Tax Exemptions in India: Simplified

10 Jun, 2021

10 min read

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What is Tax Exemption In India? - Smart Money
The Income Tax Act, 1961 provides numerous exemptions to taxpayers under sections 80C to 80U of the Act.

To avail of these deductions, it is essential to plan your finances and investments. It is also important to educate yourself on the various tax exemptions available and the amendments and modifications made to them, from time to time. Here is a simple guide to what deductions are available to taxpayers and how they work.

Income Tax Slabs for Different Income Groups

Under the Income Tax Act, different income groups are taxed differently. Those belonging to lower-income groups are either exempt from paying taxes entirely or pay a lower rate than those paid by higher-income groups. The table below provides an overview of the tax rate applicable to your income.

The table indicates the income tax rate applicable to your total taxable income. The total taxable income for an individual taxpayer is calculated by deducting the tax exemptions available from the gross annual income of the taxpayer.

Income Tax Slab

New Regime Income Tax Slab Rates for FY 2020-21

(Applicable for All Individuals & HUF)

Rs 0.0 - Rs 2.5 Lakhs

NIL

Rs 2.5 lakhs- Rs 3.00 Lakhs

5% (tax rebate u/s 87a is available)

Rs. 3.00 lakhs - Rs 5.00 Lakhs

Rs. 5.00 lakhs- Rs 7.5 Lakhs

10%

Rs 7.5 lakhs - Rs 10.00 Lakhs

15%

Rs 10.00 lakhs - Rs. 12.50 Lakhs

20%

Rs. 12.5 lakhs- Rs. 15.00 Lakhs

25%

> Rs. 15 Lakhs

30%

Let’s take a look at what these exemptions are:

Home Loans and HRA

Tax benefits on home rental expenses and home loans is underpinned by the Government’s overarching objective to provide affordable housing for all. By providing tax benefits for these expenses, it aims to ease the tax burden on individuals and families that have to purchase or rent their homes.

Home Loans

If you have availed of a home loan for the purchase or construction of a house, the repayment of which is being made from your annual income, you can claim a tax exemption of up to INR 1.5 lacs on the principal amount borrowed under section 80C of the Income Tax Act. Further, you can claim an exemption on the interest payable on the loan under section 24 of the Act, up to INR 2 lacs annually.

If a home loan is availed for the construction of a home, it must be -

(i) completed within 5 years from the end of the financial year in which it was taken

(ii) the exemption can only be claimed in the year the construction of the house is completed

There tax exemptions provided on stamp duty and registration charges of up to INR 1.5 lacs. If a newly bought home is put on rent, the interest payable on the home loan can be waived entirely from your taxable income.

Section 80 EEA provides an additional tax exemption for first-time homeowners.

House Rent Allowance

Employed individuals' annual income makes a provision for House Rent Allowance. Under section 10 of the Income Tax Act, tax exemptions are granted under this allowance. The exempted amount can be calculated as follows:

The amount exempted from the HRA can be calculated as follows :

  • 50% of the basic salary or  
  • rent paid less 10% of the basic salary

The lower amount of the two will be exempt from the annual HRA component of your salary. The balance amount will be the taxable portion of the HRA.

Health Insurance and Life Insurance Policies

1. Health Insurance Policy

Health insurance premiums made towards a mediclaim policy are deductible expenses from your annual income. Medical costs are rising, and to encourage taxpayers to avail of such medical insurance, the Government has provided stimulus in the form of deductions of insurance premiums under section 80D. Depending upon the sum the age of the insurer, the section offers varying tax exemption provisions.

Preventive health check-ups up to INR 5,000 are also eligible for tax benefits.

Eligibility Criteria

Deduction under Section 80D

  For Self and Family (All members below 60 years of age)

        ₹25,000

  For Self + Family + Parents (All members above 60 years of age)

        ₹25,000 + ₹25,000 = ₹50,000

  For Self + Family (All members below 60 years of age) + Senior Citizen Parents

        ₹25,000 + ₹50,000 = ₹75,000

  For Self + Family (Eldest member above 60 years of age) + Senior Citizen Parents

        ₹50,000 + ₹50,000 = ₹1,00,000

2. Life Insurance Policies

In the way that health insurance policies afford quality medical care for an annual premium, life insurance policies protect the expenses of a family in the event of the untimely demise of the insured family member. But that’s not all. Life insurance policies may also double up as investment instruments in addition to providing life cover. In such cases, the sum assured is payable to the policyholder at the end of a predetermined maturity period, if the policy has not become payable earlier due to untimely demise.

  • Deductions of up to INR 1.5 Lakh spent on the annual premium can be claimed under Section 80C, provided it is less than 10% of the total sum assured if the policy is taken after 1st April 2012.
  • If the policy was availed before 1st April 2012, exemption under Section 80C can be made if the annual premium payments do not exceed 20% of the sum assured.
  • Under section 10 (10D) of the Income Tax Act, the sum assured received on maturity is also free from income tax.
  • Purchase of annuity plans with LIC or any other insurer is also exempt up to INR 1.5 lacs for salaried individuals.

Investments

The Income Tax Act provides exemptions for investments in favoured schemes and instruments that are safe avenues for your hard-earned income. These instruments include :

1. Tax-Saver Fixed Deposits

Investments 5-year tax saver fixed deposits up to INR 1.5 lacs are exempt from taxable income. The interest income earned on these fixed deposits is fully taxable as per the income slab you fall under. Taxer-saver fixed deposits guarantee fixed returns and are not tied to market fluctuations. They can also be used as collateral against loans.

2. Equity Linked Saving Schemes

Equity Linked Saving Schemes (ELSS) are the only mutual fund linked tax-saving instruments. The instruments offer higher returns than a lot of other tax-saving investment schemes and have a shorter lock-in period - only 3 years. Contributions to ELSS up to INR 1.5 lacs are exempt from your taxable income under section 80C. The interest income from ELSS investments is subject to capital gains tax. If the interest income earned is under INR 1 lac, then the earnings are exempt from capital gains tax.

3. Public Provident Fund

Contributions to Public Provident Funds (PPF) are deductible up to INR 1.5 lacs a year from your income. The total contribution to PPFs in a given year can not exceed INR 1.5 lacs under section 80C. PPFs offer a fixed return on investment with interest compounded annually. The interest earned from a PPF is completely tax-free at the time of liquidation. However, PPF investments have a lock-in period of 15 years with provisions for premature withdrawals in case of certain contingencies.

Other Exemptions

There are several other headings under which tax exemptions are provided, especially for senior citizens and disabled persons.

  • Medical bills arising from the treatment of specific diseases as notified by the government may be exempt from your taxable upt0 INR 40,000. 
  • Expenses towards the care and livelihood of a permanently disabled person also attract tax exemption for the care provider’s income. 
  • Persons with disabilities are eligible for tax benefits under section 80U.
  • Senior citizens (60-80 years) and super senior citizens (80 years and above) whose only source of income is earned from pension and saving schemes are also offered tax exemptions by the Government.

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