What exactly are tax deductions?
A tax deduction is a claim made to lower your taxable income as a result of certain investments and costs undertaken by a taxpayer. As a result, an income tax deduction lowers your overall tax payment. It is a type of tax break that allows you to save money on your taxes. The amount of tax you can save, however, is determined by the sort of tax advantage you claim.
The Advantages of Tax Deductions
There are several advantages to a tax deduction, which include:
- Tax deductions allow you to minimise your taxable income and save money. When you claim an income tax deduction, the amount of your income that is liable to tax is reduced.
- A lower-taxed income allows you to save and invest in other areas.
- Tax deduction decreases income due to the higher tax bands initially. As a result, you can claim a tax deduction for tuition, medical expenditures, and charitable contributions.
- Income Tax Returns are required, and you cannot avoid paying tax entirely. However, with careful preparation, you may lower your taxable income.
In India, there are several types of tax deductions that an Individual can avail of.
Increase your deductions to minimise your taxable income. There are several investment alternatives and types of expenditure that might help you reduce your taxable income. The Indian Income Tax Act contains several provisions for this. A variety of tax-deductible alternatives are discussed below.
- Public Provident Fund (PPF)
Contributing to your PPF account qualifies you for a tax deduction under Section 80C of the Indian Income Tax Act of 1961.
- Premiums for Life Insurance
Section 80C of the Indian Income Tax Act, 1961 allows you to claim an income tax deduction for paying premiums on life insurance plans for yourself, your spouse, and your children. The amount received at insurance maturity is tax-free.
- Certificate of National Savings (NSC)
The money invested in NSC is tax-deductible under Section 80C of the Indian Income Tax Act of 1961. National Saving Certificates are one of the most secure investment options in India. However, the interest collected on NSC is taxed. Because an NSC is a cumulative plan, interest is reinvested and taxed.
- Fixed Deposits at Banks (FDs)
Under Section 80C of the Indian Income Tax Act, 1961, you can claim a tax deduction for investing in fixed deposits for a period of five years. Many Indian banks provide tax-free fixed deposits. However, the interest earned on FDs is taxed.
- Senior Citizen Savings Plan (SCSS)
Senior citizens can earn a tax break by investing in a bank’s Senior Citizen Savings Scheme. Section 80C of the same statute allows for tax deductions for certain plans. The interest generated by these programmes is completely taxed.
- Postal Service Time Deposit (POTD)
If you invest in a five-year POTD, you can claim a tax deduction under Section 80C. The interest, on the other hand, is completely taxed.
- Unit-linked Insurance Contracts (ULIP)
If you invest in ULIPs for yourself, your spouse, and your children, you can claim tax breaks under Section 80C.
- Home Loan EMIs
Section 80C of the same statute allows for income tax deductions on equated monthly instalments paid to repay the principal amount of your house loan.
- ELSS & Mutual Funds
Investing in mutual funds and equity-linked savings schemes entitles you to tax breaks under Section 80C of the Indian Income Tax Act of 1961.
- Stamp Duty and Registration Fees for a House
Under Section 80C of the Indian Income Tax Act of 1961, stamp duty and registration fees paid for transferring property are deductible from income tax.