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Income Tax deduction simplified

Some one had once said “the best things in life are free, but sooner or later the government will find a way to tax them”. Over the past few years, the Government has steadily whittled down tax exemptions available to the common man. Thankfully, there are some still available that allow deductions from our gross income.

You can apply smart tax planning techniques within the existing framework to optimize your post tax net income. The following is a quick review of some provisions that help minimize tax liability.

Like the Heads of Income defined in our earlier article, tax saving methodology too is neatly defined. The most common deductions used by various individuals.

  • HRA Exemption under section 10
  • Deductions on Interest paid on Housing Loans under Section 24
  • Deductions on Medical Insurance Premium under Section 80D
  • Deduction under section 80C and 80CCC

HRA Exemption under section 10

House Rent Allowance (HRA), which falls under the head Salary, is a component that has a part of it exempt from tax liability. So, if you are getting HRA it should be ensured that a rent receipt is given to the employer to reduce the taxable portion of HRA.

The extent of exemption is calculated as the lowest of following three values :

  • The excess of actual rent paid over 10% of the basic salary
  • Actual HRA received
  • If you live in a Metro i.e. Delhi, Chennai, Kolkata, or Mumbai then 50% otherwise 40% of basic salary received.

Deductions on Interest paid on Housing Loans under Section 24

It is smarter to take housing loan even if you have the money to buy a house outright. Home loans are one of the cheapest forms of loans available and also offer tax benefits. On the first house, interest up to Rs 1,50,000 is tax deductible. For the second house, the entire interest without any limit is eligible for tax deduction, however you will get the benefit if the annual value of the second house is less than the actual interest paid by you during the year.

 

Deductions on Medical Insurance Premium under Section 80D

 

Medical insurance is an imperative, especially in a country like ours, where the State does not cover medical costs. You should take a medical insurance cover for yourself as well as your family, irrespective of the tax deductions available.

A tax deduction up to Rs 15,000 is allowed in respect of medical insurance premiums paid by an you. If you are a senior citizen, a higher deduction of Rs 20,000 is available. Last year, our Finance Minister had extended the benefit of medical insurance premiums paid for parents by allowing an additional deduction up to Rs 15,000 or Rs 20,000, if any of your parents are senior citizens.

Deduction under section 80C and 80CCC

Section 80C deductions are the most popular section. Under section 80C, any investment up to Rs 1 lakh made in certain specified instruments can be reduced from your taxable income.

There is a long list of eligible investments including an employee’s provident fund contribution, tuition fees paid for children, principal portion of housing loan installments, investments made in Public Provident Fund (PPF), Equity  Linked Saving Scheme (ELSS), National Savings Certificates (NSC), Senior Citizen Savings Scheme, Post Office Term Deposits, Life Insurance premiums paid etc. This limit of Rs. 1 lakh also include deduction of upto Rs 10,000 available under 80CCC with respect to  contribution to certain pension funds or annuity plans of Life Insurance Corporation of India or any other insurer.

Other Deductions

  • Interest on Education Loan: Under section 80E, you can avail tax deduction with respect to the interest paid on repayment of education loan taken from a bank or any other financial institutions in India or worldwide, for higher education.
  • Donations: Deduction in respect of donations made by the you under section 80G to certain funds, charitable institutions, etc.
  • Handicapped Dependent and Medical Treatment: Under section 80DD deduction can be claimed in respect of maintenance including medical treatment of handicapped dependents. Further deduction, in respect of medical treatment of specified life threatening diseases, is available under section 80DDB. Deduction is also available in case of a person with disability.

Conclusion

Making use of all these exemptions and deductions lowers taxable income and consequently minimizes your tax outgo. The tax laws provide you with an opportunity to reduce your taxable income at the Gross Total Income level as well. Tax is always calculated on Income, net of deductions, i.e., gross total income reduced by deductions under above mentioned sections.

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Manish Misra
Manish is an Internet Professional and is currently employed with India's leading internet portal. He has versatile experience spanning across internet, e-business and retail financial services domains.

He has authored several analytical articles on personal finance in The Times of India and The Economic Times. Being a finance geek and having been involved with internet since the early days of the medium, he was a great help and source of guidance while formulating personalmoney.in. You can know more about Manish at ManishMisra.com

Disclaimer : Manish has agreed to write in his personal capacity. Views, opinions expressed in his articles are his own and do not necessarily reflect the views of his employer.

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