Group 5

INCOME TAX
EXEMPTION
Lecture Section 1

Pros and Cons

TABLE OF CONTENTS
2

Introduction.......................................................................................................... 2

Excerpts of Government Surveys, Reports and The Union Budget.......................2

Various Provisions for the Increase in Tax Exemption Limit..................................4

Impact on Each Section of Society due to the Provisions.....................................5

Overall Advantages............................................................................................ 11

Overall Disadvantages....................................................................................... 15

Conclusion.......................................................................................................... 16

References......................................................................................................... 17

1 INTRODUCTION
India has a well-developed three-tier federal tax structure. According to chapter 3 of
Income Tax Act of 1961, there is provision of exemption of income taxes. Tax exemption
induces reduction of tax burden on some sections of society. For instance, there are
exemptions from property tax, for dependents or for children who financially rely on
individual paying tax. However one should not get confused with Tax Deduction and Tax
Exemption, as when an expense received by cash payer is deduced from gross income it
results in lowering of net taxable income it is tax deduction and not tax exemption.
There are many types of income and benefits being exempted from income taxes to a
limited extent. Within the taxation laws, there are also provisions for tax exemptions from
property taxes, sales taxes and state income taxes. We are particularly interested about
exemption based on regular income.
In the Union Budget 2014-15, our Honorable Finance Minister Mr. Arun Jaitley proposed
to increase personal income tax exemption by Rs.50,000 from the previous 2 lakh to 2.5
lakh in case of all individual tax payer who are below the age of 60 years old. Well that
sounds good. But there are also some cons related to this. Confused? Well, lets throw
some light on pros and cons regarding this tax exemption.

2 EXCERPTS OF GOVERNMENT SURVEYS, REPORTS

AND THE UNION BUDGET
The Fiscal Policy Strategy Statement
Negative List of Services and service tax exemptions were reviewed for
broadening the tax base and also as a preparation for introduction of GST, in the
following manner:
(i) The Following services have been brought under the tax net, Online and mobile advertising;
Services provided by radio taxis or radio cabs.
(ii) The service tax exemption on the following services has been withdrawn, Clinical research on human participants;
Services provided by air-conditioned contract carriages
(iii) Scope of some of the existing exemption was rationalized. (Ministry of
Finance, The Fiscal Policy Strategy Statement, 2015)
This helps in improving the revenue of the Government despite increase in Tax
Exemption Limit, thereby diminishing any short term damage.
Economic Survey 2014-15; Government of India; Ministry of Finance; Department of
Economic Affairs; Economic Division; February, 2015; Volume II
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C. SERVICE TAX
Negative list of services and service tax exemptions were reviewed for
broadening the tax base and also as a preparation for introduction of the goods
and services tax (GST). Services like online and mobile advertising and services
provided by radio taxis or radio cabs have been brought under the tax net whereas
for services like clinical research on human participants and services provided by
air-conditioned contract carriages tax exemption has been withdrawn.
(Ministry of Finance, Economic Survey, 2014-2015)

3 VARIOUS PROVISIONS FOR THE INCREASE IN TAX

EXEMPTION LIMIT
SECTI
ON
80CC
C
80CC
D
80CCF
80CC
G
80D

80DD

80DD
B

80E

80EE
80G
80GG
80TTA
80U

NATURE OF DEDUCTION
Payment of premium for annuity plan of LIC or any other insurer Deduction
is available upto a maximum of Rs. 1,00,000/Deposit made by an employee in his pension account to the extent of 10%
of his salary.
Subscription to long term infrastructure bonds
Investment under Rajiv Gandhi Equity Savings Scheme, 2013
Payment of medical insurance premium. Deduction is available upto
Rs.15,000/ for self/ family and also upto Rs. 15,000/- for insurance in
respect of parent/ parents of the assessee. In case of senior citizens, a
deduction upto Rs.20,000/- shall be available under this Section. Insurance
premium of senior citizen parent/ parents of the assessee also eligible for
enhanced deduction of Rs. 20000/Deduction of Rs.40,000/ In respect of (a) expenditure incurred on
medical treatment, (including nursing), training and rehabilitation of
handicapped dependent relative. (b) Payment or deposit to specified
scheme for maintenance of dependent handicapped relative. W.e.f. 01 .
04.2004 the deduction under this section has been enhanced to
Rs.50,000/- Further, if the dependent is a person with severe disability a
deduction of Rs.1,00,000/ shall be available under this section. Budget
2015 has Further Proposed to hike the limit from A.Y. 2016-17 to Rs. 75000
from existing Rs. 50,000/- and for person with severe disability to Rs. 1.25
lakh from existing Rs. 1 Lakh.
Deduction of Rs.40,000/- in respect of medical expenditure
incurred.W.e.f.
01.04.2004, deduction under this section shall
be
available to the extent of Rs.40,000/- or the amount actually paid,
whichever is less. In case of senior citizens, a deduction upto Rs.60,000/shall be available under this Section. Budget 2015 has proposed deduction
of Rs. 80000/- for senior citizen aged 80 year or More from A.Y. 2016-17
Deduction in respect of payment in the previous year of interest on loan
taken from a financial institution or approved charitable institution for
higher studies.
Deduction in respect of interest on loan taken for residential
house property
Donation to certain funds,
charitable institutions etc.
Deduction available is the least of(i) Rent paid less 10% of total income.
Rs.2000 per month. 25% of total income
Deduction in respect of interest on deposits in savings account
Deduction of Rs.50,000/- to an individual who suffers from a physical
disability (including blindness) or mental retardation. Further, if the
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87A
80RR
B
80QQ
B

