Types of Deductions Under Various Section of Income Tax Act
Deductions form a core part of the taxation system in India. The Indian government allows taxpayers to minimize the amount of taxable income by accounting for eligible expenses and contributions. This helps the taxpayers to reduce their liabilities. The term “deductions” refers to the amounts that one may subtract from a gross income before calculating the amount of taxes payable to the government. These deductions can be redeemed by individuals, Hindu Undivided Families, and even businesses. The deductions are extensively analyzed in Chapter VI A of the Income Tax Act, 1961. This article discusses types of deductions under various income tax acts and sections.
What Are Deductions?
Deductions are all sorts of tax-saving provisions that are legally granted by the Indian government and help the Indian Citizens in reducing their tax liabilities.
These deductions depend on what an individual’s specific financial needs may be. Deductions help the individual taxpayer and society at large through the encouragement of activities like home ownership, health care spending, and charitable contributions.
Types of Deductions
Deductions under Section 80C:- Section 80C of the Income Tax Act claims up to Rs. 1.5 lakh deduction per year by investing in Employee Provident Fund, Public Provident Fund, National Pension System, Life Insurance premium, Tax-Saving Fixed deposits, Equity Linked Savings Scheme, Home Loan for Children and so on.
Medical Insurance:- For Indian Citizens, tax relief will be provided to individuals with Medical Insurance. For self, spouse and children the deduction goes up to Rs. 25,000. For parents, the deduction aims up to Rs. 50,000. Whereas, for senior citizens, the deduction ranges up to Rs. 1,00,000.
Home Loan Interest Deduction:- For individuals who struggle to pay monthly EMIs’ on home loans, Section 24(b) of the Income Tax Act claims a deduction of up to Rs. 2,00,000.
Charitable Contributions:- Payments to qualified organizations reduce taxables, thus encouraging a passion for the public welfare.
Business Depreciation:- Business depreciation entails reducing the costs of operating a business by office supplies, salaries to the workers, and rent, all of which are plowed back into the business for growth.
Advantages of Deductions
Deductions offer valuable monetary benefits to both taxpayers as well as the economy:
Lower Tax Liability:- Reduction of taxable income cuts down the tax payable on the income immediately, that is, it immediately involves a cost to the taxpayer.
Support for Businesses:- Business deductions eliminate the cost of doing business since business people can use the cash for expansion and thus offer employment.
Promotion of Retirement Savings:– Payments made towards retirement are a tax shield, thus promoting savings for retirement.
How Deductions Work
Let’s take a hypothetical example. Therefore let us presume that a taxpayer has a gross income of ₹80,000 and he or she is in a position to claim several deductions provided by the Indian government qualified of which are partly ₹15,000 of the deductions.
Let’s analyze how the deductions affect the taxable income:
Gross Income: ₹80,000
Total Deductions: ₹15,000
Taxable Income: ₹80,000 – ₹15,000 = ₹65,000
In this example, the income taxpayer will pay taxes only on ₹65,000 instead of ₹80,000 which reduces the total taxes payable by him/ her to a great extent.
Challenges of Deductions
Although deductions act as a boon for taxpayers. Certain complexities come with deductions. Some of those challenges are as mentioned below:-
Frequent Policy Changes:- In India various Amendments have been taking place in tax laws, such as changes in Section 80C, 80D, and 10(14) deductions which further creates more confusion for the taxpayers.
Documentation Issues:- Authentic proof such as investment receipts, rent agreements and medical bills etc is required by the Indian government. Also, missing documents can lead to disallowances.
Limited Awareness:- In India a large number of taxpayers are still unaware of all the eligible deductions, leading to missed tax-saving opportunities and reducing tax liabilities.
Confusion of Regimes:- Recently, In India, there has been a lot of confusion regarding the deductions offered under the Old Tax Regime and the New Tax Regime. This causes perplexities in the minds of taxpayers.
Get Started with TaxDunia
Deductions are an essential instrument in the Taxation system of India because they offer financial relief. A wide array of tax deductions especially under the Income Tax Act, of 1961 open up room for a taxpayer to downsize their tax liability by furthering personal financial goals as well as aggregate goals of long-term social and economic objectives. Over time, tax policies will have to go through changes, and deductions are going to be an integral tool for fiscal balance, taxpayer relief, and positive societal behaviors. Understanding deductions and taking their benefits is a very important part of the financial planning of taxpayers. To claim the deductions available under the income tax, reach out to TaxDunia. Our team of professionals will help you maximize your savings and optimize your taxes.
