Income Exemptions and Deductions under Income Tax Act 1961

This article is written by Avantika Jain, an intern under Legal Vidhiya.

INTRODUCTION

The Income Tax Act, of 1961 [1]is the governing legislation for income tax in India. It was enacted to consolidate and amend the laws relating to income tax and introduced a comprehensive set of provisions that govern the levy, administration, collection, and recovery of income tax.

The Income Tax Act, of 1961, has been amended several times since its inception, and it comprises various sections and schedules.

KEY PROVISIONS OF THE ACT

Some of the key provisions of the act include the following:

• Scope of Income: The Act defines the scope of taxable income, which includes all income earned or received by an individual or a company during a financial year.
•  Taxation of Different Sources of Income: The Act provides for taxation of different sources of income such as salary, business or profession, capital gains, house property, and other sources.
•  Tax Slabs: The Act provides for different tax slabs based on the income level of the taxpayer. Currently, there are three tax slabs: 0-2.5 lakhs (no tax), 2.5-5 lakhs (5% tax), 5-10 lakhs (20% tax), and above 10 lakhs (30% tax).
•  Deductions and Exemptions: The Act allows for various deductions and exemptions, such as deductions for investments made in specified instruments, exemptions for certain types of income, and deductions for medical expenses.
• Tax Deducted at Source (TDS): The Act requires certain entities to deduct tax at source while making certain payments such as salary, rent, interest, etc.
• Advance Tax: The Act requires taxpayers to pay their tax liabilities in advance, based on an estimation of their income for the financial year.
• Tax Return Filing: The Act mandates the filing of income tax returns by taxpayers who have a certain level of income or have certain types of income.
• Penalties and Prosecution: The Act provides for penalties and prosecution in case of non-compliance with the provisions of the Act.

Top of Form

Income tax is a crucial source of revenue for governments worldwide, and it is mandatory for individuals to pay taxes on their income. However, not all income is taxable under India’s Income Tax Act, of 1961. Certain exemptions and deductions provided by the government can reduce an individual’s taxable income.

EXEMPTIONS

The income exemptions under income tax law, 1961 are:

1. Agricultural Income: Agricultural income earned by an individual in India is exempted from tax under Section 10(1) of the Income Tax Act. Agricultural income is defined as income derived from land that is situated in India and is used for agricultural purposes. However, if the individual’s total income exceeds the basic exemption limit, then the agricultural income will be taken into account for computing the tax liability.
2. Dividend Income: Dividend income received by an individual from a domestic company is exempted from tax under Section 10(34) of the Income Tax Act. However, the company distributing the dividend has to pay dividend distribution tax (DDT) at the rate of 15% on the gross amount of the dividend. The dividend received from a foreign company is taxable under the Income Tax Act.
3. Interest on Tax-Free Bonds: Interest earned on tax-free bonds is exempted from tax under Section 10(15)(iv)(h) of the Income Tax Act. The government issues these bonds to finance specific infrastructure projects. The interest earned on these bonds is tax-free and issued with a specific maturity period.
4. Life Insurance Proceeds: Any sum received from a life insurance policy is exempted from tax under Section 10(10D) of the Income Tax Act. However, this exemption is applicable only if the premium paid does not exceed 10% of the sum assured.
5. Long-Term Capital Gains on Equity Shares and Equity-Oriented Mutual Funds: Long-term capital gains (LTCG) on equity shares and equity-oriented mutual funds are exempted from tax under Section 10(38) of the Income Tax Act. LTCG on equity shares is exempted if the shares are held for more than 12 months, and on equity-oriented mutual funds if the funds are held for more than 36 months. However, from the financial year 2018-19, LTCG exceeding INR 1 lakh is taxed at 10%.
6. Gifts: Gifts received by an individual are exempted from tax under Section 56(2)(vii) of the Income Tax Act. However, this exemption is applicable only if the value of the gift received does not exceed INR 50,000 in a financial year. If the value of the gift exceeds INR 50,000, then the entire amount is taxable.
7. Scholarship: Any scholarship granted to meet the cost of education is exempted from tax under Section 10(16) of the Income Tax Act. However, this exemption is applicable only to the extent of the amount spent on education. Any additional amount received is taxable.
8. Gratuity: Gratuity received by an employee from his/her employer is exempted from tax under Section 10(10)(iii) of the Income Tax Act. The exemption limit is the least of the following: 15 days of the last drawn salary for each completed year of service, or INR 20 lakhs.
9. HRA: HRA or House Rent Allowance received by an employee from his/her employer is exempted from tax under Section 10(13A) of the Income Tax Act. The exemption is allowed up to the least of the following: actual HRA received, 50% of salary for employees living in metro cities, and 40% of salary for non-metro people