80C

individual is a person with severe disability, deduction of Rs.75,000/- shall

be available u/s 80U.W.e.f. 01.04.2010 this limit has been raised to Rs. 1
lakh. Budget 2015 proposed to amend section 80U to raise limit of
deduction in respect of a person with disability from Rs. 50,000/- to Rs.
75,000 and for person with severe disability from one lakh rupees to
one hundred and twenty five thousand rupees.
Rebate Of Rs 2000 For Individuals Having Total Income Upto Rs 5
Lakh
Deduction in respect of any income by way of royalty in respect of a patent
registered on or after 01.04.2003 under the Patents Act 1970 shall be
available as: Rs. 3 lacs or the income received, whichever is less.
Deduction in respect of royalty or copyright income received in
consideration for authoring any book of literary, artistic or scientific nature
other than text book shall be available to the extent of Rs. 3 lacs or income
received, whichever is less.
This section has been introduced by the Finance Act, 2005. Broadly
speaking, this section provides deduction from total income in respect of
various investments/ expenditures/payments in respect of which tax rebate
u/s 88 was earlier available. The total deduction under this section is
limited to Rs. 1.50 lakh only.

(Kanoi, 2015)

4 IMPACT ON EACH SECTION OF SOCIETY DUE TO THE

PROVISIONS
Section 80D: Deduction for Medical Insurance
PROS:
1. If office deducts salary for medical insurance for employee and his family, the
employee can claim deduction u/s 80D.
2. Someone who has invested the amount from income exempt from tax or by taking
loan, can claim deduction u/s 80D.
3. Male children, if not employed, but a Bona Fide student can be covered upto age of
25 years.
4. Female children, if not employed, can be covered until the time she is married.

CONS:
1. Parents and Parents in Law are not covered under section 80D.
2. Children above 18 years, if employed, cannot be covered.

 Section 80E: Deduction in respect of payment in the previous year of

interest on loan taken from a financial institution or approved charitable
institution for higher studies
PROS:
1. 1. This act helps a person to ease of the burden of the loan taken by him for
himself, spouse, and children or for the student of he/she is the legal guardian.
2. 2. There is no condition that the course should be in India; that is, it includes loan
for studies in abroad.
3. 3. Parents are also eligible to claim deduction of interest paid by them on loan
taken for their childrens education.

CONS:
1. The person must take the education loan from any of the scheduled banks in India
or from Credila financial services Pvt. Ltd. or HDFC Ltd.
2. The person who takes the loan for self, children or spouse, is the only one entitled
for the benefits.
3. Education loan taken for siblings or other relatives don't qualify for Section 80E
benefit.

Section 80EE: Deduction in respect of interest on loan taken for

residential house property
PROS:
1. When a person purchases a house he/she can claim a deduction in the tax paid on
the loan taken from the bank.
2. Tax payer is allowed a deduction up to Rs. 1,50,000 for interest on borrowed
capital.
3. All the co-owners and the co-borrowers are allowed deduction for the interest
according to their share

CONS:
1. The deduction is only towards the INTEREST on the person's home loan.
2. The total amount allowed to be claimed under section 80C is capped at Rs.
1,00,000.
3. If you are an HUF, AOP, Company or any other kind of tax payer you cannot
claim the benefit under this section.

Section 80TTA: Deduction in respect of interest on deposits in savings

account
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 PROS:
1. It has led to different banks paying different interest rates and this is how it should
be in a free economy.
2. Interest is paid on a daily basis on the end of day balance in the account. This has
benefitted the customer as they would now be earning more interest not only due
to higher interest rates but also due to the change in the manner of computation.

