Deductions from Gross Total Income | UGC NET Commerce Preparation Course PDF Download

Income tax calculation is an essential part of financial planning. Knowing how much one owes to the government can help in tax-exempt investments. They can also have time to research and understand how they can save money. Also, knowledge of taxes can allow one to file returns easily. It will help avoid delays or fines for income tax returns. So, taxable income and deduction from gross total income are important terms in the financial world.

What are the Deductions from Gross Total Income?

Deductions from gross total income refer to amounts subtracted from the total income or revenue to reduce taxable income. These deductions help in lowering the tax liability for individuals.

• Section 80 of India's Income Tax Act: This section allows for deductions from gross total income for taxpayers and businesses. It encompasses Sections 80C to 80U, covering various permissible deductions.
• Promotion of Investment and Savings: Various deductions from total gross income are provided to encourage investments and savings. These deductions include tax-exempt investments that help lessen the tax burden.
• Encouraging Retirement Planning: By providing more disposable income, these deductions aid in planning for retirement. Individuals are motivated to invest in long-term secure instruments.

It is crucial to be knowledgeable about these deductions to minimize tax payments. Investments need to be made within the financial year, adhering to specific time limits or deadlines to benefit from deductions from gross total income.

Basic Rules of Deductions

Sections 80A and 80B outline the regulations for various deductions from gross total income. These provisions help in understanding the necessary steps and guidelines for claiming deductions, as stipulated in the Income Tax Act.

• The Assessee Must Claim The Deductions: When it comes to claiming deductions, only the assessee, the individual whose tax obligations are under assessment, is eligible to make these claims. Section 80A(1) mandates that only the assessee can claim deductions and must provide the required proofs to substantiate the deduction details.
• Deductions Cannot Exceed the Total Gross Income: According to Section 80A(2), after all deductions from the gross total income are made, the resulting total gross income must be a positive or zero figure. It is crucial to note that the total income should encompass all revenue sources, such as basic salary, rental income, interest, or dividend income. If the balance post-deduction from the gross total income is negative, no deductions will be granted. It is imperative to manage deductions accurately to comply with this rule.
• Deductions For Members of Associations of Persons or Bodies of Individuals: Various bodies and associations of individuals may function as distinct entities. In cases where these associations claim deductions, individual members are ineligible to claim these deductions from the gross total income. This restriction is in place because members would have already benefited from their respective associations. Section 80A(3) explicitly lays down these regulations.

Important Points for Deductions in Income Tax Filing

• Duty To Place Relevant Materials: An assessee is required to present all necessary documents and materials to the authorities to claim deductions from their gross total income. They need to effectively demonstrate their eligibility for the concessions by providing the required documentation and making a convincing case.
• Deduction For Net Income (Section 80(AB)): Deductions from the gross total income are applicable only to the net income as defined by income tax regulations. The net income, which is part of the gross income, is what the assessee is entitled to receive deductions on.
• Benefits Are Not Allowed After The Due Date: If an assessee misses the deadline for filing tax returns, they may lose the opportunity to claim certain deductions. These deductions fall under sections 80 IA, IB, IC, ID, or IAB, IE.

Parts of The Deduction Process 

The process of deducting from the gross total income consists of two main parts that outline the rules for deductions and how to utilize them. These parts are Deductions with a ₹1,50,000 overall limit and Additional Deductions.

Deductions With A ₹1,50,000 Overall Ceiling

This category of deductions from the gross total income has a cap of ₹1,50,000 for investments, payments, or savings. If the amount surpasses this threshold, only benefits up to ₹1,50,000 are applicable.
The following deductions from the gross total income apply in this segment, accessible only to individuals and Hindu Undivided Families:

• Public Provident Fund: The Public Provident Fund (PPF) is an investment option that facilitates long-term savings coupled with interest earnings.
• Employee Provident Fund: Employee Provident Fund (EPF) is a contribution made by both employees and employers, serving as a deduction from the gross total income.
• Life Insurance Premiums: Monthly or yearly premiums paid towards life insurance qualify as a deduction.
• Equity-Linked Saving Scheme (ELSS): ELSS, a type of mutual fund, enables tax deductions from the gross total income.
• Unit-Linked Insurance Plans (ULIPs): ULIPs offer tax-saving investment opportunities along with life insurance coverage.
• Notified Mutual Funds: Notified Mutual Funds are specific mutual fund types specified by the government that qualify for deductions from the gross total income.
• Home Loan: Stamp duty and home loan payments are eligible for deductions within the financial year.
• National Savings Certificate 8 issue: The National Savings Certificate (NSC) represents a government-backed investment scheme aimed at reducing tax obligations.

