IIMS, PUNE

Finance Specialization – Batch 23-25

Direct and Indirect Taxation (Semester 2)

Study Material- Unit 5

What is Tax Deductions / Credits?

In a financial year, whatever income you earn under five income heads is summed up to the gross total
income, which is chargeable to income tax. However, to compute the net taxable income of an assessee,
certain deductions are applicable, on which income tax is not chargeable. The deductions available
under the income tax act is specific to certain taxpayers under certain conditions. It covers sections that
define deductions to be made in computing the total income (Section 80A), deductions in respect of
life insurance premium, deferred annuity, contribution to provident fund, subscription to
certain equity shares or debentures etc (section 80C) and many more.

Tax deductions are the sum of money that can be reduced from the total taxable income. To get the
net income of a taxpayer, the deduction amount is first included in the gross total income and then
subtracted from it. It is kind of concession received by the taxpayers from the income tax department.
The tax deductions also promote investments and savings by a taxpayer.

Tax deduction under several subsections:

Section 80C – Deductions on Investments
Section 80C is one of the most popular and favourite sections amongst the taxpayers as it allows to
reduce taxable income by making tax saving investments or incurring eligible expenses. It allows a
maximum deduction of Rs 1.5 lakh every year from the taxpayers total income.
The benefit of this deduction can be availed by Individuals and HUFs. Companies, partnership firms, LLPs
cannot avail the benefit of this deduction.
Section 80C includes subsections , 80CCC, 80CCD (1) , 80CCD (1b) and 80CCD (2).

It is important to note that overall limit including the subsections for claiming deduction is Rs 1.5 lakh
except an additional deduction of Rs 50,000 allowed u/s 80CCD(1b)

Section 80D – Medical Insurance

Deduction for the premium paid for Medical Insurance
You (as an individual or HUF) can claim a deduction of Rs.25,000 under section 80D on insurance for self,
spouse and dependent children. An additional deduction for insurance of parents is available up to Rs
25,000, if they are less than 60 years of age. If the parents are aged above 60, the deduction amount is
Rs 50,000, which has been increased in Budget 2018 from Rs 30,000.

In case, both taxpayer and parent(s) are 60 years or above, the maximum deduction available under this
section is up to Rs.1 lakh.

Example: Rohan’s age is 65 and his father’s age is 90. In this case, the maximum deduction Rohan can
claim under section 80D is Rs. 100,000.
From FY 2015-16 a cumulative additional deduction of Rs. 5,000 is allowed for preventive health check.
Section 80E – Interest on Education Loan
Deduction for Interest on Education Loan for Higher Studies
A deduction is allowed to an individual for interest on loans taken for pursuing higher education. This
loan may have been taken for the taxpayer, spouse or children or for a student for whom the taxpayer is
a legal guardian.
80E deduction is available for a maximum of 8 years (beginning the year in which the interest starts
getting repaid) or till the entire interest is repaid, whichever is earlier. There is no restriction on the
amount that can be claimed.

Section 80G – Donations

Deduction for donations towards Social Causes
The various donations specified in u/s 80G are eligible for deduction up to either 100% or 50% with or
without restriction.

From FY 2017-18 any donations made in cash exceeding Rs 2,000 will not be allowed as deduction. The
donations above Rs 2000 should be made in any mode other than cash to qualify for 80G deduction.

a. Donations with 100% deduction without any qualifying limit

 National Defence Fund set up by the Central Government
 Prime Minister’s National Relief Fund
 National Foundation for Communal Harmony
 An approved university/educational institution of National eminence
 Zila Saksharta Samiti constituted in any district under the chairmanship of the Collector of that
district
 Fund set up by a State Government for the medical relief to the poor
 National Illness Assistance Fund
 National Blood Transfusion Council or to any State Blood Transfusion Council
 National Trust for Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and
Multiple Disabilities
 National Sports Fund
 National Cultural Fund
 Fund for Technology Development and Application
 National Children’s Fund
 Chief Minister’s Relief Fund or Lieutenant Governor’s Relief Fund with respect to any State or
Union Territory
 The Army Central Welfare Fund or the Indian Naval Benevolent Fund or the Air Force Central
Welfare Fund, Andhra Pradesh Chief Minister’s Cyclone Relief Fund, 1996
 The Maharashtra Chief Minister’s Relief Fund during October 1, 1993 and October 6,1993
 Chief Minister’s Earthquake Relief Fund, Maharashtra
 Any fund set up by the State Government of Gujarat exclusively for providing relief to the
victims of earthquake in Gujarat
 Any trust, institution or fund to which Section 80G(5C) applies for providing relief to the victims
of earthquake in Gujarat (contribution made during January 26, 2001 and September 30, 2001)
or
 Prime Minister’s Armenia Earthquake Relief Fund
 Africa (Public Contributions — India) Fund
  Swachh Bharat Kosh (applicable from financial year 2014-15)
 Clean Ganga Fund (applicable from financial year 2014-15)
 National Fund for Control of Drug Abuse (applicable from financial year 2015-16)

