Income tax exemption essentially refers to the ways in which one can end up saving huge chunks of one’s savings. The Income Tax Act has put these provisions in place to inculcate a habit of saving amongst taxpayers in India.
Income Tax in India
Income tax is a crucial element of the economy of the nation. Paying the income tax allows one to contribute to the overall well-being of the nation by investing in its infrastructure and the way in which further development can be wrought. Plus, income tax also helps in generating more jobs by providing increased funding to budding industries.
Over the course of time, income tax laws and rules have been changed in order to accommodate more people with a certain income level, while allowing people in lower income groups to be protected from any unwanted financial overheads.
Such basic rules of income tax set the minimum qualifying income level for a person in order to be eligible for paying tax. Apart from that, there might be the need to secure the future of one’s immediate family or kin, and that might require extra savings on the part of the individual. This is where tax exemptions actually come in.
Exemption Rules and Limits under the Income Tax Act
Exemptions offered on income tax as per the tax rules are the ways in which one can try to save up more on the earnings made. These provisions are in place to allow people to cultivate a habit of saving, while aiding the financial institutions of India and also making a better financial future for themselves.
According to the Finance Act of 2014, taxable income eligible for complete tax exemption has been increased in its limits, from the earlier INR 200000 to INR 250000. People with an annual income less than or equal to INR 250000 will not be considered for paying income tax. This limit is for normal age citizens. In case of senior citizens, the maximum exempted income will be INR 300000 annually and for very senior citizens, the exemption can include annual income of up to INR 500000. As of December 2015, the available changes to the partial exemptions mentioned under the Income Tax Act can be listed out as follows –
- Additional Deduction as per Section 80C, 80CCC, CCD (1) – INR 50000
- Interest paid on housing loan as per Section 24 INR 200000
- Income Tax Rebate as per Section 87A – INR 2000 for income up to INR 500000
Allowance Exemptions – These exemptions take into account the allowances provided by the employer. These can also include Tour Travel Allowance, Tour Daily Allowance, Academic, Research or Training Allowance, Special Compensatory Allowance, High Altitude Allowance, Climate Allowance, allowances applicable to North East, Hilly areas of U.P., H.P. and J & K, border area allowance, Compensatory Field Area Allowance, Counter Insurgency Allowance, High Active Field Area Allowance, island duty allowance, tribal allowance and others as per Section 10 of the IT Act, but the most prominent ones are as follows
- House Rent Allowance
- Leave Travel Allowance or Leave Travel Concession
- Transport Allowance
- Children Education Allowance
- Hostel Subsidy
It should be kept in mind that these exemptions are allowed for salaried individuals only. Let’s take a look at the above exemptions in a bit more detail before moving on to the Sections of the Income Tax Act that deal with further exemptions.
House Rent Allowance
If rent is actually being paid, the individual can get an exemption as per the House Rent Allowance and that will be the least of the following –
- Actual House Rent Allowance received
- Actual Rent paid (minus 10% of salary)
- 40% of salary (50% in case of Mumbai, Chennai, Kolkata, Delhi)
Leave Travel Allowance or Leave Travel Concession
In case an employee furnishes valid proof in forms of bills that account for expenditure during travel and leave (for official or personal reasons), this allowance can be exempted.
Tax exemption on this is allowed up to a maximum of INR 800 per month and the exemption will be valid only for the expenditure done by the employee in commuting from the residence to the place of work.
Children Education Allowance
Allowed for a maximum of two children of the employee, the exemption is INR 100 per child per month.
Allowed for a maximum of two children of the employee, the exemption is INR 300 per child per month.
Interest paid on Housing Loan (or Income/Loss from House Property)
As per Section 24, the tax exemption for interest paid is already INR 200000. In addition to that, if a house has been procured for the first time and the total cost of property and amount of loan do not exceed INR 4000000 and INR 2500000 respectively, an extra deduction of interest up to another 1 lakh can be availed.
Sections of the IT Act for Income Tax Exemption
Apart from the aforementioned overview of exemptions that hold good for most people, it is crucial to understand what different sections of the IT Act deal with the matter of income tax exemption and how one can effectively utilise them. The various sections and a related description about each of them is mentioned further.
