Last Updated on Feb 22, 2022 by Ayushi Mishra
Income tax is that portion of income that every taxpayer must pay to the Government. It is the Government’s fair share of income that is spent on the country’s welfare.
Even though taxes benefit society as a whole, nobody likes to let go of their hard-earned money. People always look for opportunities to reduce their income tax liability. You can legitimately reduce your tax liability by claiming expenses and deductions under various sections of the Income Tax Act, 1961.
Let us read further on how to reduce taxable income in India.
This article covers:
- Legitimate ways to save income tax
- Deductions under Section 80C
- Section 80CCD(1B): Deduction for contribution to National Pension System (NPS)
- Section 80D: Medical insurance premium
- Section 24: Income from house property
- Section 80TTA/ 80TTB
- Section 80CCC Deduction
- Deduction under Section 80CG
- Deduction under Section 80EE
- Deduction under Section 80DD
- Deduction under Section 80DDB
- Deduction under Section 80G
Legitimate ways to save income tax
Income tax Sections – 80C, 80CCC, 80CCD, 80D, 80DD, 80DDB, 80CCG, 80G, are the broad sections where the majority of the deductions are covered. Let’s focus on each section in detail to help you trim down your tax liability.
1. Deductions under Section 80C
Section 80C gives you a long list of investments/deductions but has an upper limit of Rs. 1.5 lakh, i.e. one type of investment will limit the scope for availing benefits from other investments.
Following are some prominent investment alternatives available under Section 80C
PPF (Public Provident Fund)
Investments in Public Provident Fund, a government-established savings scheme, is eligible for deduction under Section 80C. PPF investments have a maturity period of 15 years, and interest earned on PPF investments is tax-free.
Also known as tax-saving mutual funds, they come with a lock-in of 3 years. They are the only mutual funds in India that give tax benefits.
5-year tax-saver FDs offer you deductions up to Rs. 1.5 lakh under Section 80C. Risk-averse investors should consider investing in 5-year tax-saver FDs that usually offer 6-8% returns.
NSC (National Saving Certificate)
A National Savings Certificate will also give you a rebate of up to Rs. 1.5 lakh, provided other investments do not utilize the limit under Section 80C. NSC has a maturity period of 5 and currently offers 6.8% returns.
Home loan repayment
The amount that goes towards the repayment of the principal amount ( not the interest amount) on a home loan is tax-deductible up to Rs. 1.5 lakh per annum under Section 80C.
Payment of tuition fees
Individuals can claim deductions up to Rs. 1.5 lakh per annum for the amount paid towards tuition fees for their child’s education for a maximum of 2 children.
SCSS (Senior Citizens Savings Scheme)
SCSS investments offering 7.4% returns are tax-deductible up to Rs. 1.5 lakh. SCSS is available only to those above 60 and has a tenure of 5 years.
2. Section 80CCD(1B): Deduction for contribution to National Pension System (NPS)
NPS is available to both government and unorganized sector employees. Individuals can claim an additional deduction of up to Rs. 50,000, over and above the Rs. 1.5 lakh claimable under Section 80C for their investments in NPS.
3. Section 80D: Medical insurance premium
Individuals and HUF are entitled to claim a deduction of Rs. 25,000 ( Rs. 50,000 in case of senior citizens) for the medical insurance paid in the previous year. The deduction is available for the medical insurance premiums of self, spouse, dependant children, and dependent parents. A deduction of Rs. 5000 can also be claimed for any payments made towards preventive health check-ups within limits mentioned above.
4. Section 24: Income from house property
Section 24 allows you to claim deductions of up to Rs. 2 lakh on the home loan interest provided the owner resides in the same property or the property is vacant. The whole interest portion is allowed as a deduction if the property is rented.
5. Section 80TTA/ 80TTB
Interest saving accounts in banks, cooperative societies and post offices are exempt up to Rs. 10,000 for people aged below 60 under Section 80TTA. Section 80TTB provides an exemption of Rs. 50,000 to senior citizens on all kinds of deposits, including saving account interests and FD’s.
6. Section 80CCC Deduction
Individuals can claim a deduction of up to Rs. 1.5 lakh under Section 80CCC for their contributions towards pension funds that are offered by life insurance. No other pension funds shall be considered for Section 80CCC, and the deduction of this section is within the limit of Section 80C.
7. Deduction under Section 80CG
This section was introduced to provide relief to individuals who are not receiving any house rent allowance but are paying rent for their accommodation. Every individual that files a declaration in form 10BA and does not own any residential accommodation under his/her ownership can claim a deduction of the least of the following:
- Actual rent paid reduced by 10% of the adjusted total income.
- Rs. 5,000 per month.
- 25% of adjusted total income.
8. Deduction under Section 80EE
Section 80EE allows individuals to claim deductions of the interest portion of the loan facility availed for their residential house property, provided the house’s value is Rs. 50 Lakh or less, the quantum of loan availed is Rs. 35 lakh and less and the loan is sanctioned by a financial institution between 4 April 2016 to 31 March 2017. Deduction of up to Rs. 50,000 cab be availed under Section 80EE, and this amount is up and above the deduction of Rs. 2 lakh provided under Section 24.
9. Deduction under Section 80DD
To incentivize differently-abled people, the Department has provided a deduction for differently-abled dependants. The quantum of the deduction is Rs. 75,000 when the disability is more than 40% but less than 80% and Rs. 1.25 lakh when disability is more than 80%.
However, the deduction won’t be allowed to the individuals/HUF when the dependant has claimed a deduction for himself under Section 80U.
10. Deduction under Section 80DDB
Individuals and HUF assesses can claim a deduction for treating certain specified diseases and ailments. The ailments and diseases covered in this section are given in Rule 11DD of Income Tax. A prescription from a certified doctor is compulsory for claiming deduction under this section.
11. Deduction under Section 80G
Assesses can claim deductions for donations and contributions made to certain prescribed charitable organizations and funds. The quantum of the deduction is capped to two limits – 100% and 50% deduction without any qualifying limit.
Major donations that qualify for 100% deduction
- National Defence Fund set up by the Central Government
- Prime Minister’s National Relief Fund
- National Foundation for Communal Harmony
- An approved university/educational institution of National eminence.
Major donations that qualify for 50% deduction
- Jawaharlal Nehru Memorial Fund
- Prime Minister’s Drought Relief Fund
- Indira Gandhi Memorial Trust
- Rajiv Gandhi Foundation
Duly filing your income tax is the primary duty of any responsible citizen. By investing in tax-saving investment options and claiming appropriate deductions, not only do you reduce your net tax liability but also earn decent returns. Consult your tax advisors and make investments to best use these exemptions.