Are you paying too much tax?
Do you know that you can get a significant reduction in your tax liabilities if you take advantage of all the deductions and exemptions that are available?
The key question is, have you taken advantage of them all and maximized your tax savings? Yes, no, maybe?
If your answer is no or maybe, this guide should help you. It is a comprehensive list of all the tax exemptions and deductions that you can legally make use of in FY 2017-18 (AY 2018-19).
Let's look at each of them one by one...
Deductions that are allowed
Under Section 10
The first set of income tax deductions falls under the Section 10 of the Income tax act. These deductions are against specific allowances that may be part of your overall salary. Essentially, these exemptions will depend upon your salary structure.
Your total taxable salary is computed after reducing all these exempt allowances and the balance salary will be taxable.
Let's look at some of them.
1. House Rent Allowance (HRA)
HRA is amongst the most popular and probably the most utilized tax deductions for salaried folks. This deduction is geared to allow employees to cover for genuine expenses on rent.
However, how much HRA exemption you will get will depend upon your salary structure. Your basic pay, your exact HRA amount and your current city of residence will determine how much deduction you are eligible for.
HRA is calculated basis minimum of these three:
- Actual HRA received
- Rent paid less 10% of Salary
- 40% of Salary for Non-metro and 50% for metro locations (Mumbai, Chennai, Delhi, Kolkata)
Salary is defined as Basic plus Dearness Allowance if any.
For more details and queries on the HRA, refer our detailed guide on same
2. Leave Travel Allowance
Leave Travel Allowance or LTA, as it's commonly known, is an allowance for vacations. This allowance is eligible for exemption provided some conditions are met.
You can only claim the LTA twice in a three year block. You have to produce the proof of travelling and you should be on leave during this travel.
Also, only the travel fare will be considered for the exemption and not the shopping and other expenditure that you may incur while being on the vacation spot. Hotel stay and Food is not included either.
LTA is eligible for vacations in India only.
3. Conveyance Allowance
This deduction is against the allowance that's provided to you to travel between your office and your home. This is essentially an allowance for local transport.
If your employee offers you this allowance, you can claim same as a deduction. The good thing about this specific deduction is that you don't need to provide any proofs or receipt for same.
However, the employer shouldn't be offering you free conveyance for you to be eligible for this benefit.
This deduction is limited to a maximum of 1600/month.
4. Children Education Allowance
Children Education Allowance is also exempted from income tax. Just like previous exemptions, this allowance should already be part of your salary structure.
This allowance is limited to INR 100/month/child for a maximum of 2 children.
5. Hostel Subsidy
Hostel Subsidy is geared towards providing for your child's education. If you have this as part of your salary structure, you can claim a deduction of INR 300/month/child up to a maximum of 2 children.
6. Uniform Allowance
Any allowance to cover the expenditure on purchase and maintenance of uniform that's needed for performance of official duties or employment of profit is allowed as an deduction.
7. Research Allowance
Any allowance towards research activities in pursuit of professional duty or academics is allowed as a tax deduction. This is exempt to the extent of expenditure incurred.
8. Helper Allowance
This is an allowance to cover the expenditure incurred on a helper where such helper is helping you to perform your duties or professional service. This is least of amount received in your salary or the amount actually spent.
9. Travel Allowance
Any allowance to meet the cost of travel on a tour or on transfer is tax exempt to the extent of expenditure incurred.
10. Daily Allowance
Daily allowance is provided to meet the ordinary daily charges incurred by an employee on account of working in a different place from his normal place of duty.
This is exempt to the extent of expenditure incurred.
11. Special Compensatory Allowance (Hilly Areas)
If you receive a special compensatory allowance because you work in Hilly areas or areas with tough climate, the same will be eligible for a deduction.
This deduction is limited to INR 800/month for various areas of NE, Hilly areas of UP,HP, J&K and INR 7k/month for Siachen. Any area outside these, but otherwise at a height of 1000 Meter or more is eligible for a deduction of INR 300 per month.
12. Remote Area Allowance or Border Area Allowance or Difficult Area Allowance or Disturbed Area Allowance
These allowances are provided to employees who are otherwise working in difficult areas.
Exempted amounts range from INR 200 per month to INR 1300 per month and are specified in Rule 2BB.
13. Tribal Area Allowance/Scheduled Area/Agency Area Allowance
This allowance is only applicable in MP, Assam, UP, Karnataka, West Bengal, Bihar, Orissa, Tamil Nadu and Tripura.
It's limited to INR 200/month.