CONS:
1. This deduction is NOT applicable to the interest you received on your FDs/time
deposit or term deposit.
2. This benefit is not available to a firm, an Association of Persons, a Body of
Individuals, LLP or Company Assessee.

Section 87A: Rebate Of Rs 2000 For Individuals Having Total Income

Upto Rs 5 Lakh
PROS:
1. A person earning less than Rs 5 lakhs per anum will be given rebate against his tax
whose value is equal to Rs 2000 or 100% of tax, whichever is less.
2. This section doesnt increase the tax slab so it cant be claimed by all the
individuals.
3. Education cess and secondary and Higher education cess will be charged after
adjusting this rebate.

CONS:
1. Income Tax Rebate is not applicable to Super Senior Citizens
2. Income Tax Rebate is applicable only for resident individuals so even NonResident Individuals cant claim benefit of this rebate.
3. Other than individuals, no person like HUF, Companies, Partnership Firms, LLPs
are allowed to claim this rebate.

Section 80RRB: Income Tax Deduction in respect of royalty on patents

PROS:
1. Assesse should be patentee (he may be a co-owner of patent); i.e., the person or
persons, being the true and first inventor of the invention, whose name is entered
on the Patents Register as the Patentee as per the Patents Act, 1970.

2. Where a deduction under this section for any previous year has been claimed and
allowed, no deduction in respect of such income shall be allowed under any other
provision of the Act in any assessment year.
3. A certificate in prescribed Form No. 10CCE verified by any person responsible for
making such payment to the assessee is required to be filed with Return of income.
4. Where a compulsory license is granted in respect of any patent under the Patents
Act, 1970, the income eligible for the purposes of this section shall not exceed the
amount of royalty under the terms and conditions of a license settled by the
Controller under that Act.

CONS:
1. In respect of income earned from any sources outside India, only so much of the
income as is brought into India in convertible foreign exchange within 6 months
from the end of previous year or within such further period as competent authority
may allow shall be taken into consideration.
2. Extent of Deduction: 100% of royalty or Rs. 3 lakhs, whichever is lower.
3. Individual who is Resident in India.

Section 80QQB: Deduction for Royalty Income of Authors

PROS:
1. In respect of income earned from any source outside India, only so much of the
income as is brought into India in convertible foreign exchange within 6 months
from the end of previous year or within such further period as competent authority
may allow shall be taken into consideration.
2. Deduction is available to the extent of Rs.3lacs or income received, whichever is
less.

CONS:
1. The taxpayer should be an individual resident of India (non residents not
covered).
2. If royalty or copyright fee is not provided for complete transfer of rights of
author In such case, deduction will be income, before allowing expenses
attributable to such income, as in excess of 15 % of the value of books sold
during the previous year. If the income is earned from outside India - Only
that much amount which is brought in India in convertible foreign exchange
within six months from the end of previous years or within extended time by
RBI.

3. If the income is earned outside India, the assessee must furnish a certificate in
the prescribed form from the prescribed authority along with the return of
income.

Section 80DD: Deduction for expenses on maintenance/ medical

treatment of disabled dependent
PROS:
1. The physical and mental agony experienced by the parents/ guardian of such
dependents cannot be taken away but Government of India, National Trust, LIC
and other charitable institutions are doing commendable job by reducing the
financial agony of such families. It is important for all of us to look for such
benefits available and talk these about in various media to take it across as many
people as possible. This is a bit of social work which can give relief to
handicapped persons and their parents.

Eligibility:
1. Individual or a Hindu undivided family, who is a resident in India.
2. Deduction u/s 80DD is not available to non-resident Indian (NRI).

What Expenses are eligible for deduction?

1. Expenditure for the medical treatment (including nursing), training and
rehabilitation of a disabled dependent.
2. Money paid to Life Insurance Corporation (LIC), Unit Trust of India or any
other insurer for the purpose of buying specified scheme or insurance for the
purpose of maintenance of such dependent.
Section 80G: Donation to certain funds, charitable institutions etc.

