What is Tax Deduction? Definition, Types, and Benefits

Tax Deductions are a provision in the Income Tax Act, of 1961 that allows the taxpayer to reduce their tax liability by using various methods. If you follow the Income Tax Act, you can save a lot of tax liability and reduce the burden on yourself.

The deduction is a legal way to save taxes and acts as a strategic incentive for various activities that the government wants to promote.

For example- If the Government wants to promote PPF Account, then the Government can provide Tax deductions on the investment made towards the PPF Account.

So, the amount that you invest in PPF Account will be saved in PPF Account and you’ll receive the tax deduction benefit for that.  In this article, we will discuss What is Tax Deduction? Definition, Types, and Benefits, etc.

Tax Deduction VS Tax Exemption

Tax Deduction and Tax Exemption both provide tax reductions to taxpayers however, the application of both of these is different.

Tax Deduction is the deduction of the taxable liability that one gets when one invests in some scheme that the government wants to promote.

Tax exemption is provided when some items are kept outside the calculation of the tax liability. The best example of this is Agricultural Income which is exempted from any kind of tax payments.

Both of them provide tax relief however, the application becomes different hence, the calculation for the taxation is also different.

Types of Tax Deduction

There are various types of tax deductions provided by the government using which you can reduce your tax liability. The following are the types of tax deductions-

Public Provident Fund (PPF)

Public Provident Fund is a long-term tax-saving scheme that offers attractive returns for the investment that you make. It is a voluntary scheme and it is open for anyone to invest in the scheme. You can claim tax deductions under section 80C of the Income Tax Act, 1961.

Life Insurance Premiums

The premium paid for the life insurance policy also comes under Section 80C of the Income tax act and you can claim the deduction.

National Saving Certificate (NSC)

National Saving Certificate is a savings bond scheme backed by the Government that encourages the subscribers to invest in the account and earn interest for their investment. You can claim Tax Deduction under section 80C of the Income Tax Act.

Bank Fixed Deposits (FDs)

Banks offer Fixed Deposits for the customer to invest their dormant funds into the account and earn interest on their investment. You can claim a tax deduction for the investment made into the Bank Fixed Deposits.

Senior Citizen Savings Scheme (SCSS)

If you are a Senior Citizen then Senior Citizen Savings Scheme can be beneficial for you as you can now claim a tax deduction on the payment made towards the SCSS instrument.

Post Office Time Deposit (POTD)

Similar to the Fixed Deposit, the Post Office Time Deposit is a specialized scheme provided by the Post Office to investors for saving funds in the POTD Account. For this investment, you can claim the Tax Deduction and save taxes under Section 80C of the Income Tax Act, 1961.

Unit-linked Insurance Plans (ULIP)

A unit-Linked Insurance Plan is a plan provided by various insurance companies to the plan seeker which provides them with long-term investment tool at same time and insurance benefit that protects them in case of any mishap. For the investment made towards this account, you can claim tax deduction under sections 10D and 80C of the Income Tax Act, 1961 up to Rs. 1, 50,000.

Home Loan EMIs

Under section 24B of the Income Tax Act, 1961, you can claim a tax deduction for the interest paid towards the Home Loan EMIs.

Mutual Funds & ELSS

Mutual Fund or Equity-Linked Savings Scheme (ELSS) is a mutual fund class that offers tax deductions under section 80C of the Income Tax Act. This instrument offers the highest rate of return than any other 80C instrument.  

Stamp Duty and Registration Charges for a Home

Whenever you are purchasing a home, then you can claim a tax deduction on the Stamp Duty and Registration Charges.

Retirement Savings Plan

You can save taxes by investing in the Retirement savings plan under 80CCD of the Income Tax Act. This type of instrument not only helps you save taxes but also provides you with retirement benefits.

Tuition Fees

Tuition fees for the children’s education can be claimed under section 80C of the Income Tax Act, 1961. In addition, Section 10 also provides Tax exemption for the tuition fee of up to Rs 1,200 (Rs 100 per month) per child for a maximum of two children

Infrastructure Bonds

For the development of the country, the government released infrastructure bonds where people can invest and earn returns on their investments. Apart from returns, you can also get tax deductions for the investment made towards the Infrastructure bonds under section 80C of the Income Tax Act. The maximum amount that one can claim is Rs.20,000 per year.

Charitable Contribution

Any charitable contribution made can be claimed as a Tax deduction under Section 80G of the Income Tax Act, 1961. The donation made to recognized NGOs or organizations will be considered for this claim.

Treatment of Disabled Dependents

You can claim expenses done for treatment, nursing, training, and rehabilitation of the Disabled dependent and get tax exemption. This claim can be made under Section 80DD of the Income Tax Act, 1961.

Deduction for Preventive Health Check-ups

Under Section 80D of the Income Tax Act, you can claim a cumulative deduction of Rs.5000/- for the payments made for Preventive Health Check-ups.

Interest Paid on Education Loan

If you’ve taken an education loan for your child or any of the family members, then you can claim the tax deduction on the interest paid towards the loan. This deduction can be claimed under Section 80E of the Income Tax Act, 1961.

Deduction on House Rent Paid

If you live in the house on rent you can claim a deduction on the house rent paid. This deduction can be claimed under Section 80GG of the Income Tax Act, 1961.

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