14. Compensatory Field Area Allowance
Compensatory Field Area allowance is applicable to some areas of AP, Manipur, Sikkim, Nagaland, HP, UP & J&K. If this exemption is taken, you can't claim any exemption on border area allowance.
This allowance is limited to INR 2600 per month.
15. Compensatory Modified Area Allowance
This allowance is available in specified areas of Punjab, Rajasthan, Haryana, UP, J&K, HP, West Bengal and North East. This exemption is limited to INR 1000 per month.
If you avail of this exemption, you can't claim any exemption on border area allowance.
16. Allowance for Employees in a Transport system
This is an allowance granted to an employee working in a transport system to meet their personal expenditure incurred in the course of running such transport from one place to another.
70% of this allowance is eligible for a deduction with a maximum of an INR 10k / month.
17. Underground Allowance for employees working in Mines
Underground allowances are granted to those employees who are working in underground mines. This allowance is towards their service in an uncongenial and unnatural climate.
This allowance is limited to a maximum of INR 800 per month.
Special Allowances only for the Armed Forces
18. Counter Insurgency Allowance
The Counter Insurgency Allowance is provided is provided to the armed forces who are operating in specified areas.
This allowance is limited to INR 3900 per month.
If this exemption is availed of, the employee cannot claim any exemption with respect to the border area allowance
19. Island duty allowance
Island duty allowance is granted to members of Armed forces working in Andaman & Nicobar and Lakshadweep Group of Islands.
This exemption is limited to INR 3250 per month.
20. High Altitude Allowance
A special allowance is granted to the members of the Armed forces who are working at a height of more than 9000 feet.
This allowance is INR 1060 per month for altitude between 9000 and 15000 feet and INR 1600 per month for an altitude above 15000 feet.
21. Highly active field area allowance
If the armed forces are operating in a highly active field area, they may be granted a special compensatory allowance.
This allowance is exempted from taxes up to INR 4200 per month.
In addition to these deductions for Armed forces, that are some other deductions as well that are applicable for some specific roles.
Some key ones are as follows:
22. Allowance paid by the Government to its employees posted outside India
23. Entertainment allowance received by the Government employees
24. Allowances paid to High Court Judges under High Court Judges act
25. Sumptuary allowances paid to the High Court and Supreme Court Judges
26. Allowances received by an employee of UNO from their employer
27. Salary and Allowances received by a teacher/professor from SAARC member state
For more details on these deductions, refer this link.
28. Save taxes through tax exempt perquisites
Perquisites are strictly not a deduction from your taxable salary, but most companies will allow you to restructure your salary and get equivalent perquisites instead of cash.
If this facility is available to you, this can be an extremely efficient way to save taxes as some of these perquisites are tax-exempt to some extent.
The most popular tax-exempt perquisites are as follows:
- Food coupons till a limit of INR 50 per meal which translates to INR 2200 per month (2 meals per day for 22 working days)
- Gifts or Gift vouchers not exceeding INR 5000 per year
- Club memberships
- Telephone or mobile phone bills
- Books and periodicals
- Medical allowances up to INR 15k per year
- Company leased car
- Chauffeur salary and maintenance of company leased car
Except for food or gift coupons, you will have to submit actual bills against each of above perquisites for you to be eligible for the exemption.
29. Deductions against Interest paid on Home Loan
Home loan is amongst the most popular ways to save taxes.
If you have a current home loan that's running, you can save tax on amount equivalent to interest you are paying on the same.
This amount can be adjusted against income from any head upto 2 lakhs per year.
Your house should be self-occupied and not on rent for you to be eligible for this exemption. If your home is under construction right now, you may aggregate and get this benefit in future years.
You should note that this deduction under Section 24 is for Interest only and not for the principal payments. The principal payment is allowed as a deduction under Section 80C.
30. Deductions on Home Loan for the first time Home Owners
This benefit is only available to the first time home owners and they are eligible for a deduction of INR 50k per year.
This benefit is available under the Section 80EE and is over and above the Section 24 benefit of 2 lakhs per year.
It's only applicable to Individuals and HUFs or AOPs cannot claim this benefit.
You should have taken the loan from a financial institution for purchasing your first property. This loan should have been sanctioned between April 1st, 2016 and March 31st, 2017.
The value of the house should be less than 50 lakhs and the loan should be 35 lakhs or less. Also, as on the date of sanction, you shouldn't own any other property.
This exemption is not per property but rather per person. So if you have taken a joint loan for a joint property, all the co-borrowers will be eligible for this deduction.
