How to Save Income Tax in India: Deductions & Exemptions

Saving income tax in India involves leveraging provisions within the Income Tax Act, 1961, that allow individuals to reduce their taxable income. These provisions, including various deductions and exemptions, encourage specific investments and expenses. Taxpayers can utilize these legal avenues to optimize their tax outgo, ensuring compliance while maximizing savings.

Common Deductions from Gross Total Income

Taxpayers in India can significantly reduce their taxable income by utilizing various deductions available under different sections of the Income Tax Act. These deductions are applied to the Gross Total Income, the sum of income from all sources, to arrive at the Net Taxable Income.

Section 80C is a widely used provision, offering a maximum deduction of ₹1.5 lakh for specified investments and expenditures, including:
Contributions to the Public Provident Fund (PPF)
Employees Provident Fund (EPF)
Equity Linked Savings Schemes (ELSS)
Life insurance premiums
Repayment of home loan principal
Children’s tuition fees (up to two children)
National Savings Certificates (NSC)
Tax-saving Fixed Deposits (FDs)
Sukanya Samriddhi Yojana

Beyond the primary limit of Section 80C, an additional deduction for contributions to the National Pension System (NPS) is available under Section 80CCD, allowing for an extra deduction of up to ₹50,000. An employer’s contribution to an employee’s NPS account can also be deducted under Section 80CCD, up to 10% of the employee’s basic salary and dearness allowance for private sector employees, and up to 14% for central government employees.

Medical expenses and health insurance premiums are addressed under Section 80D. An individual can claim a deduction of up to ₹25,000 for health insurance premiums paid for themselves, their spouse, and dependent children if they are below 60 years of age. For senior citizens (60 years or above), this limit increases to ₹50,000. An additional deduction is available for premiums paid for parents, with a limit of ₹25,000 if they are below 60, and ₹50,000 if they are senior citizens.

Expenses for preventive health check-ups are also deductible under Section 80D, up to ₹5,000. This amount is part of the overall ₹25,000 or ₹50,000 limit. Payments for these check-ups can be made in cash.

Section 80E provides a deduction for interest paid on education loans taken for higher education. This deduction is available for loans taken for the taxpayer, their spouse, or children. While there is no specified limit on the interest amount, the deduction is available for a maximum of eight consecutive assessment years or until the interest is fully repaid, whichever is earlier.

Donations to certain charitable institutions and funds are eligible for deduction under Section 80G. The deduction amount varies from 50% to 100% of the donated sum, and may be subject to a qualifying limit based on the recipient organization. For example, donations to funds like the Prime Minister’s National Relief Fund qualify for a 100% deduction without an upper limit. Other donations may be limited to 50% of the donated amount and subject to a maximum of 10% of the donor’s adjusted gross total income.

To claim the deduction, donations exceeding ₹2,000 must be made through non-cash modes such as cheques, demand drafts, or digital payments.

Interest income from savings bank accounts offers a deduction under Section 80TTA for individuals and Hindu Undivided Families (HUFs) who are not senior citizens, capped at ₹10,000 annually. For resident senior citizens (aged 60 years or above), a deduction is available under Section 80TTB, allowing them to claim up to ₹50,000 on interest income from savings bank accounts, fixed deposits, and recurring deposits held with banks, post offices, or cooperative banks.

Utilizing Exemptions and Allowances

Beyond deductions, several exemptions and allowances directly reduce the income subject to tax, often before the gross total income is calculated. These provisions relate to specific types of income or reimbursements that are either fully or partially excluded from taxable earnings.

Salaried individuals can benefit from the House Rent Allowance (HRA) exemption for rent paid on accommodation. The exempt amount is the lowest of three criteria: the actual HRA received, 50% of basic salary plus dearness allowance for metropolitan cities (40% for non-metros), or the actual rent paid minus 10% of basic salary plus dearness allowance.

The Leave Travel Allowance (LTA) is another common exemption for salaried employees. It covers travel expenses incurred within India for the employee and their family. It is available for two journeys within a block of four calendar years, covering only the cost of tickets for travel by air, rail, or bus.

Salaried individuals and pensioners are entitled to a Standard Deduction. For the financial year 2024-25, this fixed amount is ₹50,000, directly subtracted from salary income. This deduction simplifies tax calculations for many.

Gratuity received by employees upon retirement, resignation, or termination is partially exempt from tax under Section 10. For private sector employees, the maximum tax-exempt amount is ₹20 lakh. Government employees receive full exemption if gratuity is from the Central or State Government.

Compensation received under a Voluntary Retirement Scheme (VRS) is eligible for tax exemption under Section 10. The maximum exempt amount under this provision is ₹5 lakh. This exemption applies to compensation received by an employee at the time of voluntary retirement or termination of service.

Agricultural income in India is entirely exempt from income tax. This includes income from agricultural operations, rent or revenue from agricultural land, and income from the sale of agricultural produce. Interest income from sources like the Public Provident Fund (PPF) and certain tax-free bonds is fully tax-exempt. Dividend income is now fully taxable at the individual’s applicable slab rates.

Navigating Tax Regimes

Taxpayers in India can choose between two distinct income tax regimes: the Old Tax Regime and the New Tax Regime. Each regime has different tax slab rates and a varying list of available deductions and exemptions.

The Old Tax Regime operates with tax slab rates that vary based on an individual’s age. The basic exemption limit is ₹2.5 lakh for those below 60 years, ₹3 lakh for senior citizens (60 to 79 years), and ₹5 lakh for super senior citizens (80 years and above). This regime allows taxpayers to claim a wide array of deductions under various sections, such as 80C, 80D, and 80G, and exemptions like HRA and LTA.

In contrast, the New Tax Regime offers lower tax rates across different income slabs, but significantly limits available deductions and exemptions. From FY 2024-25, this regime is the default option for taxpayers, though individuals can opt for the old regime. The tax slabs under the new regime are generally lower.

Under the New Tax Regime, many common deductions and exemptions available in the old regime are not permitted. This includes most deductions under Chapter VI-A, such as Section 80C for investments, Section 80D for health insurance premiums, and Section 80G for donations. Exemptions like HRA and LTA are also generally unavailable. The interest deduction on housing loans for self-occupied property under Section 24 is also not allowed.

However, the New Tax Regime retains a few specific deductions and exemptions. For salaried individuals, a standard deduction of ₹75,000 is available from their salary income for FY 2024-25. The employer’s contribution to NPS under Section 80CCD also continues to be deductible. Certain allowances like transport allowance for specially-abled persons and conveyance allowance for job-related travel are permitted.

Taxpayers can choose between these two regimes annually when filing their income tax returns. The decision often depends on an individual’s income level, investment habits, and eligible expenses. Those with significant deductions and exemptions may find the Old Tax Regime more beneficial. Individuals with fewer tax-saving investments or who prefer a simpler tax structure might benefit from the lower rates offered by the New Tax Regime.