ITR Filing: Essential income tax exemptions and deductions every taxpayer should know

Certain allowances are exempt from income tax up to certain thresholds. This essentially lowers your taxable income, which in turn lowers your total tax obligation. To receive these tax exemptions, you have to provide your employer with the required documentation when you file your income tax return (ITR).

Utilizing deductions and exemptions presents an excellent opportunity for salaried employees to reduce their tax liabilities. However, taxpayers must understand the fundamental difference between deductions and exemptions. While they might appear similar to first-time ITR filers, a closer examination reveals distinct definitions and their respective significance in tax payments.

Deductions refer to specific expenses that decrease your taxable income. Typical deductions for salaried individuals include investments made under Section 80C (such as PPF and ELSS), medical insurance premiums under Section 80D, and home loan interest under Section 24 of the Income Tax Act, 1961.

Exemptions refer to types of income that are entirely exempt from taxation. Allowances such as HRA and LTA fall into this category. By utilizing these exemptions, you effectively lower the taxable income considered by the government when determining your tax liabilities.

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Explaining some common income tax deductions

• Home loan interest: For Indian homeowners, claiming home loan interest under Section 24 of the Income Tax Act is a significant tax benefit. This provision lowers your tax liability by allowing you to deduct the interest you pay on your house loan from your taxable income. Interest paid on loans taken out to buy, build, or renovate a residential property is deductible.

Whether the property is rented out or self-occupied affects the deduction limit.

1. For self-occupied property: You are eligible to deduct up to ₹2 lakh per financial year, provided that construction is finished within the allotted time.
2. For rental property: There is no upper limit on the amount of interest you can deduct from your home loan; you can claim the full amount paid.

Additionally, five equal installments of pre-construction interest may be obtained starting in the year that construction is completed. For a smooth tax filing process, it is essential to keep accurate records of loan documents and interest payment receipts.

• Investments under Section 80C: Section 80C of the Income Tax Act, 1961 is a robust avenue for tax savings in India. It provides deductions for diverse investments and expenses, enabling you to diminish your taxable income and potentially decrease your tax liability.

Below is a summary of the deductions that qualify under Section 80C:

1. Public Provident Fund (PPF): This long-term investment choice has favourable tax advantages and interest rates.
2. Employee Provident Fund (EPF): This program, which is required for those on salaries, offers tax breaks on contributions made by both employers and employees.
3. Equity Linked Savings Schemes (ELSS): Mutual fund plans that invest in stocks and provide tax breaks and growth opportunities.
4. National Savings Certificate (NSC): This is a fixed-income deposit program backed by the government that offers tax advantages and guaranteed returns.
5. Cost of tuition: A deduction of up to ₹1.5 lakh can be made for the full-time education of up to two children paid for each year.

Section 80C allows for a maximum deduction of ₹1.5 lakh per fiscal year. Investments made in your name, the name of your spouse, and the names of your dependent children are all eligible for deductions. Unit Linked Insurance Plans (ULIPs), Senior Citizens Savings Scheme (SCSS), Sukanya Samriddhi Yojana (SSY), and National Pension System (NPS) are further investment options available under Section 80C of the Act.

• Medical insurance premiums: You can write off the premiums you pay for a variety of health insurance policies under Section 80D of the Income Tax Act. This section allows you to deduct the premiums you pay for health insurance that covers you, your spouse, your dependent children, and your parents. The age of the insured determines the maximum deduction limit:

1. Up to ₹25,000 can be claimed for health insurance premiums paid for yourself, spouse, and dependent children, irrespective of your age.
2. Up to ₹50,000 can be claimed for health insurance premiums paid for parents who are senior citizens aged 60 years or above.

The deduction amount remains unaffected by the type of insurance plan (whether individual or family floater). To claim the deduction, you must possess documents such as premium payment receipts and policy documents.

• Charities and donations made: The Income Tax Act’s Section 80G provides a way to contribute to charitable organizations and save money on taxes. It enables you to deduct contributions made to designated charity organizations and funds that have been authorized by the Department of Revenue.

The available deduction amount varies based on the recipient organization and the type of donation:

1. 50% deduction: A 50% deduction applies to the majority of donations given to recognized nonprofit organizations.
2. 100% deduction: Donations towards rural development or scientific research, for example, may be eligible for a 100% deduction.

Not every donation is eligible for a Section 80G deduction. Donations are only accepted from organizations that have been authorized and registered. To be eligible for the deduction, you need to get a donation receipt from the recipient organization with specific information on it. There might be restrictions on the amount of donations that can be deducted depending on your gross annual income.

It’s wise to investigate and confirm the eligibility of charitable organizations under Section 80G before taking advantage of this deduction for yourself and your interests. To optimize your tax benefit and support worthwhile causes at the same time, strategically plan your donations.

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Explaining some common income tax exemptions

• House Rent Allowance: This exemption is a valuable perk for salaried individuals who rent their homes. The extent of HRA exemption you can claim hinges on three key factors:

1. HRA received: The portion of your salary that your employer designates as HRA.

2. Rent paid: The actual monthly rent you pay for your accommodation, excluding maintenance costs.

3. Location: Whether you reside in a metro city (like Delhi, Mumbai, Kolkata, Chennai) or a non-metro city.

The tax-exempt HRA amount is determined by the least of these three figures:

1. HRA received from the employer.

2. Actual rent paid minus 10% of your basic salary + dearness allowance (DA).

3. 50% of your basic salary + DA (for metro cities) or 40% (for non-metro cities).

You must provide rent receipts to your employer for monthly tax deductions or include them with your ITR form to claim HRA exemption. Your taxable income may be effectively reduced by this exemption, possibly putting you in a lower tax bracket.

• Leave Travel Allowance: The LTA exemption amount is not contingent on the mode of travel but is instead a fixed limit set by the government for a block of four years. Within this period, you can claim LTA exemption for two journeys. Any unclaimed exemptions can be carried forward to the next block, subject to specific conditions.

Here is a more comprehensive explanation of LTA exemptions:

1. Who can claim: LTA exemptions are available to all employees, whether from the public or private sector.
2. Coverage: This exemption applies to expenses incurred on domestic travel within India for yourself, your spouse, children, dependent parents, and siblings.
3. Modes of travel: Eligible travel modes include flights (economy class), trains, or buses.
4. Exempt expenses: Only the actual cost of travel tickets (such as airfare, train fare, bus fare) is exempt from tax. Expenses like accommodation, food, or local conveyance are not eligible for exemption.

• Children’s education allowance: Employers in India do not typically provide a specific “Children’s Education Allowance.” Instead, individuals can benefit from tax exemptions on children’s education expenses under Section 10(14) of the Income Tax Act, 1961. This provision allows for a reduction in taxable income based on such expenditures.

There are two parts to this benefit:

1. Children’s Education Allowance (CEA): Up to two children may be exempt from paying taxes of ₹100 per month each, for a total of ₹2400 annually.
2. Hostel Expenditure Allowance (HEA): If your child lives in a hostel, you are eligible to receive an extra exemption of ₹300 per month for each child, up to a maximum of ₹7200 annually.

This exemption applies solely to your taxable income, thereby decreasing the amount you are liable to pay in taxes.

Combined, deductions and exemptions can substantially reduce the amount of taxes you owe. You can significantly reduce your tax liability and more effectively accomplish your financial goals by making use of income tax deductions and exemptions.

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Published: 20 Jun 2024, 10:34 AM IST