31. More deductions on house property Income
If you have a house/flat that you have either rented out or have kept vacant, you will be considered to have an additional income from house property.
This income will either be the actual rent that you are getting or deemed rent if you haven't yet let out your property. It will be part of your Gross income and will be taxable.
However, while computing the income earned from letting out property, you can avail of some deductions under Section 24 which are applicable only against this specific income.
These deductions are as follows:
- Municipal Taxes
- The standard deduction
- Interest paid on a home loan
Municipal taxes include any taxes paid to the Government for the property owned. These taxes generally include property or house tax and can be reduced from the Gross Annual value.
Gross Annual Value is the rent at which property is reasonably expected to be let out. This is determined after taking to account the actual rent received as well as expected rent (or deemed rent) and is higher of these two amounts.
Net Annual Value will be Gross Annual Value minus Municipal Taxes paid. These taxes can be levied by the local authority and are borne by the owner against the house property.
Further, there is a standard deduction of 30% of Net Annual Value. This deduction is designed to allow for any expenses you may have had on maintenance of the property and you don't have to produce any proof as such for same.
Finally, if you have a home loan against the property, you will be allowed to deduct home loan interest payments from your house property income.
Please note that a maximum of 2 lakhs of deductions is allowed if you are adjusting these payments against income from other heads (i.e. Income from salary etc).
However, you can adjust the complete amount if the adjustment is against income from house property.
Further, interest payable in pre-construction period will be aggregated and will be allowed as a deduction for 5 successive financial years from when the construction was completed.
Essentially, the final taxable house property income will be:
Gross Annual Value = Higher of Actual Rent or Notional/Deemed Rent
Net Annual Value = Gross Annual Value - Municipal Taxes
Standard Deduction = 30% * Net Annual Value
Final Taxable House Property Income = Net Annual Value * 70% - Losses from house property/interest payments on a home loan
Any brokerage or commission that you may have paid to acquire an asset is not allowed as a deduction.
Points to remember:
- Income from house property which is self occupied or wasn't occupied due to employment at another place is taken as NIL. There is no standard deduction available in this case, though you will be eligible for deduction of interest paid on house loan.
- Income from house property is added to total income only if it's let out for the whole or the part of the year. If you have self occupied the home for part of the year and let it out for the rest, your Gross Annual Value will be calculated basis as if you had rented it out for the whole year. E.g. if you rent it out for 6 months and stay in it for 6 months, the Gross Annual Value will be the higher of your Actual rent received (for 6 months) or Expected rent (for 12 months).
- If you have more than one house, you can treat one of them as self-occupied while all the other houses will be deemed to be let out.
- Starting Union Budget 2017, if you are holding the house property as stock-in-trade and such property isn't let out at any point of the year, it won't have any notional income and the deemed annual value will be NIL for one year from the end of the financial year in which the certificate of completion was first obtained.
32. Under Section 80C, 80CCC, 80CCD(1)
The Government of India wants to encourage investing behavior with its citizens. With that in mind, it provides tax deductions for some types of investments under section 80C.
Investments in following vehicles are covered under Section 80C:
- Employee Provident Fund
- Pension/Annuity Schemes
- Life Insurance Premium
- Tax Saving Mutual Fund (ELSS)
- Home Loan Principal Payment
- Sukanya Samriddhi Account
- Tuition Fees of Children
- PPF Account
- National Savings Certificates
- Tax Saving Fixed Deposits
- Post Office Time deposits
- Senior Citizen Savings Schemes
Section 80CCC allows for deductions against premiums paid for Annuity plans of insurance companies. This exemption is limited to 10% of your salary if you are salaried and 10% of gross income if you are self employed.
Similarly, your contributions to pension plans are eligible for tax deductions under Section 80CCD(1). This is limited to 10% of your salary (for employees) or 20% of your gross income (for self employed).
Please note that the combined overall deduction limit for these sections is 1.5 lakhs/year. Even if you have investments beyond this amount, this is the maximum benefit you will get.
33. Self contribution to NPS or Atal Pension Yojana (Section 80CCD (1B))
A new section was introduced by the Government to promote the adoption of NPS.
Any investments by you in your NPS account will make you eligible for an additional deduction of up to INR 50,000 per year under section 80CCD(1B). Contributions to Atal Pension Yojana are also eligible.
This deduction is over and above the standard 1.5 lakhs/year limit.