Pension Fund of LIC or Other Companies Under Section 80CCC: 

The investment in annuity pension funds allows for regular post-retirement payments. Pension fund payments post-maturity or surrender are deductible from the gross total income. Additionally, the interest and bonuses earned are tax-exempt.

Contribution To National Pension Scheme (Section 80 CCD) 

The national pension schemes offer deductions from your gross total income. There are specific limits to be aware of for this deduction. The maximum deduction you can claim under this pension scheme would be the lesser amount from the following conditions.

• Employees are eligible for a deduction of up to 10% of their salary along with dearness allowance.
• Other individuals, such as self-employed individuals, have a deduction limit of 10% of their gross income.

Additionally, the NPS scheme allows for an extra deduction from your gross total income of ₹50,000 (under Section 80CCD (1b)). Benefits under Section 80CCD (2) are specifically for salaried employees, with the maximum deduction being 10% of their salary and dearness allowance.

Additional Deductions

Taxpayers can benefit from another deduction from their gross total income by making specific investments to reduce their taxable income.
Section 80D outlines the rules for limits on medical insurance premiums. These deductions can also cover expenses for health checkups for oneself, spouse, or dependents. Below are the limits for this deduction.

For Individuals:

• Individuals can claim deductions of up to ₹25,000 on medical insurance premiums, checkups, or treatments.
• An additional deduction of ₹25,000 is available for premiums, treatments, or checkups for parents.
• The limit increases to ₹30,000 if the parents are senior citizens.

For Hindu Undivided Family (HUF):

• A ₹25,000 deduction applies to medical premiums, treatments, and checkups for any HUF member.
• The deduction limit is ₹30,000 for medical expenses of a senior family member.

Medical Treatment and Deposits for a Handicapped Dependent (Section 80DD):
Deductions for the treatment, maintenance, or rehabilitation of a handicapped dependent are available.

• For 40% to 80% disability: deduction up to ₹75,000.
• For more than 80% disability: deduction up to ₹1,25,000.

Treatment of Specified Diseases for Self or Dependent (Section 80DDB):

• Deductions for the cost of treatment of specified diseases are available.
• The deduction amount is the actual treatment cost or ₹40,000, whichever is lower.
• For senior citizens, the limit increases to ₹60,000.

Interest on Higher Education Loan (Section 80E):

• Deductions are allowed for interest paid on education loans.
• There is no limit on the deduction, but the period should not exceed eight years.

Persons with Disabilities (Section 80U):
Deductions are available for individuals with disabilities.

• For 40% to 80% disability: deduction up to ₹75,000.
• For more than 80% disability: deduction up to ₹1,25,000.

Donations to Funds and Charitable Institutions (Section 80G):
Donations to approved charitable organizations allow deductions of 50% or 100%.

• 100% deduction examples: Prime Minister’s Relief Fund, National Defense Fund, National Illness Assistance Fund, National Sports Fund, National Cultural Fund.
• 50% deduction examples: National Children’s Fund, Rajiv Gandhi Foundation.

Deductions for Rent Paid (Section 80GG):
If there is no house rent allowance and one rents a house, deductions can be claimed, subject to the least of the following:

• ₹5,000 per month
• Rent paid minus 10% of total adjusted income
• 25% of adjusted total income

Donations for Scientific Research or Rural Development (Section 80GGA):

• Deductions are available for donations to scientific research organizations or rural development efforts.

Contributions to Political Parties (Section 80GGC):

• Approved contributions to political parties can be deducted from gross total income.

Interest on Bank Savings Deposits (Section 80TTA):

• A deduction of up to ₹10,000 is allowed for interest earned on savings deposits in banks.

