Types of Income Tax Deductions

Income tax paid by citizens constitutes a major chunk of the government’s revenue. It is imperative to pay taxes for the smooth functioning of the economy. Often a tedious expense, taxation also has perks to it.

Income tax deductions are a relief offered by tax authorities that help individuals lower their taxable income and ultimately reduce their tax outgo in any given financial year. These deductions are in the form of expenses or investments made by the taxpayer during the year. Deductions also inculcate a healthy savings routine.

But, what types of deductions under Income Tax are most suitable for you?

The most popular provisions of income tax deductions include investments made under Section 80C of the Income Tax Act, 1961. These are typically made in Equity Linked Savings Scheme (ELSS) funds, Public Provident Fund (PPF), National Pension Scheme (NPS), etc. With these types of deductions, you not only save tax but also earn profit on your investment.

Let’s get a closer look!

Types of Income Tax Deductions:

1. Life Insurance Premiums under section 80C

   When you pay a premium amount of a life insurance policy for children, spouse, or yourself, such amount paid as well as the maturity proceedings received are deductible from your taxable income. The deduction can be availed for a maximum of Rs. 1,50,000.

2. Public Provident Fund (PPF)

   If you have a small risk appetite and are looking to earn a high and stable return, PPF is the right tool for you. PPF is a government-mandated long-term investment with a mandatory lock-in period of 15 years. However, you have the option to withdraw a portion of funds after 5 years of the initial investment.

3. Equity Linked Savings Scheme (ELSS)

   Typically known as mutual funds, these are equity-oriented investments with a mandatory lock-in period of three years. These offer tax exemption of up to Rs. 150,000 from your annual taxable income under Section 80C of the Income Tax Act. Additionally, the income earned at the end of the tenure is considered as Long Term Capital Gain, taxed at 10%.

4. National Pension Scheme (NPS)

   This is one of the several types of deduction you can consider if you have a low-risk appetite. You invest in a pension account at regular intervals during your employment. After retirement, you can withdraw a certain percentage of the corpus. You will receive the remaining amount as a monthly pension post your retirement. A tax deduction up to Rs. 150,000/- can be claimed for your contribution and for the contribution of your employer.

5. Standard Deduction

   Under the old taxation regime, a standard deduction of Rs. 50,000/- is allowed to salaried individuals only.

6. Charitable Contribution

   Under Section 80G, declarations of completed charitable donations before December 31 every year are eligible for a tax deduction.

7. National Saving Certificate (NSC)

   Investments in NSC are eligible for a tax deduction up to Rs. 150,000/-. However, the interest earned is taxable in this cumulative scheme.

8. Home Loan

   First-time homebuyers can claim a deduction of Rs. 1,50,000/- on home loan interest payments under section 80 EEA. The crux here is that the buyer should not have an existing house in his name.

9. House Rent

   This deduction applies to salaried taxpayers who do not own residential accommodation at the place of employment and do not receive HRA. The extent of tax deduction is limited to the least of the following options:

   Rent paid minus 10% of the total adjusted salary

   • Rs. 60,000/- pa
   • 25% of the total adjusted income

10. Bank Fixed Deposits

    Investments made in fixed deposits with scheduled banks for a period of 5 or more years are eligible for a tax deduction. However, the interest earned on the fixed deposit will be taxable.

11. Interest on education loan

    Under Section 80E, you can claim a deduction of the interest paid on an education loan. This loan for higher education can be for your spouse, children or a student to whom you are a legal guardian. This deduction can be availed for eight years starting from the year you start paying the loan.

12. Tuition Fees

    Tuition fee paid for your children’s education qualifies deduction under section 80C. The fee has to be paid for full-time education in an Indian university or school for any two children. This does not include any donations made or development fees. A type of deduction that encourages education!

    These types of deductions are usually offered with an objective to encourage education.

13. Post Office Time Deposit

    These are 5 year-deposits that qualify for a tax deduction. The interest however is fully taxable.

14. Preventive Health Check-ups

    The amount (maximum Rs. 5000/-) that you spend on preventive health check-ups for yourself or your family members qualifies for tax deduction under section 80D of the Indian Income Tax Act, 1961.

15. Senior Citizen Savings Scheme (SCSS)

    Designed for Senior citizens, offered by banks, these schemes are eligible for tax deduction under Section 80C. However, the interest earned from these schemes is taxable.

    (the above list of types of deductions is inclusive; not exhaustive)

Final words

There are several types of tax deductions to choose from as per your taxation needs. Not all may be aligned with your financial plans. Prudent assessment of your financial goals and resources is essential in your endeavour to save taxes.

As always, happy investing!