b. Donations with 50% deduction without any qualifying limit

 Jawaharlal Nehru Memorial Fund
 Prime Minister’s Drought Relief Fund
 Indira Gandhi Memorial Trust
 The Rajiv Gandhi Foundation

c. Donations to the following are eligible for 100% deduction subject to 10% of adjusted gross total
income
 Government or any approved local authority, institution or association to be utilized for the
purpose of promoting family planning
 Donation by a Company to the Indian Olympic Association or to any other notified association or
institution established in India for the development of infrastructure for sports and games in
India or the sponsorship of sports and games in India

d. Donations to the following are eligible for 50% deduction subject to 10% of adjusted gross total
income
 Any other fund or any institution which satisfies conditions mentioned in Section 80G(5)
 Government or any local authority to be utilized for any charitable purpose other than the
purpose of promoting family planning
 Any authority constituted in India for the purpose of dealing with and satisfying the need for
housing accommodation or for the purpose of planning, development or improvement of cities,
towns, villages or both
 Any corporation referred in Section 10(26BB) for promoting the interest of minority community
 For repairs or renovation of any notified temple, mosque, gurudwara, church or other places.

Section 80JJAA Deduction

Section 80JJAA is a facility for claiming a deduction for the recruitment of new or additional employees.
The section has been made available in the Income Tax Act to encourage employers to recruit fresh
employees on a periodic basis. This deduction of the Income Tax Act can be claimed by all assessees for
creating employment generation opportunities. Section 80JJAA deduction is aimed at generating
employment in all sectors of the Indian economy.

Section 80QQB – Royalty Income – Deductions under 80QQB

Deduction for Royalty Income of Authors
Authors write books and give it to publishers. Publishers publish them and earn profit on selling those.
They pay an agreed percentage of profit or sales made to the authors as a reward or compensation for
writing books. This reward or compensation is called Royalty.
While the Income tax department charges tax on this income under “Profit and Gains of Business or
Profession” or “Other Sources” head of Income, it also provides a deduction on the same that can be
claimed by the authors to save tax. This deduction is covered under 80QQB of the Income Tax Act,1961.
Authors who write books and present the same to publishers can avail deductions under Section 80QQB
of the Income Tax Act 1961. The maximum amount available for deduction under this section is Rs
3,00,000 or original amount of royalty amount received (whichever is less).

Section 80RRB – Royalty of a Patent

Deduction with respect to any Income by way of Royalty of a Patent
80RRB Deduction for any income by way of royalty for a patent, registered on or after 1 April 2003 under
the Patents Act 1970, shall be available for up to Rs.3 lakh or the income received, whichever is less. The
taxpayer must be an individual patentee and an Indian resident. The taxpayer must furnish a certificate
in the prescribed form duly signed by the prescribed authority.

Section 80 TTA – Interest on Savings Account

Deduction from Gross Total Income for Interest on Savings Bank Account
If you are an individual or an HUF, you may claim a deduction of maximum Rs 10,000 against interest
income from your savings account with a bank, co-operative society, or post office. Do include the
interest from savings bank account in other income.
Section 80TTA deduction is not available on interest income from fixed deposits, recurring deposits, or
interest income from corporate bonds.

Section 80U – Physical Disability

Deduction for Person suffering from Physical Disability
A deduction of Rs.75,000 is available to a resident individual who suffers from a physical disability
(including blindness) or mental retardation. In case of severe disability, one can claim a deduction of Rs
1,25,000.

From FY 2015-16 – Section 80U deduction limit of Rs 50,000 has been raised to Rs 75,000 and Rs
1,00,000 has been raised to Rs 1,25,000.