34. Employer's Contribution to NPS (Section 80CCD(2))
Your employer's contribution to your Pension account is an additional tax saving opportunity i.e. it's exempted from the overall limit of 1.5 lakhs under Section 80C. This deduction, however, is limited to 10% of your overall salary.
This is something you should look at if you are investing in NPS plans as it allows you to save additional taxes that you may not have been able to save otherwise.
35. Rajiv Gandhi Equity Saving Scheme (RGESS) (Section 80CCG)
If you are a first time investor in stocks and your annual income doesn't exceed 12 lakhs, you can get tax benefits if you invest in this scheme.
50% of your investment will be eligible for tax savings and you can invest a maximum of INR 50k under this scheme. Essentially, you are eligible for a maximum benefit of INR 25000.
There is a lock-in period of 3 years where for first 1 year you can't take anything out of your investment and for the next two years you can only take out the gains that were made in your account while maintaining the initial investment amount.
There are many mutual funds that are eligible for RGESS, but this scheme hasn't caught on due to numerous rules and conditions it puts on individuals for them to be eligible.
36. Medical Insurance and Health Checkup Deduction (Section 80D)
Any amount that you spend on a Medical insurance is eligible for deductions. The deduction amount is limited to INR 65000 per year and medical insurance of self, family (spouse and dependent children) and parents is allowed under this section.
Any amount you spend on a preventive health check up will be eligible for a deduction as well.
37. Education Loan for Higher Studies (Section 80E)
If you have taken a loan to fund your higher education, you can claim a deduction against interest paid on that loan. There is no overall limit as such on this deduction, but for you to be eligible, you should fulfill following:
- The loan must be from a financial institution (and not from friends/family etc)
- The maximum number of years you can claim this deduction is 7 years
This benefit is allowed for your, your spouse's or your children's higher education.
Again, please note that the benefit is only on interest repayment and not on the principal that's paid back.
There is no maximum limit as such on this deduction and you can avail of this facility both for education in India or outside.
38. Deduction on House Rent Paid (Section 80GG)
This deduction is allowed for those who don't get any HRA from their employer. If that's the case, you don't get any HRA benefit as such and the Government has allowed a different deduction against your rent expenditure.
This deduction is the least of
- Rent Paid minus 10% of total income
- INR 5,000/month
- 25% of total income
You, your spouse or your minor child should not own any residential accommodation at your place of employment for you to be eligible for this benefit. Additionally, you should not have any self occupied residence in any other place.
39. Section 80DD, 80DDB, 80U
You can get a deduction of up to INR 50000 in case you have a dependent with mental or physical disability under Section 80DD. Also, for treatment of serious illness, you can get an exemption of INR 80k for senior citizens and INR 40k for others. You will have to produce the bills and only the actual expenditure (i.e bills minus insurance reimbursements) is eligible.
40. Deduction for donations towards Social Causes (Section 80G)
The various donations in Section 80G are eligible for either a 100% or a 50% deduction with or without a qualifying limit. Please note that this deduction is not applicable if more than INR 2000 is paid in cash.
There are four types of donations under this section:
- Donations with 100% deduction without any qualifying limits
- Donations with 100% deduction with any qualifying limits
- Donations with 50% deduction without any qualifying limits
- Donations with 50% deduction with any qualifying limits
Donations approved for 100% deduction without any limit as such mostly involve funds set up by the Central or the State Governments for the benefit of society. National Defense Fund and Prime Minister's relief Fund are some prominent names here.
Further, there are some donations that are allowed for 100% deduction, but have an overall qualifying limit of 10% of adjusted gross total income. The adjusted gross total income is calculated by reducing the deductions under other sections from overall total income.
This type of donations can be made to any approved local authority, institution or association with a purpose to promote family planning. Companies can get this benefit for donations to IOA or sports associations.
Next, there are four donation types, that are eligible for a 50% deduction without any qualifying limits. These are donations to:
- Jawaharlal Nehru Memorial Fund
- Prime Minister's Drought Relief Fund
- Indira Gandhi Memorial Trust
- The Rajiv Gandhi Foundation
Finally, there are donations that are eligible for a 50% deduction, but subject to a qualifying limit of 10% of adjusted gross total income.
For a complete overall list of exempted institutions, refer this link.
41. Donations for scientific research or rural development (Section 80GGA)
100% of donations towards scientific research or rural development can be deducted for all accesses except those who have an income from a business or profession.
These donations can be a paid to research associations undertaking scientific research or to a college or university to be used for scientific research purposes only or to an approved association or institution that undertakes rural development or training.
