Last Updated on May 25, 2022 by Neera Bhardwaj
While filing your income tax return, you must have come across various sections mentioned in the ITR form. If you are unaware of their particulars, chances are that you are missing out on various tax savings benefits.
The Income Tax Act, 1961 provides the opportunity (and the rules regulating the same) to avail various deductions before calculating your taxable income. Before paying your taxes, it is of utmost importance to see what these deductions are so that you do not end up paying more tax than you need to.
All the deductions come under certain sections of the Act. Let us first understand what deductions are before we get into detail.
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What are tax deductions?
Tax deductions are claims that an individual can make in order to reduce the amount of total taxable income, which in turn reduces the tax liability of the person.
For instance, assume that your income is Rs. 20 lakh and you are liable to pay tax at 5%. Your tax liability will be Rs. 1 lakh. Now, you noticed that you are eligible for deductions of Rs. 2 lakh on account of certain investments made by you. In such a case, your taxable income comes down to Rs. 18 lakh, thereby reducing your tax liability to Rs. 90,000.
Depending on your investment or expense nature, the deductions are classified under different sections. Let us read in detail the provisions given under Section 80C, 80D, and 80CCD of the Act.
Deductions under Section 80C
Section 80C of the Income Tax Act was enacted in April 2006. This section describes what expenditures and investments are exempt or allow deductions on them while filing the return and to what limit. Certain investments like PPF, tax saver FDs, NPS, and more come under this section. You can claim a total deduction up to an amount of Rs. 1.5 lakh.
A comparative analysis of the investments that are tax-deductible is given as follows:
| Investment | Type of investment | Lock-in period | Rate of return | Tax benefits | Level of risk |
Unit Linked Insurance Plan (ULIP) | Insurance + Wealth creation | 5 yrs | Varies from plan to plan but around 8-10% | Up to 1.5 lakh annually | Moderate |
Tax-Saving Fixed Deposits | Debt investment | 5 yrs | 5-6% | Up to 1.5 lakh annually | Low |
ELSS (Equity Linked Savings Schemes) | Mutual fund | 3 yrs | Varies from scheme to scheme but around 12-15% | Up to 1.5 lakh annually | High |
PPF (Public Provident Fund) | Debt investment | 15 yrs | 7.1% forFY2021-2022(revised annually) | Up to 1.5 lakh annually, on interest earned and on maturity amount | Low |
SSY (Sukanya Samriddhi Yojana) | Debt investment | 21 yrs | 7.6% (revised quarterly) | Up to 1.5 lakh annually, on interest earned and on maturity amount | Low |
National Savings Certificate (NSC) | Fixed income | 5 yrs | 6.8% (revised quarterly) | Up to 1.5 lakh annually, interest taxed after 5 yrs | Low |
National Pension System (NPS) | Retirement plan | Until retirement | 9-12% | Up to 2 lakh | High |
Senior Citizen Savings Scheme (SCSS) | Debt investment | 5 yrs | 8.60% | Up to 1.5 lakh | Low |
Apart from these, the deduction can also be claimed on the following:
- Children’s tuition fees (up to 2 children).
- Interest on a home loan up to Rs. 50,000.
- The principal amount of home loan up to Rs. 1.5 lakh.
- Registration charges and stamp duty on the purchase of a home/property.
- Infrastructure bonds and NABARD rural bonds up to Rs. 1.5 lakh.
- Five-year post office time deposit scheme.
- Life insurance.
- Pension plans from insurance companies.
It must be noted that the Rs. 1.5 lakh limit is inclusive of deductions on all of the investments and not for each individual investment.
Deductions under Section 80D
Section 80D lists the maximum deduction an individual or HUF can claim pertaining to medical expenses. This includes medical insurance, health checkups, and so on. The deduction amount is different for all individuals, depending on their age.
The deductions are as follows:
- For the insurance premium for self, spouse, and unemployed children, a deduction of up to Rs. 25,000 is allowed. If parents below 60 yrs of age are also included, the maximum deduction amount rises to Rs. 50,000.
- For insurance premium for self, spouse, unemployed children, and parents above the age of 60, a deduction of up to Rs. 75,000 is allowed.
- If individuals themselves are above the age of 60 yrs, a deduction of up to Rs. 1 lakh is allowed on the insurance premium for self, spouse, dependent children, and parents.
In this context, a dependent child refers to either an unemployed male child under the age of 25 yrs or an unemployed and unmarried female child.
Deductions Under Section 80CCD
Section 80CCD is a subsection of Section 80C and covers the deductions available to individuals for their investment in the National Pension System. It is further divided into 3 parts: 80CCD (1), 80CCD (1B), 80CCD (2).
- Section 80CCD (1) gives the details for the deductions available on the employee’s contribution to NPS. Under this section, a maximum deduction of 10% of basic salary + dearness allowance is permitted for salaried individuals. For other non-salaried individuals, the limit is 10% of gross income. For self-employed individuals, this limit is 20%. In total, a maximum deduction of Rs. 1.5 lakh can be availed.
- Section 80CCD (1B) allows an additional deduction of up to Rs. 50, 000, which raises the total deduction amount to Rs. 2 lakh.
- Section 80CCD (2) deals with the deductions available on the employer’s contribution to NPS. This section applies to salaried individuals only. Deductions of upto 10% of their basic salary + dearness allowance or 10% of the contribution made by the employer can be claimed.
Conclusion
It is very important for you as a taxpayer to educate yourself on the various deductions available. It permits you to avail the maximum benefits while paying taxes. Moreover, you can make smart investment choices that not only give you good returns but also result in tax savings. Many other deductions are available under other sections of the Act. Make sure to read up on them to mitigate your tax liability.