Section 80GG – House Rent Paid

Deduction for House Rent Paid Where HRA is not Received
a. Section 80GG deduction is available for rent paid when HRA is not received. The taxpayer, spouse or
minor child should not own residential accommodation at the place of employment
b. The taxpayer should not have self-occupied residential property in any other place
c. The taxpayer must be living on rent and paying rent
d. The deduction is available to all individuals

Deduction available is the least of the following:

a. Rent paid minus 10% of adjusted total income
b. Rs 5,000/- per month
c. 25% of adjusted total income*

Section 80EE – Interest on Home Loan

Deductions on Home Loan Interest for First Time Home Owners
FY 2017-18 and FY 2016-17 This deduction is available in FY 2017-18 if the loan has been taken in FY
2016-17. The deduction under section 80EE is available only to home-owners (individuals) having only
one house property on the date of sanction of the loan. The value of the property must be less than Rs
50 lakh and the home loan must be less than Rs 35 lakh. The loan taken from a financial institution must
have been sanctioned between 1 April 2016 and 31 March 2017. There is an additional deduction of Rs
50,000 available on your home loan interest on top of deduction of Rs 2 lakh (on interest component of
home loan EMI) allowed under section 24.

Section 80DD – Disabled Dependent

Deduction for Rehabilitation of Handicapped Dependent Relative
Section 80DD deduction is available to a resident individual or a HUF and is available on:
a. Expenditure incurred on medical treatment (including nursing), training and rehabilitation of
handicapped dependent relative
b. Payment or deposit to specified scheme for maintenance of handicapped dependent relative.
i. Where disability is 40% or more but less than 80% – fixed deduction of Rs 75,000.
ii. Where there is severe disability (disability is 80% or more) – fixed deduction of Rs 1,25,000.
To claim this deduction a certificate of disability is required from prescribed medical authority. From FY
2015-16 – The deduction limit of Rs 50,000 has been raised to Rs 75,000 and Rs 1,00,000 has been raised
to Rs 1,25,000.

Section 80DDB – Medical Expenditure

Deduction for Medical Expenditure on Self or Dependent Relative
a. For individuals and HUFs below age 60
A deduction up to Rs.40,000 is available to a resident individual or a HUF. It is available with respect to
any expense incurred towards treatment of specified medical diseases or ailments for himself or any of
his dependents. For an HUF, such a deduction is available with respect to medical expenses incurred
towards these prescribed ailments for any of the HUF members.

b. For senior citizens and super senior citizens

In case the individual on behalf of whom such expenses are incurred is a senior citizen, the individual or
HUF taxpayer can claim a deduction up to Rs 1 lakh. Until FY 2017-18, the deduction that could be
claimed for a senior citizen and a super senior citizen was Rs 60,000 and Rs 80,000 respectively. This has
now become a common deduction available upto Rs 1 lakh for all senior citizens (including super senior
citizens) unlike earlier.

c. For reimbursement claims

Any reimbursement of medical expenses by an insurer or employer shall be reduced from the quantum
of deduction the taxpayer can claim under this section.
Also remember that you need to get a prescription for such medical treatment from the concerned
specialist in order to claim such deduction. Read our detailed article on Section 80DDB.

Section 80GGB – Company Contribution

Deduction on contributions given by companies to Political Parties
Section 80GGB deduction is allowed to an Indian company for the amount contributed by it to any
political party or an electoral trust. Deduction is allowed for contribution done by any way other than
cash.

Section 80GGC – Contribution to Political Parties

Deduction on contributions given by any person to Political Parties
Deduction under section 80GGC is allowed to an individual taxpayer for any amount contributed to a
political party or an electoral trust. It is not available for companies, local authorities and an artificial
juridical person wholly or partly funded by the government. You can avail this deduction only if you pay
by any way other than cash.
Section 80 TTB – Interest Income
Deduction of Interest on Deposits for Senior Citizens
A new section 80TTB has been inserted vide Budget 2018 in which deductions with respect to interest
income from deposits held by senior citizens will be allowed. The limit for this deduction is Rs.50,000.

No further deduction under section 80TTA shall be allowed. In addition to section 80 TTB, section 194A
of the Act will also be amended so as to increase the threshold limit for TDS on interest income payable
to senior citizens. The earlier limit was Rs 10,000, which was increased to Rs 50,000 as per the latest
Budget.

