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Know more about these tax deductions
Finance - Tax Planning

Would you like to save some tax money? Have you made use of all the tax deductions that the law provides?

There may be eligible deductions in many of the expenses that you incur.

e.g. Your house rent could fetch you lower taxes. Even when you make donations, the law of the land entitles you to certain tax privileges. Let us study them here.

Deductions for rent paid

If you have 'HRA' as a component of your salary, section 10 (13A) of the Income Tax Act, 1961 entitles you to the following exemption:

The least of the following amount is exempt from income tax:

  • Amount of HRA
  • Amount of rent paid less 10 per cent of salary (Salary = Basic + DA)  Or
  • 50 per cent of your basic salary (for metro cities) or 40 per cent  of your basic salary (for non-metro cities)

For example, if your salary comprises of the following and you live in a metro city, let us compute the amount of exemption you can get:

Basic = Rs 20,000 per month.

DA = Rs 7,000 per month.

HRA = Rs. 10,000 per month.

Amount of actual rent paid = Rs 15,000 per month.

The amount of exemption from income tax is the least of the following amounts:

  • Amount of HRA = Rs 10,000 per month.
  • Rent paid less 10 per cent  of salary =  (15,000 – 2700) = Rs 12,300 per month.
  • 50 per cent  of basic salary = Rs 10,000 per month.

Hence you can claim Rs 10000 per month as exemption. The annual exemption adds to Rs 1,20,000.

What happens in cases where you do not receive HRA from your employer or are self employed  but pay rent for your accommodation? Section 80GG of the Income Tax Act allows you the following deduction:

Using the above example, except with the HRA component as Nil, the least of the following amount is exempt from income tax

  • Rent / lease amount paid less 10 per cent  of your total income = Rs 12,300 per month. or Rs. 14.76 lakh per annum.
  • Rs. 2,000 p.m. or Rs. 24000 per annum.
  • 25 per cent of your total income = Rs 6750 per month. or Rs. 81000 per annum.

Under this section, total income is : Gross Total Income minus long term capital gain, short term capital gain that would be charged at a concessional tax rate (like STCG from sale of shares), all deductions other than the deduction under Section 80GG

Hence you can claim an amount of Rs 24,000 as an exemption under section 80GG from income tax.

Deduction on donations made

If you make donations to certain prescribed funds during a year, you are entitled to tax deductions. You can get deductions for 100 per cent or 50 per cent  of the amount of donation depending upon the fund to which you donate. For example, if you donate Rs 10,000 during a financial year to the Prime Minister's National Relief fund, the entire amount is an eligible deduction.

On the other hand, if you donate an even sum to the Rajiv Gandhi Foundation, you are entitled to a 50 per cent deduction, i.e. a deduction of Rs 5000/- only. Some donations have a limit of 10 per cent of Gross Total Income.

So, when you make donations to charitable institutions you can verify if your donation is also an eligible tax deduction.

Deduction for education loans

The interest amount on an education loan taken for higher studies is eligible for deduction under section 80E of the Income Tax Act.

Higher studies include all education after school. This deduction is available even on loans taken for education cost of children and spouse too.

Loans have to be taken from financial institutions or approved charitable institutes only. You can claim this deduction for maximum term of 8 years.

So, if you take a loan from your bank for the tuition fees of your spouse and the interest payment amounts to Rs 15000 for the year, you can claim this amount as a deduction from taxable income.

However, if you borrow money from your parents to pay for tuition fees, even if you pay interest thereon, it is not tax deductible.


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