By: Tamanna Chawla , B.BA LL.B , 4th Year, Lovely Professional University
TAX DEDUCTION AS PER PROVISION OF INCOME TAX ACT
Introduction
Tax deduction refers to the reduction in taxable income that an individual or business can claim,
thereby lowering the amount of tax they owe to the government. Tax deductions are provided by tax authorities as incentives for certain behaviours or expenses that are considered beneficial to the
economy or society as a whole.
What is Tax Deductions?
In a financial year, whatever income you earn under five income heads is summed up to the gross total income, which is chargeable to income tax. However, to compute the net taxable income of an assessee, certain deductions are applicable, on which income tax is not chargeable. The deductions available under the Income Tax Act is specific to certain taxpayers under certain conditions. It covers sections that define deductions to be made in computing the total income (Section 80A), deductions in respect of life insurance premiums, deferred annuity, contribution to provident funds, subscriptions to certain equity shares or debentures, etc (section 80C), and many more.
There are two main types of tax deductions:
1. Standard Deduction: This is a fixed deduction amount that taxpayers can claim without
needing to itemize their deductions. The standard deduction amount varies depending on the taxpayer's filing status, such as single, married filing jointly, or head of household.
Taxpayers can choose between claiming the standard deduction or itemizing their deductions, whichever provides the greater tax benefit.
2. Itemized Deductions: These are specific expenses that taxpayers can deduct from their taxable income by itemizing them on their tax return. Common itemized deductions include mortgage interest, property taxes, state and local income taxes or sales taxes, medical expenses that exceed a certain percentage of income, charitable contributions, and certain unreimbursed business expenses.
Tax deductions are designed to incentivize certain behaviours or expenditures that benefit the taxpayer or society as a whole. For example, deductions for charitable contributions encourage philanthropy, while deductions for mortgage interest promote homeownership.
It's important for taxpayers to understand the eligibility criteria and documentation requirements for claiming deductions, as well as any limitations or restrictions that may apply. Tax laws regarding deductions can vary by country and may change over time, so taxpayers should stay informed and consult with tax professionals for advice on maximizing their deductions while remaining compliant with tax regulations.
Who is eligible to pay?
The eligibility to pay taxes varies depending on the tax jurisdiction and the type of taxes being
referred to. In general, individuals, businesses, and other entities may be required to pay taxes based on various factors such as income, profits, transactions, property ownership, and activities conducted within a particular jurisdiction.
1. Individuals: Most individuals are required to pay taxes on their income, which can include wages, salaries, investment income, rental income, and other sources of income.
Additionally, individuals may be subject to taxes on property ownership (such as real estate taxes), sales taxes on purchases, and other types of taxes depending on their location and circumstances.
2. Businesses: Businesses, including corporations, partnerships, sole proprietorships, and other types of entities, are typically subject to taxes on their profits or income. This can include corporate income taxes, business property taxes, payroll taxes, sales taxes on goods and
services sold, and other taxes depending on the nature of the business and its operations.
3. Property Owners: Property owners may be required to pay taxes on the value of their real estate or other types of property, such as land, buildings, vehicles, and personal belongings. These taxes, often referred to as property taxes or ad valorem taxes, are typically assessed by local governments based on the value of the property.
4. Consumers: Consumers may be required to pay taxes on goods and services purchased, such as sales taxes, value-added taxes (VAT), or goods and services taxes (GST). These taxes are usually included in the price of the goods or services and are collected by businesses on
behalf of the government.
5. Investors: Investors may be subject to taxes on their investment income, including dividends, interest, capital gains, and other forms of investment returns. Tax rates and rules governing investment income can vary depending on the type of investment and the investor's individual circumstances.
1. SECTION 80C Deduction regarding life insurance premium, annuity and contribution towards provident fund, etc.
Conditions
(i) Assessee must be an individual or HUF.
(ii) Amount of Deduction: Amount of deduction is the least of the following:
a. The gross qualifying amount; or
b. Notified amount i.e. ₹1.5 lac.
2. SECTION 80CCC Deduction regarding contribution to Pension Fund:
Conditions
1) Assessee must be an individual.
2) During the relevant previous year he must have paid or deposited a sum under annuity plan of LIC or any other insurer for receiving pension.