Section 80 Deduction Table

Allowed Limit
Section Deduction on (maximum) FY 2018-19

80C Investment in PPF Rs. 1,50,000

– Employee’s share of PF contribution
– NSCs
– Life Insurance Premium payment
– Children’s Tuition Fee
– Principal Repayment of home loan
– Investment in Sukanya Samridhi Account
– ULIPS
– ELSS
– Sum paid to purchase deferred annuity
– Five year deposit scheme
– Senior Citizens savings scheme
– Subscription to notified securities/notified deposits
scheme
– Contribution to notified Pension Fund set up by Mutual
Fund or UTI.
– Subscription to Home Loan Account scheme of the
National Housing Bank
– Subscription to deposit scheme of a public sector or
company engaged in providing housing finance
– Contribution to notified annuity Plan of LIC
– Subscription to equity shares/ debentures of an
approved eligible issue
– Subscription to notified bonds of NABARD

80CCC For amount deposited in annuity plan of LIC or any other –

insurer for a pension from a fund referred to in Section
10(23AAB)

80CCD(1) Employee’s contribution to NPS account (maximum up to –

Rs 1,50,000)

80CCD(2) Employer’s contribution to NPS account Maximum up to 10% of

 Allowed Limit
Section Deduction on (maximum) FY 2018-19

salary

80CCD(1B Additional contribution to NPS Rs. 50,000

)

80TTA(1) Interest Income from Savings account Maximum up to 10,000

80TTB Exemption of interest from banks, post office, etc. Maximum up to 50,000
Applicable only to senior citizens

80GG For rent paid when HRA is not received from employer Least of :
– Rent paid minus 10% of
total income
– Rs. 5000/- per month
– 25% of total income

80E Interest on education loan Interest paid for a period

of 8 years

80EE Interest on home loan for first time home owners Rs 50,000

80D Medical Insurance – Self, spouse, children – Rs. 25,000

Medical Insurance – Parents more than 60 years old or – Rs. 50,000
(from FY 2015-16) uninsured parents more than 80 years
old

80DD Medical treatment for handicapped dependent or payment – Rs. 75,000

to specified scheme for maintenance of handicapped – Rs. 1,25,000
dependent
– Disability is 40% or more but less than 80%
– Disability is 80% or more

80DDB Medical Expenditure on Self or Dependent Relative for – Lower of Rs 40,000 or

diseases specified in Rule 11DD the amount actually paid
– For less than 60 years old – Lower of Rs 1,00,000 or
– For more than 60 years old the amount actually paid

80U Self-suffering from disability : – Rs. 75,000

– An individual suffering from a physical disability – Rs. 1,25,000
(including blindness) or mental retardation.
– An individual suffering from severe disability

80GGB Contribution by companies to political parties Amount contributed (not

allowed if paid in cash)

80GGC Contribution by individuals to political parties Amount contributed (not

allowed if paid in cash)
 Allowed Limit
Section Deduction on (maximum) FY 2018-19

80RRB Deductions on Income by way of Royalty of a Patent Lower of Rs 3,00,000 or

income received

What is Tax Exemption: -

There are various categories for tax exemptions in India depending on the nature of income. Some of
the incomes that are exempt are agricultural income, pension, allowances, etc. There is also Deduction
of Tax at Source that can be availed.

Tax exemption is the monetary exclusion that reduces the taxable income. You can get complete relief
from tax or reduced tax rates or tax will be applicable on a certain portion. Tax exemption is therefore a
statutory exemption to a general rule instead of the absence of taxation in certain circumstances. Tax
exemptions are offered to encourage certain economic activities.

A tax exemption is the right to exclude all or some income from taxation by federal or states
governments. Most taxpayers are entitled to various exemptions to reduce their taxable income, and
certain individuals and organizations are completely exempt from paying taxes.

Tax exemptions are related to but distinct from tax deductions. A tax deduction is a portion of taxable
income that may be excluded from taxation when certain conditions are satisfied, while a tax
exemption constitutes income that is not subject to taxation in the first place. Meanwhile, a tax credit is
applied to reduce the amount of tax owed, independent of taxable income.

Difference between Tax Deduction and Tax Exemption

BASIS FOR
DEDUCTION EXEMPTION
COMPARISON

Meaning Deduction means subtraction i.e. an Exemption means exclusion, i.e. if certain
amount that is eligible to reduce income is exempt from tax then it will not
taxable income. contribute to the total income of a
person.

What is it? Concession Relaxation

Concept The amount of deduction is first The exempted income is not considered
included in the gross income and then as a part of total income, the whole
deducted from it to arrive at the net amount is an exemption for the taxpayer.
income.
 BASIS FOR
DEDUCTION EXEMPTION
COMPARISON

Income is Tax deductible Tax free

Objective To promote savings and investments of To boost that particular section in which
the general public. tax is exempted.

Sections Section 80 C to 80 U deals with Section 10 deals with exemptions

deduction

Allowable to Specific persons All the persons

Conditional Yes No