What expenses are tax deductible to reduce income tax? Will the tax liability be reduced if no deduction is sought? Under the Income Tax Act, certain expenses are allowed to be deducted from the taxable income. If no deduction is claimed, then you can opt for a lower tax rate.
Expenses eligible for tax deduction
For an expenditure to be considered for reducing tax liability, it must have been incurred by the end of the financial year for which the tax calculation is being done. Here are the major expenses that can be made up to March 31 for consideration for deduction under Chapter 6A of the Income Tax Act.
Premium paid for life insurance (up to 10% of the sum insured) taken in the name of the taxpayer, spouse and children (including adults); fees (excluding donations and development funds) for schools, including play schools, colleges, universities, and other educational institutions for the full-time education of any two children; repayment of home loan principal, etc, are tax deductible as per Section 80C of the Income Tax Act.
Maximum deduction of Rs 1.5 lakh
Investments and expenses up to a maximum amount of Rs 1.5 lakh either individually or collectively are allowed for deduction from the total income for consideration of taxes as per section 80C of the Income Tax Act.
Deduction of up to Rs 75,000 on medical insurance
An amount up to Rs 25,000 can be claimed for tax deduction from the total income for premium paid towards insurance policy for medical treatment of self, spouse and dependent children. In addition to this, another sum of up to Rs 25,000 paid by the taxpayer as premium for insurance policy for parents can also be considered for tax deduction. If one of the parents is a resident senior citizen, then the maximum deduction eligible is Rs 50,000.
Also, for parents who are senior citizens but have no insurance protection, an amount of up to Rs 50,000 spent on their medical treatment is eligible for tax deduction.
The premium for medical insurance or medical expenses for parents should be paid by non-cash means only from the taxable income of the taxpayer. However, cash payment of up to Rs 5,000 for a preventive health checkup can be claimed as tax deduction.
Interest on educational loan
The interest on loan taken from a bank or specified financial or charitable institution for the higher education (after senior secondary examination) of the taxpayer, spouse or children is eligible, without limit, for tax deduction from the total income.
The deduction can be claimed only on the interest paid from the taxable income of the taxpayer and is applicable for eight years, including the year of payment.
Tax deduction up to specified amounts from the total income and subject to certain conditions can be claimed for interest on home loan (Section-24B), specific donations (Section-80G); the cost of treatment of a dependent person with a specific disability (Section-80DD); cost of treatment of specific diseases such as cancer, kidney disease, Parkinson's, of the taxpayer or a dependent (Section 80 DDB); expense on rent in a place where the taxpayer does not own a house (Section 80gg); interest up to Rs 10,000 on post office and bank savings accounts (Section 80 TTA) (for those above 60 years of age, the exemption limit is Rs 50,000 (Section 80 TTB)); and by people with specific disabilities such as autism, cerebral palsy and mental retardation (Section 80U).
Investments must be made and expenses must be incurred by March 31 to claim the tax deductions for the current financial year.
People residing in India (resident) and with taxable income less than Rs 5 lakh can claim a tax rebate on 100% of the tax amount payable or Rs 12,500 whichever is less.
Lower income tax rates if deductions not claimed
Taxpayers have the option of opting for a lower tax rate if they don’t claim any of the above deductions. In such a case, salaried employees cannot seek any tax deductions, including the standard deduction.
Taxpayers can choose to pay income tax at a lower rate by not claiming any deduction or pay at the normal rate by opting for the deductions after first determining which method results in lower tax liability.