DEDUCTIONS

Basic deductions that can be deducted from any taxable income are:

• Standard Deduction: A standard deduction is a fixed amount that can be deducted from the taxable income of an individual. The exact amount varies from country to country and is determined by the tax authorities.
• Home Loan Interest: Interest paid on a home loan is also deductible from the taxable income of an individual up to a certain limit. This is done to promote homeownership and to provide relief to individuals who have taken a home loan.
• Health Insurance Premium: The premium paid towards a health insurance policy is also deductible from the taxable income of an individual up to a certain limit. This is done to encourage people to take health insurance policies and to provide relief to individuals who have taken a health insurance policy.
• Donations to Charity: Donations made to registered charitable organizations are also deductible from the taxable income of an individual up to a certain limit. This is done to encourage philanthropy and support charitable organizations.

Deductions under the income tax act, of 1961 are:

• Section 80C – This section allows deductions up to Rs. 1.5 lakh from gross total income for investments made in specified instruments such as PPF, EPF, tax-saving mutual funds, etc.
• Section 80CCC – This section allows a deduction up to Rs. 1.5 lakh for contributions made towards pension plans.
• Section 80CCD – This section allows a deduction up to Rs. 1.5 lakh for contributions made towards National Pension Scheme (NPS).
• Section 80D – This section allows deductions for the premium paid towards health insurance policies for self, spouse, and dependent children.
• Section 80DD – This section allows a deduction for expenses incurred towards the medical treatment of a dependent person with a disability.
• Section 80E – This section allows deductions for interest paid on education loans taken for higher studies.
• Section 80G – This section allows deductions for donations made to specified funds, charitable institutions, etc.
• Section 80GG – This section allows deductions for rent paid in case the taxpayer does not receive house rent allowance from their employer.
• Section 80TTA – This section allows deductions up to Rs. 10,000 for interest earned on savings account deposits.
• Section 80TTB – This section allows a deduction up to Rs. 50,000 for interest earned on deposits held by senior citizens.

DIFFERENCE BETWEEN EXEMPTION AND DEDUCTION

PARAMETERS	EXEMPTION	DEDUCTION
Meaning	Exemption refers to the amount excluded from taxation.	Deduction refers to the subtraction of the amount that is not subjected to taxation
Calculation	Included in gross taxable income	Not included in gross taxable income
Objective	Encourage investment and saving	Avoid exploitation and over taxation
Eligibility	Conditional	Unconditional
Concession and relaxation	Concession	Relation
Taxable income	Deductible income	Tax-free income

DIFFERENCE BETWEEN INCOME TAX EXEMPTION AND DEDUCTION

CONCLUSION

To conclude, the Income Tax Act of 1961 provides various deductions and exemptions to taxpayers to reduce their tax liability. Deductions are allowed on certain expenses incurred by the taxpayer, such as medical expenses, education expenses, donations to charitable institutions, and home loan repayments.

Exemptions, on the other hand, are allowed on certain incomes, such as agricultural income and income earned by charitable institutions. Some of the popular deductions and exemptions available under the Income Tax Act of 1961 include the standard deduction, deduction for interest paid on a home loan, deduction for health insurance premiums, deduction for contributions to the National Pension System (NPS), and exemption for long-term capital gains on the sale of listed equity shares and mutual fund units.

 It is important for taxpayers to understand the various deductions and exemptions available to them and to take advantage of them while filing their tax returns. This can help them reduce their tax liability and save money in the long run. However, it is also important to note that there are limits to the amount of deductions and exemptions that can be claimed, and taxpayers should consult with a tax professional or use tax filing software to ensure they are correctly claiming all available deductions and exemptions

---

[1] The Income Tax Act, 1961 is the primary legislation in India that governs the imposition, collection, and administration of income tax. The Act was enacted on 1st April 1962, and it has been amended several times since then to reflect changes in the Indian tax system and to incorporate new provisions.