Royalty on Patents (Section 80RRB):

• Residents can claim a deduction of up to ₹3,00,000 on royalty income earned from patents.

Allowable Deductions from Gross Total Income for Individual 

In India, individual taxpayers have the opportunity to reduce their gross total income by claiming various deductions. This ultimately helps in lowering their taxable income and, as a result, their tax liability. Below are some of the most common deductions that individuals can claim from their gross total income under the Income Tax Act, 1961:

Section 80C: Deductions on Investments and Payments
Under Section 80C, individuals can claim deductions on investments and payments up to a limit of ₹1,50,000 per fiscal year. Eligible investments/payments include:

• Life Insurance Premiums
• Contributions to the Employee Provident Fund (EPF) and Public Provident Fund (PPF)
• National Savings Certificates (NSC)
• 5-year fixed deposits with banks and the Post Office
• Senior Citizens Savings Scheme (SCSS)
• Sukanya Samriddhi Account
• Tuition fees for children's education (up to two children)
• Repayment of the principal on a home loan
• Equity Linked Savings Scheme (ELSS)
• Investments in the National Pension System (NPS) (also covered under Section 80CCD)

Additionally, there are other deductions that individuals can claim to reduce their taxable income:

• Contributions to political parties approved by the electoral board
• Deduction limit of ₹10,000 for interest received on bank saving deposits by the assessee in the financial year
• Deduction of up to ₹3,00,000 applicable for royalty received on patents by a resident

Income Tax Deductions in India

Section 80CCC: Pension Funds
Contributions to specific pension funds are eligible for tax benefits, with a total cap of ₹1,50,000 under Section 80C.

Limit

• Employee's contribution: Up to 10% of salary (Basic + DA).
• Self-Employed: Up to 20% of Gross Income.
• Additional deduction under Section 80CCD(1B): Up to ₹50,000 for National Pension System (NPS) contributions.

Section 80CCD: National Pension System (NPS)
Contributions to NPS have specific limits.

Limit

• Employee's contribution: Up to 10% of salary (Basic + DA).
• Self-Employed: Up to 20% of Gross Income.
• Additional deduction under Section 80CCD(1B): Up to ₹50,000 for NPS contributions.

Section 80D: Health Insurance Premiums
Deductions are available for health insurance premiums.

Limit

• For Self, Spouse, and Children: Up to ₹25,000.
• Additional for senior citizens (Self, Spouse, Parents): Up to ₹50,000.
• Preventive health check-ups: Up to ₹5,000 within the specified limits.

Section 80DD: Maintenance and Medical Treatment of a Disabled Dependent
Deductions are provided for the care and treatment of disabled dependents.

Limit

• For disability (40%-80%): Up to ₹75,000.
• For severe disability (more than 80%): Up to ₹1,25,000.

Section 80DDB: Medical Treatment for Specified Diseases

• Up to ₹40,000 for medical treatment expenses (₹1,00,000 for senior citizens).

Section 80E: Interest on Education Loan

• No upper limit, but applicable for interest paid on a loan taken for higher education for up to 8 years from the start of repayment.

Section 80EE: Interest on Home Loan for First-Time Homeowners

• Up to ₹50,000 per year, subject to certain conditions like loan amount and property value caps.

Section 80G: Donations to Certain Funds and Charitable Institutions

• 50% or 100% of the donation amount, subject to caps based on the type of institution and qualifying criteria.

Section 80GG: House Rent Paid

• Deduction for rent paid by individuals not receiving House Rent Allowance. The least of the following:
• ₹5,000 per month
• 25% of total income
• Rent paid minus 10% of total income

Section 80GGB and 80GGC: Donations to Political Parties

• Entire contribution made by an individual (80GGC) or companies (80GGB) to political parties is deductible.

Section 80TTA: Interest on Savings Account

• Up to ₹10,000 for interest earned on savings accounts with banks, post offices, or cooperative societies.

Section 80TTB: Interest Income for Senior Citizens

• Senior citizens can claim a deduction of up to ₹50,000 on interest earned from deposits in banks, post offices, or co-operative banks.

