Tax Deduction vs Tax Exemption
Both the terms sound similar, but there is a difference between Tax exemption and Tax deduction. The tax deduction is claimed after the calculation of Gross Total Income. At the same time, certain incomes or parts of Income are not taxable and are not considered in the calculation of Total Income. Such incomes are called exempt Income.
For example – Section 10 of the Income Tax Act 1961 prescribes certain incomes exempt from tax, such as Agricultural Income, a portion of House Rent Allowance, an Amount received on voluntary retirement or termination etc.
The ‘tax deduction’ and ‘tax exemption’ aim is to lower the overall tax liability.
What are Tax deductions?
Tax deductions are the benefits that an Income Tax assessee gets in the form of a deduction from their taxable Income. Certain schemes are prescribed by Income Tax Act 1961, investment wherein can be claimed as a deduction from Total Income, and tax will be calculated only on the balance portion of Income. Thus, tax deductions can help you save a great deal of outflow in the form of taxes.
Types of Tax deductions
Chapter VI A of the Income Tax Act prescribes various sections where deductions are available from Gross Total Income. Some of the most commonly used sections relevant to Individuals and HUFs are discussed below –
(i) Section 80C
Section 80C allows deduction from Gross Total Income if an investment is made in some specified schemes. The maximum deduction available under this section is ₹1,50,000. Some of the schemes specified under this section are Public Provident Fund (PPF), Life Insurance Premiums, National Saving Certificate (NSC), Bank Fixed Deposits (FDs), Senior Citizen Savings Scheme, Post Office Time Deposits, Unit-linked Insurance Plans, Home Loan Repayment, Mutual Funds & ELSS, Tuition Fees etc.
(ii) Section 80CCC, 80CCD (1) , 80CCD (1b) and 80CCD (2)
Contribution to Annuity pension plans and contribution towards national pension schemes by employers and employees are covered under these sections. The amount of deduction is different for all these sections.
The maximum deduction amount is ₹ 1,50,000 for section 80C, 80CCC, 80CCD(1).
An additional deduction of ₹ 50,000 is available for sections 80CCD(1b) and 80CCD(2) over and above 1.5 lacs.
(iii) Section 80D
Deduction in respect of premium paid for mediclaim is allowed under this section. The deduction is allowed for mediclaim paid for self, spouse, dependent children and parents. The amount of deduction is as follows-
(a) Premium paid for self, spouse and dependent children – ₹ 25,000
(b) Premium paid for parents(non-senior citizen) – ₹ 25,000
(c) Premium paid for parents (senior citizen) – ₹ 50,000
(A deduction of a maximum ₹ 5,000 can also be claimed for preventive health check-ups of the above persons. It will be included in the overall limit mentioned above)
Please note that where health coverage is not available for a senior citizen (60 years or above), a deduction of ₹ 50,000 can be claimed for medical expenditure incurred in respect of such a person.
(iv) Section 80E
Deduction for interest on loans taken for pursuing higher education is allowed under this section. Loans taken for self, spouse or children or for a student for whom the taxpayer is a legal guardian eligible for deduction under this section. No restriction on the amount of deduction.
(v) Section 80TTA/ 80TTB
A deduction of ₹ 10,000 for interest on saving banks for regular people and ₹ 50,000 for senior citizens is allowed under this section.
Benefits of Tax deductions-
There are several benefits associated with tax deductions which include:
(i) Tax deductions help in reducing tax liabilities to a great extent.
(ii) Investment in certain schemes to claim tax deductions builds investment habits which result in more significant savings.
(iii) Lower the taxes, the higher the disposable Income. Higher disposable Income increases the scope of investment and expansion in business.
There are many expenses and investments which are eligible for a tax deduction. The nature of these expenses and investments is prescribed in the Income Tax Act. It is sometimes complicated for an ordinary individual to understand the intricacies of the law. Hence, the help of an expert should be taken in planning taxes and preparation of an Income Tax Return so that every important provision which could be beneficial is noticed.
We encountered a consulting firm last year. They have guided us in one of the most crucial aspects of Income Tax, i.e., the Review of Income Tax Returns so that we take advantage of all important deductions and Tax benefits and respect the provisions of the Income Tax Act. They also provide Income Tax Consultancy Services which have helped a lot of business owners and individuals. Since then, they have been planning taxes, investments and finances for our business, along with support on bookkeeping, tax filing, regular compliances, and Tax / Legal advisory as and when required.