Deductions, Exemptions, and Tax Planning
What this domain tests
This domain tests the difference between exemptions and deductions, the main Chapter VI-A deductions, and lawful tax planning. You must know which benefits survive under the new regime and which do not.
Core rules
- An exemption excludes an item from total income, such as specified HRA, gratuity, or leave encashment. A deduction is subtracted from gross total income under Chapter VI-A.
- Section 80C: up to ₹1,50,000 for specified investments and payments, including PPF, life insurance premium, principal repayment of housing loan, and tuition fees.
- Section 80CCD(1B): an additional ₹50,000 for contributions to the National Pension System.
- Section 80D: health insurance premium and preventive health check-up, generally up to ₹25,000 for self and family, and up to ₹50,000 if the insured is a senior citizen.
- Section 80E: interest on an education loan, with no monetary ceiling, for the specified period.
- Section 80G: donations to specified funds, subject to eligibility and limits.
- Section 80TTA: interest on savings accounts up to ₹10,000 for non-senior individuals; section 80TTB gives up to ₹50,000 for senior citizens.
- The new regime is the default. Most Chapter VI-A deductions, HRA, and professional tax are available only under the old regime; the new regime mainly allows the standard deduction and specified employer contributions.
Worked example
A taxpayer under the old regime has gross total income of ₹10,00,000. She claims ₹1,50,000 under 80C, ₹25,000 under 80D, and ₹10,000 under 80TTA. Total deductions = ₹1,85,000. Total income = ₹8,15,000. Tax is computed on ₹8,15,000. Under the new regime, the 80C, 80D, and 80TTA claims would generally be lost, so the comparison must be made on the final tax, not on the deduction total alone.
Traps
Do not double-count the 80C limit across several investments. Do not assume every donation qualifies fully under 80G. Tax planning is lawful arrangement within the law; evasion is illegal concealment.