Section 80U: Self-Disability

• The deduction limit is ₹75,000 for individuals with disabilities, and ₹1,25,000 for those with severe disabilities (80% or more).

Deduction from Gross Total Income Problems 

Understanding the deductions from gross total income is crucial for minimizing tax liability. However, taxpayers often encounter various common issues when trying to utilize these deductions. Below are five detailed problems related to claiming deductions from gross total income:

Documentation and Proof of Investment

Taxpayers frequently struggle with maintaining and providing sufficient documentation to support their deduction claims.

Mistakes in Detail

• Missing Receipts: Many deductions, like those under Section 80C (e.g., Life Insurance Premiums, Tuition Fees), require receipts or proof of payment. Failing to provide these documents can lead to disallowed claims.
• Inadequate Documentation: Incorrect or incomplete documentation for medical expenses under Section 80D or Section 80DDB can result in the rejection of these deductions.
• Timely Submission: Investment proofs must be submitted to employers (for salaried individuals) or at the time of filing returns. Any delays can result in the disallowance of benefits for that financial year.
• Misinterpretation of Deduction Limits: Misunderstanding or misinterpreting the prescribed limits and conditions for various deductions can lead to inaccurate claims or missed benefits.

Solution:  Make sure to gather and organize all receipts, certificates, and proof of documents quickly. Keep a physical or digital folder for tax-related paperwork throughout the year.

Common Misinterpretations in Tax Deduction

Many taxpayers face challenges in correctly understanding and applying tax deductions, leading to potential errors in their claims. 
Here are some common misconceptions:

• Section 80C: Taxpayers often assume that any contribution to eligible instruments can be claimed under Section 80C without adhering to the Rs. 1,50,000 upper limit.
• Section 80D: Health insurance premiums for non-senior citizen parents might be inaccurately claimed above the Rs. 25,000 limit.
• Education Loans: Claims under Section 80E might extend beyond the allowable 8-year period from the commencement of repayment.

Errors in Calculation of Eligible Deductions

Incorrectly calculating deductible amounts can result in either under-claiming or over-claiming deductions. Here are some specific issues:

• HRA under Section 80GG: Incorrect calculation involving the least of three conditions can lead to erroneous deductions.
• Preventive Health Check-Up Costs: Misapplication of the Rs. 5,000 limit within the overall Section 80D limit could result in incorrect claims.
• Home Loan Interest under Section 80EE: Calculating and applying the additional Rs. 50,000 deduction can be intricate and prone to miscalculations.

Solutions: To address these challenges and avoid misinterpretations, it is crucial to:

• Stay informed about specific limits and conditions for each deduction.
• Regularly review updates from the Income Tax Department or seek guidance from tax professionals.
• Utilize reliable tax planning software or consult tax advisors for accurate calculation of eligible deductions.
• Double-check calculations regularly and understand how limits are practically applied.

Eligibility Criteria and Fine Print

Overlapping Claims on Same Investments

Problem: Mistakenly Claiming Deductions Under Multiple Sections Incorrectly claiming deductions under various sections for the same expense or investment can result in disallowed claims during tax assessments.
Details

• Home Loan Principal and Interest: The principal repayment can be claimed under Section 80C, while interest payments can be claimed under Section 24 for self-occupied properties and Section 80EE for first-time homebuyers.
• Medical Expenses: Claims should be clearly differentiated between Section 80DDB for specific illnesses and Section 80D for general health insurance and routine check-ups.
• NPS Contributions: Contributions made by the employer should be claimed under Section 80CCD(2), not under Section 80C.

Solution: Develop a clear understanding of the appropriate deduction sections for each type of expense or investment. Maintain detailed records and ensure accurate claims by referencing the latest finance and tax guidelines.

Conclusion 

Deduction from gross total income notes is essential for understanding taxation and making smart investment decisions. One should understand these deductions and make the same during the financial year to reduce their obligations. Deductions from Gross Total Income play a crucial role in determining an individual's taxable income and, consequently, their tax liability. These deductions are provided under various sections of the tax code in many countries, and they serve several purposes, including encouraging certain behaviors, providing relief to specific groups, and promoting investments in key sectors of the economy.