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Availing Exemptions on Income Tax in India

Tax exemption is absolution on the taxable income which in turn reduces the total amount payable towards tax. An individual taxpayer can either get complete relief or deduction on certain portions of their tax amount. Tax exemption is offered by the government to promote upliftment in the economic and social spectrums of the society.

What are the Tax Exemptions Available?

Tax exemption is attainable on the property tax or income tax if the assessee has children or other family members dependent on him/her.

Tax exemption is available under the following Sections
Exemption under Section 10

There are several exemptions available under Section 10. For example

  • Agriculture Income as per Section 10 (1): Income received from agriculture is exempted from tax, but if the income from other sources is added to it, it is taxable.
  • Academic Allowance as per Section 10 (14) (i): Exemption is given in scholarships and fellowships to encourage further studies and research in various fields.
  • Leave Travel Allowance (LTA): Exemption on domestic travel expenses for an individual and his/her family is available under Section 10 (5) of Income Tax Act. This exemption is specific to the income slab of an individual.

    The exemption can be claimed under certain conditions such as:

    • The employer provides LTA to the employee for traveling anywhere in India, the actual travel cost is exempted from taxes.
    • Traveling domestically and not overseas.
    • Exemption available only on travel cost and not on food, stay etc.
    • In the case of traveling with a family only spouse, children, parents, and siblings can avail LTA.
  • Life Insurance (Section 10D): The insurance amount claimed either on maturity or death of the individual is exempted from tax.
  • Gratuity under Section 10(10): As per Payment of Gratuity Act, gratuity amount under Rs. 10 Lakhs is not taxable.
  • Leave Encashment: Retirement or leaving the job is tax-free in the case of government employees.

    Non-government employees can avail benefits under the following:

    • Transferring the number of earned leave into the monthly salary.
    • 10 multiplied by the average salary of the employee.
    • An amount of Rs. 3,00,000.
    • The actual amount of leave encashment received.
  • Computed Pension: For government employees, the computed pension is tax-free. For non-government employees, the exemption is available on 1/3 of pension received in the case of payment of gratuity and half of the pension received in the case of no gratuity.
  • VRS Compensation: Under VRS (Voluntary Retirement Scheme) an amount of up to Rs. 5 Lakhs can be exempted in case if an employee retires early.
  • Dividends Received: If the dividends are announced for the mutual funds or stocks, the tax on them is exempted for the individual, irrespective of the company paying tax on it.
  • Equities: Equities held for more than a year is also tax-free at the time of sale.
  • Superannuation Fund: The superannuation amount is tax-free in the hands of an individual.
  • Transport Allowance: A total amount of Rs. 9,600 is compensated for transport allowance i.e., Rs. 800 per month. The transportation allowance is referred to the travel expenses incurred by an employee for commuting between work and residence.
  • Interest on Securities: Income from the interest on securities, premium earned from bonds, shares, deposits, and certificates are exempted from tax.
  • HRA Exemption: House Rent Allowance (HRA) is offered to the employees by the employer to pay for the cost of the house rented by them. As per Income Tax Act, deductions are available on it under Section 10 (13A) and Rule 2A of the Income Tax rules. However, the exemption is not available for the whole HRA amount if the house is owned by the employee.

    Deduction is available on criteria such as:

    • The actual HRA amount paid by the employer.
    • Annual rent - 10% of the basic salary.
    • In case you are living in a metro city, 50% of basic salary and 40% in case of a non-metro city.
Section 80C, 80CCC and 80CCD

An individual can claim a maximum deduction of Rs. 1.5 Lakhs under Section 80C, Section 80CCC and Section 80CCD.

Some of the investment schemes that are eligible for tax deduction are

Section 80CCG - Rajiv Gandhi Equity Scheme (RGESS)

Additional deduction of the 50% of the investment can be claimed under this scheme. This scheme is only for first-time investors in share market with income less than Rs. 10 Lakhs.

Section 80D - Medical Insurance Deduction

Under this section tax deduction is available on the premium made towards the medical insurance taken by an individual for himself or his/her family.

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Section 80DD - Disability Deduction

A deduction of Rs. 50,000 and Rs. 75,000 can be claimed on the amount spent on the treatment and care of a disabled individual. If an individual is certified as either physically or mentally disabled, deduction of the medical expenses incurred in caring for the individual can be obtained (Rs. 50,000 for normally disabled and Rs. 75,000 for severely disabled).

