5 types of tax benefits for individuals under the Income-tax Act
Most of us find it difficult to handle income tax and need help of tax experts. However, it’s best to understand about basic concepts such as tax exemptions, tax deductions and tax rebates. All three help bring down your tax outgo, but are different from each other.
1. Exemption:Income tax exemptions are specific income of taxpayer that is excluded from the tax liability for paying Income taxes. Section 10 of the Income Tax Act defines the provisions of Income Tax Exemptions. For example House Rent Allowance (HRA).
2. Deduction: A specified amount of some expenses incurred by the taxpayer during the financial year that can be subtracted from their gross income to calculate the tax liability. Investments u/s 80C (equity-linked savings schemes (ELSS), Public Provident Fund (PPF), National Savings Certificates (NSC) etc.), medical expense for self/parents u/s 80D, interest on loan for higher education of self/relative u/s 80E, donations made u/s 80G are deductible from the taxable income.
3. Rebate: After exemptions and deduction, what remains is the income tax liability on which you pay the tax. After tax calculation, a rebate help taxpayers reduce their income tax liability. It is the amount of tax that an taxpayer is not liable to pay.
As per Section 87A of the Income Tax Act, if your total income is below ₹3.5 lakh in a financial year, then you can claim rebate of up to ₹2,500 from income tax.
For example someone earns ₹5 lakh and claims HRA exemption of ₹50,000 on filing his ITR, then total tax liability will be ₹4.5 lakh after the exemption. And total tax liability comes down to ₹3 lakh after deduction of ₹1.5 lakh under sec 80C. The tax liability at a slab rate of 5% will come to ₹2,500. Given the rebate of ₹2,500, the person will not be liable to pay any tax.
4. Allowances: Paid in addition to salary, to meet specific expenses. Dearness Allowance, House Rent Allowance, Entertainment Allowance, Overtime Allowance, Children Education allowance, Compensatory Allowance to judges of Supreme and High Court.
5. Indexation: Indexation is used to adjust the purchase price of an investment to reflect the effect of inflation on it. A higher purchase price means lesser profits, which effectively means a lower tax.
Under section 80C, up to ₹. 1.5 lakh Investment are deductible notified equity linked savings schemes, these are subject to a 3-year lock-in.
In case of SIP, each instalment of SIP is taken as a separate investment.
All these tax benefits are provided and allowed by the income tax department to bring down the tax liability of an individual. Take full advantage of the benefits to enhance your savings.