The total deduction allowed under this section is INR 150000 (including 80CCC and 80CCD (1)). This section deals with investments, savings and some expenditure that can avail deductions on income tax. Some of those are –
- Payment of premium towards life insurance
- Payment of premium or subscription for deferred annuity for self or immediate family
- Payment of premium (deducted from salary paid to government employee, limited to 20% of salary) or subscription for deferred annuity for self or immediate family
- Contribution towards Employee’s Provident Fund Scheme
- Contribution towards Public Provident Fund
- Contribution towards any recognised provident fund
- Investments done through deposits of 10 years or 15 years with Post Office Savings Bank
- Investments done as subscription to recognised securities or deposits scheme (e.g. – National Savings Scheme)
- Investments done as subscription to any notified savings certificate, Unit Linked Savings Certificate (e.g. – NSC VIII)
- Investments done as subscription to ULIPs (Unit Linked Insurance Plans) of any Mutual Fund
- Contribution towards fund set up by the National Housing Scheme
- Payments towards principal of any housing loan
- Payments made towards the tuition fees of any two children’s full time education in institutes based in India
Also accounting for some miscellaneous investments and savings scheme, the details as per this section are as follows –
- Payment of premium towards annuity plans of any insurance company
- Payment of premium for annuity plan of LIC or any other insurer (maximum cap of INR 100000)
Premium thus paid must be kept deposited in order to avail a deduction.
Section 80CCD (1):
This section deals with the deduction applicable if the assessee or the employee is contributing towards a pension scheme notified by the Central Government. The applicable limits of deduction are as follows –
- 10% of salary in the previous year in the case of an employee
- 10% of gross total income in any other case
Section 80CCD (2):
This section deals with the deduction applicable if the employer of the assessee or the employee is contributing towards a pension scheme notified by the Central Government. The applicable limit of deduction is 10% of salary in the financial year in the case of an employee.
It is worthwhile to note that this deduction is over and above the INR 150000 limit that includes deductions through Section 80C, 80CCC and 80CCD (1) (as per rules under Section 80CCE)
Since the announcement done as per the budget of 2012, Rajiv Gandhi Equity Savings Scheme allows investors with annual income less than INR 12 lakhs to invest a maximum of INR 50000 and avail a deduction of 50% of the investment amount. Thus, the maximum available deduction as per this would be INR 25000.
A maximum deduction of INR 40000 is allowed on medical insurance as per the rules stated in this section of the Income Tax Act. The limits and division of deduction is illustrated below –
- Deduction for self, spouse and dependent children – INR 15000 (INR 20000 for senior citizens)
- Deduction for parents (individual or both) – INR 5000 (INR 20000 for senior citizens)
- Deduction for preventive health check-up (within the INR 40000 limit) – INR 5000
This section deals with expenses related to the support of a handicapped dependent relative (s). The maximum applicable deduction will be INR 50000 subject to the expenses as follows –
- Medical treatment, training and rehabilitation of handicapped dependent relative
- Payment made towards a deposit or scheme that aids in the support of aforementioned relative
In case of severe disabilities (as regulated by the law), a maximum of INR 100000 can be claimed for deduction.
As per the list of diseases mentioned in Rule 11DD, a form 10 I can be furnished from any registered doctor and a maximum of INR 40000 or the actual expense (lesser of either) can be claimed for deduction. The expenses are to be of a medical nature for treatment of self or dependent relative.
A variable deduction can be claimed on loans taken for the cause of higher education for self or a relative.
A list of donations specified under this section can allow a 50% or 100% deduction with or without restriction.
This section pertains to the house rent that is paid by the assessee. The limits are the least of the following –
- Actual rent paid minus 10% of the total income
- INR 2000 per month (till a maximum of INR 24000 annually)
- 25% of the total income
The above limits will be viable only if the assessee, his/her spouse or minor child
- Not own a residential accommodation at the place of employment
- Not receive house rent allowance
- Not have self-occupied residential accommodation in any other place
A variable deduction with respect to payments made towards scientific research or rural development.
A variable deduction with respect to contributions made towards political parties.
A maximum deduction of INR 300000 on royalty income from patents.
A maximum deduction of INR 300000 on royalty income to the author of certain books other than textbooks
As of 2015, a maximum deduction of INR 10000 is allowed on the interest earned on deposits in savings accounts. This deduction will be made from the gross total income of the assessee.
Similar to Section 80DD, this deals with the income of an individual with physical disability or extreme mental disability. In cases of severe disability (as defined by the law), a maximum deduction of INR 100000 can be availed. In all other cases, a deduction of INR 50000 will be allowed.
Tax Exemption and Income Tax Filing:
Going through all the available tax exemption and deductions that are in the system, one can be fairly sure that in certain cases, when one is being constrained while considering payment of taxes, there is leeway available most of the time. However, it shouldn’t be taken lightly that such exemptions are not cross verified and the details not checked. Filling up one’s income tax return diligently allows such deductions and exemptions to work as they are intended.