Section 80DDB - Serious Ailment Deduction

A person can avail deduction of Rs. 40,000 on tax for the treatment of serious diseases. The deduction is available for the expenditure on the treatment of disease for self or for the family. The illness should be verified by a certified doctor and an amount of Rs. 80,000 is available for deduction in case of a senior citizen.

Section 80E - Deduction on loan for Higher Studies

The deduction can be claimed on education loan (up to 7 years in the case of higher education). This benefit is only available for immediate family members such as the spouse, children etc.

Section 80G - Deduction on Donations

Any taxpayer can get a deduction of 50 to 100 percent on taxes, depending on the entities where the donations are made towards.

Section 80 GG - Deduction on House Rent

People who do not receive HRA from their employer can claim a tax deduction on the rent they pay under this Section. A deduction of Rs. 60,000 annually (Rs. 5,000 per month) is available under specific circumstances if their rent is less than 10% of the salary or 25 % of the whole income.

Section 80 TTA - Saving Account Interest Deduction

If the tax payable at the end of financial year is less than Rs. 10,000, then the interest received on the savings account is not accounted for taxable income.

Section 80U - Deduction for Disabled

Any person suffering from a disability can be granted a deduction on his/her taxable income. An amount of Rs. 50,000 is usually available for deduction but in the cases of severely disabled the amount can increase up to Rs. 1 Lakh.

Section 80 GGA - Rural Development Donation Deduction

Any taxpayer can claim a deduction in case the donations are made towards rural development or scientific research.

Section 80 GGC - Donation to Political Parties Deduction

In case an individual is contributing money to any political party, the deduction is available on it under this section.

Section QQB - Deduction on Royalty from Patent

If a person earns his/her income through royalties received from patent then maximum deduction of Rs. 3 Lakhs is available on it.

Section 80 RRB - Deduction on Royalty from Books

If a person receives royalty income from the sale of books, journals or any other literature, then he/she can avail a tax deduction of Rs. 3 Lakhs on it.

Tax Exemption on Car Loan

An individual can gain additional tax benefit under this head. A tax deduction is available on the interest paid towards the car loan. This benefit can be only enjoyed by individual taxpayers who are either self-employed or own a business. No salaried individual can avail this deduction. To avail this claim, one must declare the profit or capital gains earned and mention if the car will be used for business purposes. This deduction on the interest of the car loan is available under Section 80C.

Tax Exemption for Women

The government has provided various schemes and policies for claiming tax exemptions for earning women.

The exemption can be availed under Section 80C, 80D and 80U

  • Public Provident Fund
  • Pension Plan provided by Government
  • Investment in Fixed Deposit for a period of 5 years
  • National Savings Certificate
  • Life Insurance Policies
  • Premium paid towards Health Insurance
  • Interest on Education Loan
  • Employee Provident Fund (EPF)
  • Equity linked savings schemes
  • Donations to research and development programs
  • Contribution towards political parties

Tax Exemption with regards to Capital Gains

Capital gain is the profit earned on the sale of an asset. Tax exemption can be claimed on capital gain under the following Sections:

Section 54 and 54F

Under this section exemption from the taxes can be claimed on capital gains if the gains are invested in either buying or constructing of a house property. The new property must be bought a year or two after the sale of original property or the house is constructed within three years. This is only available if the person does not have any other property except for the original one and the property is located within India. The capital gain deposit account scheme is also available for the benefit.

Section 54B

An assessee can avail exemption on the capital gains from the sale of agricultural land that he/she utilized for agricultural purposes. The assessee must buy new agriculture land within two years of the sale and then gain tax exemption on it. Investment of the gains in Capital gain deposit account scheme is also available.

Section 54EC

Any individual can claim exemption under this section on the sale of assets. It is essential that the asset is a long-term capital asset and is sold after a period of three years from the time it was acquired. The gains from the sale can be invested in NHAI (National Highway Authority of India) and REC (Rural Electrification Corporation) bonds, which should be done within a period of six months. A maximum amount of Rs. 50 Lakhs and Rs. 45 Lakhs can be invested in the bonds respectively. The capital gain deposit account scheme is not available under this Section.

It is important to take into notice that the income from capital gains can be only invested in one scheme or asset. Even if an assessee sells two assets together, the capital gain earned from the sale is to be invested only once. If the earning is invested more than once then tax is liable on it.