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How to Begin with Income Tax: A Beginner's Guide to Exemptions & Deductions

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Created on
August 9, 2023


What’s Inside

Comprehending the various income tax rules and regulations can be overwhelming for beginners. Understanding the basics of income tax, exemptions, deductions, income tax basic exemption limit and the permissible deductions is essential as it will help you understand your actual liability and avoid both, underpaying or overpaying taxes.

Income Tax Basics

An income tax is a direct tax imposed by the government on an individual's income. It is calculated based on various income sources, such as salary, business profits, capital gains, and more. Understanding the income tax basics is the first step towards managing one's tax liabilities.

Exemptions from Income Tax

Exemptions are specific categories of income that are not included in the taxable income. These exemptions allow taxpayers to reduce their tax liability legally. Some common exemptions include House Rent Allowance (HRA), Leave Travel Allowance (LTA), and exemptions on certain allowances for government employees.

Income Tax Basic Exemption Limit

The income tax basic exemption limit refers to the minimum annual income at which an individual becomes liable to pay income tax. For beginners, it is crucial to know this threshold as it determines whether they need to file income tax returns. Currently, in India, the basic exemption limit is subject to change each financial year, and taxpayers should keep themselves updated with the latest threshold.

Deductions in Income Tax

Deductions are provisions that allow taxpayers to reduce their taxable income by specific amounts. It helps in lowering the overall tax liability. Deductions can be claimed under various sections of the Income Tax Act, such as Section 80C, which covers investments in Provident Funds, Public Provident Fund, and Equity-Linked Savings Schemes (ELSS). Section 80C allows for a maximum deduction of ₹ 1.5 Lakhs each financial year.

Other notable sections that allow for deduction under the old tax regime include:


Deductions Available 

Section 80D

Deductions on the premium paid for health insurance policies

Section 80E

Deductions on the interest paid on education loans taken for higher education

Section 80G

Deductions on donations made to specified charitable institutions and funds

Section 80TTA

Deductions on interest earned from savings accounts

Section 80GG

Deductions on rent paid by individuals who do not receive House Rent Allowance (HRA) from their employer

Section 80CCD(1B)

Deductions for voluntary contributions made towards the National Pension System (NPS)

Note: The conditions and deduction limits are subject to change each financial year. You should stay abreast or consult a tax advisor to understand your specific tax liability. Moreover, these deductions are only available under the old tax regime.

Common Mistakes to Avoid

For beginners, unintentional mistakes in tax planning can lead to penalties and additional tax liabilities. Common mistakes include not claiming eligible exemptions and deductions, failing to report income accurately, and missing tax deadlines. Being aware of these errors can help beginners avoid unnecessary financial stress.

In Summation

Use this knowledge to optimize your tax liabilities and make informed financial decisions. Stay informed about tax regulations and seek professional help when needed. Section 80C is a popular source of tax savings, offering up to ₹1.5 Lakhs in deductions. ELSS mutual funds are an instrument that can save you taxes while building a sizable fund for your future.

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Frequently Asked Questions

1. What is income tax, and how is it calculated based on an individual's earnings?

Income tax is a direct tax on an individual's income. It's calculated using tax slabs based on their total earnings, including salary, business profits, and capital gains. The tax liability increases as the income rises.

2. What are exemptions in income tax, and how do they differ from deductions?

Exemptions are income categories excluded from the overall income, reducing tax liability. Deductions are provisions that reduce taxable income based on eligible expenses or investments. Exemptions reduce the total income, while deductions reduce the taxable income.

3. Can you provide some common examples of income tax exemptions available to taxpayers?

Tax exemptions include: House Rent Allowance (HRA), Leave Travel Allowance (LTA), gratuity on retirement, agricultural income, interest on tax-free bonds, dividends on certain investments, and scholarships for education.

4. What are deductions in income tax, and how do they help reduce taxable income?

Deductions are expenses or investments that reduce taxable income. Taxpayers can claim deductions under different sections of the Income Tax Act to lower their taxable income. This decreases their tax liability, helping them keep more of their income and manage their finances better.

5. How do tax exemptions and deductions benefit individuals and influence their overall tax liability?

Tax exemptions and deductions can lower an individual's taxable income, resulting in lower taxes. This helps people keep more of their earnings and plan better for long-term goals.


Investment and securities are subject to market risks. Please read all the related documents carefully before investing. The contents of this article are for informational purposes only, and not to be taken as a recommendation to buy or sell securities, mutual funds, or any other financial products.
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