3) Amount must be paid out of taxable income which may be of current previous year or earlier previous years.
4) Amount of Deduction: amount of deduction is least of the following:
a. Amount deposited; or
b. 1.5 Lac
3. SECTION 80CCD: Deduction regarding contribution to Notified Pension Scheme (NPS)
Conditions
(1) Assessee must be an individual.
(2) Assessee must be an employee of Central Government or any other employer or he may be self employed individual
(3) He must have joined his employer on or after January 1, 2004.
(4) He has paid or deposited any amount in his account under pension scheme notified by Central Government.
(5) the amount paid or deposited by the employee (or self employee) eligible for deduction:
a. in the case of an employee:
Employer's contribution upto 10% [twenty per cent]¹ of salary of employee. Therefore
employer's contribution is deductible in the hands of employee in the year in which contribution is made provided it is upto 10% [twenty per cent]² of salary of employee. Hence, employer's contribution in excess of 10% [twenty per cent]³ of salary of employee.
4. SECTION 80D: Deduction regarding Health Insurance premia
Conditions
(i) Assessee must be an individual or HUF.
(ii) Assessee must have contributed any sum in previous year to General Insurance Corporation (GIC) or any other insurance towards medical insurance premium on the health under "Central
Government Health Scheme", or such other scheme as may be notified by the Central Government in this behalf or any payment made on account of preventive health check-up of the assessee or his family" of the following:
Assessee Person on whose health |
Individual (a) Individual or his family; (b) Parent or parents of individual (whether dependent or not). |
HUF Any member of hUF. |
(iii) Such insurance must be in accordance with scheme framed by GIC or any other insurer and approved by Insurance regulatory and development authority.
(iv) The payment must be made by him by any mode of payment other than cash.
However, in case of preventive health check up payment may be made by any mode including cash
(v) Amount of Deduction:
Assessee | Amount of Deduction |
Individual | (a) The whole amount paid to effect or to keep in force an insurance on the health of assessee or his spouse and dependent children or any contribution made to Central Government health scheme but should not exceed In aggregate £15,000. (b) The whole amount paid to effect or to keep in fore insurance on the health of the parent or parents whether dependent or not of the assessee but should not exceed In aggregate 15,000. (c) payment made on account of preventive health check-up of the assessee or his family (spouse, dependent children and parents) should not exceed in aggregate 5,000. |
HUF | (a) The whole amount paid to effect or to keep in force and insurance on the health of any member of that HUF as does not exceed in excess of 15,000. |
additional deduction of 83,000, where the person on whose name health insurance is taken is a
senior equalizer 060 years for the previous year relevant to A. Y. 2018-19) then additional deduction of R5,000 shall be allowed.
5. SECTION 80E: deduction regarding interest on loan taken for higher education
(i) Assessee must be an individual.
(ii) He must have taken loan from:
(a) any financial institution ( Banking Company or Notified Financial Institution); or
(b) an approved charitalso institution ie. instiation approved for the purpose or [Section 10(23C) or 80G(2)(a)].
iii) Loan must be taken for higher education.
Higher education: It means any course of study pursued after passing the Senior Secondary Examination or its equivalent from any School Board or University recognized by the Central
Government or State Government or local authority or by any other authority authorized by the Central Government or State Government or local authority to do so.
(iv) Loan must be taken for assessee's own or his relative's higher education. relative, in relation to an individual, means the spouse and children of that individual or the student for whom the individual is the legal guardian.
v) Deduction regarding interest paid: The interest on such loan must be paid during previous year out of the taxable income.
vi) Period of Deduction: The deduction is allowed in computing the taxable income of the
Assessment year relevant to the previous year in which assessee starts paying the interest on loan and it will continue till,
seven years immediately succeeding the Assessment years, or the above interest is paid in full, whichever is earlier.
No deduction can be claimed regarding principal amount of loan paid by the assessee during Previous year.
Example: Mr. A has taken educational loan for higher education of his son. During Previous Year 2017-18, he has paid instalment of 71,20,000 (750,000 - principle amount + 770,000 - interest) therefore, amount of deduction under this section would be 70,000.
6. SECTION 80G Deduction regarding donation to certain funds, charitable institutions, etc
Conditions
(i) Assessee can be any person (individual, HUF, partnership firm or company, etc.);
(ii) Assessee must make donation to specified fund or institutions;
(iii) Donation must be of a sum of money. Donation in kind is not eligible for deduction.
