Importance of tax deduction at the time tax planning

Written by Gagandeep Arora - Printed on - Date - 3rd June 2022

The tax deduction is a methodology followed to lower the tax liability of a taxpayer. The motive behind this technique is to build a habit of saving among people for a stable future. The technique used here is to set off all the expenses made in the form of investments against the gross annual income in a financial year. A carefully designed plan would not only lead to lower tax liability but a brighter financial future for an assessee. Lucrative juices of tax deduction can be enjoyed by all the taxpayers, no matter the head under which you file your tax return. Let us briefly understand the famous tax deductions available for different taxpayers.

Tax Deductions For Salaried Employees and Business Owners

A salaried taxpayer can save their tax liability by investing in any of the schemes given by the Income Tax Act. Most of the deductions are covered under Section 80. There are a few predetermined criteria which are to be fulfilled by an assessee to obtain the benefit of these deductions.

Section 80 C

A famous and a favourite section amongst the taxpayers as an investment in instruments mentioned in this section will result in a reduction in their tax liability. Schemes covered under this section are-

1- Life Insurance Premiums Payment of premiums not only benefits a taxpayer in procuring an insurance cover but also offers certain tax benefits. To be applicable for the deduction the policy must be taken in the name of the taxpayer, his spouse and his children. The deduction is restricted to 20% of the capital sum assured in respect of policies issued on or before 31-3-2012 and 10% in case of policies issued on or after 1-4-2012. A minimum holding period of two years is required for claiming deduction under this section.

2- Equity-linked savings scheme These schemes are beneficial for higher returns as well as greater tax benefits. If compared to other tax-saving schemes this scheme has the lowest lock-in period. Up to Rs. 1,50,000 can be availed as tax exemption over the amount invested here. Tax on interest earned and dividends if comes under capital gains is also tax-free.

3- Employee provident fund A Provident fund is a security fund in which the employees contribute a part of their salary and sometimes an employer also contributes on behalf of their employees. There are different types of provident funds with different tax treatments for them. The treatment can be checked as given below.

Categories	Recognised Provident Fund	Unrecognised Provident Fund	Statutory Provident Fund	Public Provident Fund
Employers	Contribution to12%	Not Taxable	Not Taxable	Not Taxable
Contribution	of salary is exempt, above that is added to the salary income of the employee.
Employee’s Contribution	Section 80 C deduction	No Section 80 C deduction	Section 80 C deduction allowed	Section 80 C deduction allowed
Interest on Provident Fund	Any interest above 9.5% is added to salaries. Until 9.5% is exempt.	Not taxable	Exempt	Exempt
Amount withdrawn at retirement time	Exempt in special circumstances	Contribution from employer and interest on that is taxable under the head income from salaries. Contribution from an employee is not taxable and interest on that is taxable under the head income from other sources.	Exempt	Exempt

4- Annuity Pension scheme Retirement is an inevitable stage in one's life along with free time in hand it brings financial insecurity along with it. To overcome this uncertainty an individual invests their savings in an annuity pension scheme. There are different plans available which can be chosen according to the individual's choice. Most of these schemes are covered under Section 80 C and are allowed as a deduction.

5- Principal payments on home loans Buying a house on home loans come with multiple tax benefits under section 24, 80C and 80 EEA. This is the way the Indian government motivates people to buy their own houses. The principal amount of the instalment paid is allowed as a deduction and the maximum amount that can be availed as a deduction is Rs. 1.5 lakhs. Tuition fees for children

6- Tuition fees for children Payment of tuition fees up to Rs1.5 lakhs can be claimed as a deduction. But the payment of fees should be for one of the two children of an individual. The deduction is not permissible for the spouse.

7- Contribution to PPF Account Contribution to PPF Account This scheme has the benefit of triple exemptions. The interest accrued, and corpus collected at the time of maturity is also exempt from tax.

8- Sukanya Samriddhi Account This scheme is also covered under a triple exemption which is EEE. The investment made in a year, interest earned on the investment and money withdrawn at the maturity. This scheme helps you build a corpus for the future of your daughter as well as save tax.

9- NSC (National Saving Certificate) This is a fixed income investment open scheme in which an individual can start at any post office. The scheme motivates small to mid-income investors to invest while saving on income tax. To claim the benefit of tax exemption the taxpayer should declare the interest earned from your NSC investment each year under the head Income of Section 80 C.

10- Fixed Deposit ( Tax Savings) It is one of the low-risk investments which comes with a tax benefit. To avail the fruits of the taxation from investing in fixed deposits the lock-in - period of the amount is five years minimum. The deduction of Rs.1.5 lakhs can be claimed in a financial year. Income from capital gains alone then income is not applicable under section 80 C. Otherwise a tax deduction can be availed up to Rs. 1.5 lakhs by investing in these tax saving schemes.

Section 80 D

An individual can claim a deduction for medical expenditure, the income tax act has a provision to claim benefit on the medical premium paid for the family and self. The details are as follows

1 - Twenty-five thousand is allowed as a deduction for premiums paid.

2 - Fifty thousand is allowed for senior citizen parents.

3 - Medical check-ups are allowed as a deduction of up to five thousand.

4 - A deduction up to fifty thousand, if any medical expenditure is incurred by the senior citizen or the expense is incurred for senior citizen parents provided they are not covered under any mediclaim policy. If an employer has paid the premium on behalf of the employee then also the premium paid is eligible for deduction.

Section 80 G

Donations made to charitable organisations are also applicable for deductions under the Income-tax act. The amount of deduction is dependent on the receiving organisation, fifty per cent or a hundred per cent. Tax Deduction For Business

Business expense

All the above deductions are common for all the taxpayers but besides that, a hundred per cent capital expenditure incurred for the purpose of business is allowed as a deduction provided the businesses begin their operations on and after the specified dates.

Tax Deductions Help Us To Save

The motive behind tax deductions is to promote savings and investments among taxpayers to prosper and create economical stability amongst them.