Tax Exemption Rules In 2021

Tax Exemption/Deductions Rules in 2021

Income tax lies at the foundation of every functioning economy. It provides the resources a government needs to carry out essential operations and launch new initiatives. However, while paying applicable income tax is essential, it is just as essential to stay informed if your tax burden can be lowered. Every taxpayer is eligible to rightfully lower his or her tax burden by the means of tax exemptions.

What are Tax Deductions?

Tax deductions is a feature by which the tax burden of income or certain transactions can be reduced or completely removed. Taxpayers typically make certain investments with the purpose of availing deductions for these investments and thereby lowering their overall tax liability. Tax deductions, therefore, provide considerable relief to the taxpayers and allow them to legitimately reduce their taxable income.

New Tax Regime - Budget 2021

Until last year, a taxpayer could avail all applicable exemptions/deductions that he is eligible for as per the Income Tax Act and file his taxes under the standard slabs at the applicable rates. This system is still in place and the tax slabs and rates remain unchanged from last financial year.

However, Union Budget 2020 introduced an optional new tax system that offers varied tax slabs and lower tax rates to the taxpayer. The condition for availing these lower tax rates, however, is that the taxpayers cannot avail several of the most popular tax exemptions/deductions. These include deductions such as Section 80C and Section 80D.

Exemptions in New Tax Regime 2021

Having said that, there are various tax exemptions /deductions that are still available under the new tax regime. Hence, you can enjoy the lower tax rates of the new tax regime and avail the following tax exemptions:

Maturity of life insurance : Exemptions on premiums paid for life insurance are not available in the new tax regime. However, the new tax regime does include tax exemption on the maturity amount received from the insurance provider.

Employer’s Contribution to NPS or EPF account : The amount contributed by your employer to your NPS or EPF account will be exempted under the new tax regime.

Keep in mind that employers can contribute an amount that equals 10% of an employee's basic salary, to the Tier-1 of his or her NPS. Similarly, employers can contribute an amount that equals 12% of an employee's basic salary, to his or her EPF account.

Public Provident Fund: Any interest or maturity amount received from your Public Provident Fund, or PPF, is exempted from tax under the new tax regime.

ukanya Samriddhi Yojana: Similarly, any interest or maturity amount received from your Sukanya Samriddhi Yojana, or SSY account, is exempted from tax under the new tax regime.

National Pension Scheme: The National Pension Scheme continues to be a useful tax-saving instrument under the new tax regime. The lump sum received at the maturity of your NPS account (up to 60 percent of your corpus) will be exempted. Any partial withdrawal you make from your Tier-1 NPS account will also be exempted.

Home Loan on Rented Property: Interest on home loan taken out on a property that is self occupied is not applicable for tax exemption under the new tax regime. However, the same is not true for home loan on property that is rented out. Hence, the latter is still eligible for tax exemption.

Leave Encashment on Retirement: In several companies, an employee can opt to receive payment in exchange for his or her share of unused leaves on retirement. This is known as leave encashment and it remains exempted from tax under the new tax regime (provided it amounts to less than Rs 3 lakhs).

Gift from Employer: Any form of gifts you receive from your employer remain exempted under the new tax regime, provided the value of the gifts remains under Rs 5,000.

While these are only the available exemptions under the new tax regime, all of the popular tax deductions, such as 80C and 80D, are still available under the old tax regime. At the end of the day, the taxpayer must determine for himself which tax regime best helps him lower his overall tax burden.

One of the most effective means of lowering your tax burden is by investing in a trusted term insurance such as the iSelect Smart360 Term Plan, available on Canara HSBC Life Insurance . The premium payments made towards this term insurance will be eligible for exemptions under Section 80C for as much as Rs. 1,50,000. Moreover, the term plan also comes with a variety of add-on riders, such as Accident Death and Disability, to enhance your coverage better and protect your finances from the unexpected.