(iv) Donation must be made to any of the following institution:
Institutions without qualifying limit: These are further of following two types:
(a) Institution where donations are eligible for 100% deduction without qualifying limit:
(1) National Defence Fund set up by the Central Government;
(2) Prime Minister's National Relief Fund;
(3) Prime Minister's Armenia Earthquake Relief Fund;
(4) Africa (Public Contributions India) Fund;
(5) National Foundation for communal Harmony;
(6) University/Educational Institution of National Eminence approved by the prescribed authority;
(7) Maharashtra's Chief Minister's Earthquake Relief Fund;
(8) Any fund set up by the State Government of Gujaral, exchastel for providing relief to the victims of earthquake in Gujarati
7. SECTION 80GG: Deduction in respect of rent paid
Condition
(i) Assessee must be an individual.
(ii) He must be:
a self-employed person; or
an employee who did not get house rent allowance (HRA) from his employer at any time during the Previous Year.
(iii) Following persons should not own any residential accommodation at the place where assessee resides, performs his duties of office or employment or carries on business or profession.
(a) Assessee; or
(b) His or her spouse; or
(c) His or her minor child; or
(d) HUF where assessee is a member.
(iv) Where assessee owns a residential house at any place other than his place of residence or work Then it shall not be treated as self occupied residential house and no concession can be claimed under section 23(2).
(v) Amount of deduction: the amount of deduction is least of the following:
(a) Rent paid in excess of 10% of Adjusted Gross Total Income (AGTT) or
(b) 25% of ATI or
(c) 75,000 per month
8. SECTION 80U: Deduction Regarding income of Person With Disability (PWD)
Condition
(i) Assessee must be an individual (Indian or foreign citizen].
(ii) He must be a resident of India during the relevant previous year (ROR or RNOR but not NR).
(iii) Person With Disability: He must be a Person with Disability i.e. he must suffer with a minimum 40% or more of any disability given under section 2(i) of the person with disability ( equal opportunities, protection of rights and full Participation) Act, 1995 i.e.
(a) Blindness: It refers to a condition where a person suffers from any of the following conditions namely:
(1) total absence of sight; or
(2) visual acuity not exceeding 6/60 or 20/200 (snellen) in the better eye with correcting lenses; or
(3) limitation of the field of vision subtending an angle of 20 degrees or worse.
(b) Person with low vision: It means a person with impairment of visual functioning even after
treatment or standard refractive correction but who uses or is potentially capable of using vision for the planning or execution of a task with an appropriate assistive device.
(c) Leprosy-cured person means any person who has been cured of leprosy but has:
(1) loss of sensation in hands or feet as well as loss of sensation and paresis in the eye and eye lid but with no manifest deformity;
(2) manifest deformity and paresis but having sufficient mobility in their hands and feet to enable from to engage in normal economic activity;
(3) extreme physical deformity as well as advanced age which prevents him from undertaking any gainful occupation.
(d) Hearing impairment: It means loss of sixty decibels or more in the better ear in the conversational range of frequencies.
(e) Locomotor disability: It means disability of the bones, joints or muscles leading to substantial restriction of the movement of the limbs or any form of cerebral palsy.
(f) Mental retardation: It means a condition of arrested or incomplete development of mind of a person which is specially characterized by sub-normality of intelligence.
(g) Mental illness: It means any mental disorder other than mental retardation.
Meaning of person with severe disability: It means a person with more than 80% of one or more disabilities as mentioned under section 56(4) of the Persons with Disabilities (Equal Opportunities, Protection of Rights and Full Participation) Act, 1995.
iv) Amount of Deduction
a) 75,000 - where Normal Disability i.e. more than 40% but upto 80%
b) 1,25,000 - where disability is Severe Disability i.e. more than 80%
Conclusion
As a responsible taxpayer, you need to be aware of the tax provisions on your salary income to utilise the benefits maximally. Section 16 of the Income Tax Act, 1961 provides a standard deduction and
other deductions on entertainment allowance and professional tax. However, a few aspects need
special consideration while accounting for the applicability of the specific tax provision. Understand them rightly or take professional advice while seeking such provisions to ascertain the tax benefit.