Any deduction that has been claimed under Section 80GGA, can't be deducted against any other provision of the Income tax act.
42. Contribution to political parties (Section 80GGC)
Deduction is allowed to a taxpayer for any amount contributed to any political party or an electoral trust. Deduction is allowed for contribution done by any way other than cash.
Political party means any political party registered under section 29A of the Representation of the People Act.
43. Saving Account Interest Deduction (Section 80TTA)
The interest that you earn on your savings bank accounts is interest free till INR 10k. This interest is added under head "Income from other Sources" in your income tax filing. An exemption against same is allowed under Section 80TTA.
44. Dividends received
Dividends announced by any company, be it mutual funds or stocks, are exempt from tax in the hands of the individual. The company may be liable to pay taxes on dividend distributions though.
45. Equities held for more than 1 year
If you hold equities or equity mutual funds for more than a year, your income from the same will be tax exempt as these will be considered as long term capital gains from equity investments.
46. Interest on specified securities
As the name indicates, any interest income or premium you gain on specified tax-free securities will be tax exempt.
47. Encashment of Leaves
Most employees have a certain number of leaves that can be claimed each year. Some employers allow their employees to encash same if they don't avail of same.
This amount is called as Leave Encashment and is exempt from taxes subject to certain conditions.
If you are a Government employee and encash your leaves on your retirement or when you are leaving the job, it's considered to be completely tax free under Section 10.
For non-government employees, it's exempt to the least of the following:
- Months of earned leave multiplied by average monthly salary
- Average monthly salary * 10
- INR 3 lakhs
- Actual leave encashment received
48. Agricultural Income
Income from Agriculture is totally exempt from any taxes if it's the only source of income in the financial year. However, if you have income from other sources, this income becomes taxable.
Agricultural Income is any revenue from a land that's situated in India that's being used for agricultural purposes. It may income from cultivation as well as income through rent of aforesaid properties.
Following are some examples of what can be considered to be Agricultural income:
- Income from growing flowers, creepers, paddy, wheat etc
- Rent received for letting out agricultural land
- Income from sale of replanted trees or seeds
- Share of profit of a partner from a firm engaged in agricultural operations
- Interest on capital received by a partner from a firm engaged in agricultural operations
Income from activities like poultry farming, bee hiving, dairy farming or renting out your farm house for TV or Movie shooting is not considered to be part of agricultural income.
For more details, refer to this detailed tutorial
49. Royalty Income on patents (Section QQB)
Any income by way of royalty for a patent that was registered on or after April 1st, 2003 under the patents act 1970, will be exempted till a limit of INR 3 lakhs per year.
For an individual to be eligible, he/she should be the Patentee and resident of India.
50. Royalty income on books (other than textbooks) (Section 80RRB)
Any royalty income from writing literary, artistic or scientific books is exempt from taxes up to a limit of INR 3 lakhs per year.
This limit is not applicable to the authors of textbooks or magazines or newspapers.
51. Provident Fund
Any payments received from Provident Fund are exempt as part of Section 10. However, if you do a PF withdrawal prior to 5 years of total service, same will be taxable.
Any gratuity amount received by a Government Employee is totally exempt from tax. For all others who are covered under gratuity act, it is exempt to the least of the following:
- 15 days salary based on last drawn salary multiplied by each year of service
- INR 10 lakhs
- Actual gratuity received
Some employers promote a Voluntary Retirement Scheme where if employees retire before their actual age of retirement, they get some amount against same.
This amount received by the employee for voluntary retirement is exempted under Section 10(10C) up to a maximum of INR 5 lakhs.
54. Pension Income
You may get pension from your employer or through an annuity scheme that you may have purchased. The pension can either be commuted or uncommuted. Commuted pension is essentially paid upfront while Uncommuted pension is paid over regular intervals.
Commuted Pension for the Government Employees is fully exempt. For all others, it's exempt to the least of following:
- If you have received Gratuity, one third or the pension received
- If you haven't received Gratuity, one half of the pension received
However, the uncommuted pension is fully taxable in hands of individual.
55. Scholarships and Awards
If you have received any scholarship to meet the cost of education, it's fully tax exempt under section 10(16). Cost of education inclues tuitition fees as well as any other incidental expense. This exemption is irrespective of actual expenditure incurred.
Similarly, any awards constituted by the Government in public interest, whether in cash or in kind are tax exempt.
And that's it. These are 55 ways you can legally use today to save Income Tax. Let me know if you have any questions.