer who is disabled in any manner such as autism, unsound mind etc. is eligible to claim tax exemptions to a maximum of Rs 75,000 per year under this section. Individuals with severe disability qualify to get a maximum of Rs 1.2 lacs tax deductions subjected to certain conditions.