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Tax Exemption and Scope of Coverage

Feb 05, 2020 | 5 months ago | Read Time: 5 minutes | By iKnowledge Team
Tax Exemption and Scope of Coverage

Taxation is a critical component of every functioning economy. It is impossible to run a government without revenues and the bulk of government revenues comes from various types of taxes. There are broadly two types of taxes in India—direct and indirect. The goods and services tax are a form of indirect tax, while the income tax is the perfect example of direct tax. While the government needs revenue, it is also its duty to promote certain types of investments and savings.

What is meant by Tax Exemption?

Tax exemptions are nothing but the reduction of the tax liability on a person for investing in an instrument or spending as approved by the government. Tax exemptions have become an effective tool for promoting investments and savings. Some of the exemptions like investments listed under Section 80C of the Income Tax Act, 1961 are well-known, but there are a host of other tax exemptions allowed by the government.

Tax Exemption under Section 80C

It is the umbrella section for tax saving for investing in a number of instruments. As per Section 80C of the income tax law, an individual can claim a deduction of up to Rs 1.5 lakhs in a financial year for investing in listed instruments. The investments allowed for tax exemption under the section are:

  • Public Provident Fund: A maximum of Rs 1.5 lakhs can be invested in PPF in a year and deduction can be claimed for the amount. The returns and the withdrawal from PPF are tax-exempt, giving PPF the EEE status.
  • Unit-linked Insurance Plans: Contributions to a ULIP are eligible for a deduction of up to Rs 1.5 lakhs per year under the section. The benefits of ULIP are eligible for exemption under Section 10(10D) of the income tax act.
  • ELSS: Just like ULIP and PPF, investing in ELSS or equity-linked savings scheme qualifies for tax exemptions under the section.
  • Employee Provident Fund: The contributions to the EPF account qualify for income tax exemption under Section 80C.

Along with EPF, ELSS, ULIP and PPF, contribution to the National Pension Scheme, Senior Citizens Savings Scheme, Post Office Savings Scheme, and National Savings Certificate also provide tax exemption under Section 80C of the tax law. Please note the total exemption allowed under Section 80C is Rs 1.5 lakh per year.

Tax Exemption under Section 80D

Under Section 80D tax deduction of Rs 25,000 is allowed for premiums of medical insurance. Coupled with the health insurance premium of parents, the exemption allowed under the section rises to Rs 50,000 in a year.

House Rent Allowance Exemption

Housing Rent Allowance

The exemption allowed on house rent is especially relevant for salaried people. Sometimes it becomes pertinent in a job to move cities. Relocation requires one to rent a house, which makes it an unavoidable expense. The rent paid by an employee is eligible for a tax deduction, while the housing allowance paid by employers is tax-exempt. There are certain limits on the exemption for housing. The tax exemption will be available only for the lowest among:

  • The actual HRA
  • Any rent paid over 10% of the salary plus dearness allowance
  • Half of the salary plus dearness allowance in case of metro cities and 40% in the case of other cities.

Housing loan Exemption

Owning a house is an essential requirement for many people. The construction or purchase of a house is a capital-intensive task. One generally has to take a home loan to own a house. The government provides a plethora of tax exemptions on home loans. The principal payment for home loan including the stamp duty and registration qualifies for a tax deduction of up to Rs 1.5 lakhs under Section 80C. The interest component of the loan is also tax-exempt under Section 24. An additional deduction of up to Rs 50,000 is provided to first time home buyers under Section 80EE.

Tax Exemptions on Education Loan

Tax Exemptions on Education Loan

The government provides tax exemptions for loans availed of higher studies under Section 80E of the income tax law. The deduction is aimed at helping students opting for higher education and is allowed only for 7 years.

Exemption for Treatment of Serious Disease

Exemption for Treatment of Serious Disease

Tax exemption of up to Rs 40,000 under Section 80DDB can be availed for expenses to treat a serious disease. For senior citizens, a tax deduction of Rs 80,000 is allowed. The section covers a prescribed list of diseases.

New tax regime for financial year 2020-21 

Budget 2020 gave individual taxpayers a new direct tax regime with a view to increase tax compliance. According to the new tax system presented by the Finance Minister, taxpayers can now choose between either of the two tax regimes based on their income and investments. This new regime has not only slashed the tax rates, but also plans to remove 70 of the 100 deductions and exemptions currently in place. Taxpayers who opt for the new regime get to enjoy significantly lower tax rates. However, they cannot claim any of the deductions or exemptions existing under the old scheme.

An individual with very few qualifying investments would find the new tax regime more beneficial, due to lower tax outlay. On the other hand, an individual with more investments and deductions may find the existing tax regime more favorable. The advantage is that every taxpayer gets to choose the scheme that benefits them most.

The following table shows a detailed comparison of the various tax slabs and rates as per the old tax regime and the new system. 

Total income (in Rs.) Tax rates under existing regime Tax rates under new regime
Up to Rs. 5,00,000 No Tax No Tax
Rs. 2,50,001 to Rs. 5,00,000 5% No Tax
Rs. 5,00,001 to Rs. 7,50,000 20% 10%
Rs. 7,50,001 to Rs. 10,00,000 20% 15%
Rs. 10,00,001 to Rs. 12,50,000 30% 20%
Rs. 12,50,001 to Rs. 15,00,000 30% 25%
Rs. 15,00,001 and above 30% 30%

Conclusion

An understanding of tax exemptions allowed under various sections of the income tax law can help you in tax savings. Along with the host of exemptions listed above, there are various other sources of income and investments that can help you get an income tax exemption.

Another essential tax saving instrument you can take advantage of is term insurance. You can opt for Aegon Life’s term insurance. By availing this term insurance plan, you can be eligible for tax deductions on premiums paid of up to Rs. 1 crore under Section 80C of the Income Tax Act. The payouts you receive from the policy will also be tax-free under Section 10(10D). Along with numerous tax benefits, the term plan also comes with its own set of policy benefits, such as life coverage up to 100 years of age, three different plan variants for you to choose from and lower premiums for females and non-smokers. So, purchase the term plan to make the most of its two-pronged benefits of financial security as well as tax saving. To know about Aegon Life’s life insurance products like term insurance and other products, visit our home page.


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