PROS
1. Allowable to all kind of Assessee.
2. There is no upper limit on the amount of donation. However in some cases
there is a cap on the eligible amount i.e. a maximum of 10% of the gross total
income.
3. The persons or organization who donates under section 80G gets a deduction
of 50% from their taxable income. Here at times a confusion creeps in, that the
tax advantage under section 80G is 50%, but actually it is not so. 50% of the
donation made is allowed to be deducted from the taxable income and
consequently tax is calculated.
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 CONS
1. Only donations in form of money and not in kind will qualify for deduction.
2. W.e.f. 1-4-2013, deduction in respect of donations in cash will be allowed only
upto Rs.10,000.
3. Where deduction allowed u/s 80G for any assessment year, deduction in
relation to such sum shall not be allowed under any other provision of the Act
for the same or any other assessment year.
4. Any approval u/s 80G(5)(vi) on or after 1-10-2009 would be a one-time
approval which would be valid till it is withdrawn.
5. Wholly/substantially whole religious purpose is not a charitable purpose.
Section 80GG: Deduction in respect of rents paid

PROS
1. Under Section 80GG, an Individual can claim deduction for the rent paid even
if he dont get HRA.
2. Deduction will not be denied if
Some other residential accommodation is owned at places other than the
place where the assessee ordinarily performs his duties of employment or
carries on business or profession and
The assessee does not claim concession in respect of self-occupied house
property in respect of such accommodation.
3. Allowable to all kind of assessee.

CONS
1. The deduction will also not be available to an assessee if any residential
accommodation is owned by the assessee at any other place, which he is
occupying, and the concessions in respect of self-occupied house are claimed
by him for that property. In such a case, no deduction will be allowed in respect
of the rent paid, even if the person does not own any residential
accommodation at the place where he ordinarily resides.
2. An employee who is entitled to house rent allowance from his employer, is
eligible for exemption u/s 10(13A) and not for deduction u/s 80GG.

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5 OVERALL ADVANTAGES
Reductions in income tax rates affect the behavior of individuals and businesses
through both income and substitution effects. The positive effects of tax rate cuts
on the size of the economy arise because lower tax rates raise the after-tax reward
to working, saving, and investing. These higher after-tax rewards induce more
work effort, saving, and investment through substitution effects. This is
typically the intended effect of tax cuts on the size of the economy.
They reduce the value of existing tax distortions and induce an efficiencyimproving shift in the composition of economic activity (even holding the level
of economic activity constant) away from currently tax-favored sectors, such as
health and housing. But pure rate cuts may also provide positive income (or
wealth) effects, which reduce the need to work, save, and invest.
Commenting on tax deduction limit, the proposal to increase the tax benefits for
health insurance from Rs.15,000 to Rs.25,000 is a welcome step.
Currently, over 78-80 per cent of health care expenses are funded by the Indians
out of their own pocket and this move will encourage people to increase their
coverage keeping in the mind the rising cost of healthcare.
A hike in the exemption limit to Rs.3 lakh and 80 C limit to a minimum of Rs.2
lakh in the case of personal income tax would provide the incremental stimulus
resulting in more consumption and/or saving. A much needed tax side intervention
is stimulation of household financial savings by a further enhancement of
limit under 80C specifically for household financial savings kept under PPF
or small saving instruments with fixed tenures.
Increase the personal income tax exemption limit by Rs.50,000 from Rs.2 lakh to
Rs. 2.50 lakh in case of all individual tax payer who are below the age of 60 years
This will enable India to become a pensioned society instead of a pensionless
society This proposal, according to an estimate, is likely to be benefit about 2
crore tax payers.
Tax changes that are made to promote growth in the long-run, or to reduce an
inherited budget deficit, in contrast, are undertaken for reasons essentially
unrelated to other factors influencing output. Thus, examining the behavior of
output following these relatively exogenous tax changes is likely to provide more
reliable estimates of the output effects of tax changes. The results of this more
reliable test indicate that tax changes have very large effects: an exogenous
tax increase of 1 percent of GDP lowers real GDP by roughly 2 to 3 percent.

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 When they consider the two types of exogenous tax changes separately, the tax
increases to reduce an inherited budget deficit have much smaller output costs than
other tax increases. This is consistent with the idea that deficit-driven tax
increases may have important expansionary effects through expectations and
long-term interest rates, or through confidence.

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13

(The Financial Express: Agencies)

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6 OVERALL DISADVANTAGES
To begin with, it is difficult to see the raising of the personal income tax exemption as
anything more than tokenism. It is certainly not relevant for the aspiring Indian
middle-class home buyer. The expected exemption limit of Rs. 3 lakh would have had
some
significance.
Exempting proceeds from the sale of a residential property from Capital Gains tax if
they are invested in equity or equipment of an SME definitely provides home owners
with more reinvestment options. Previously, the only route for exemption was
purchase of another property or tax saving bonds. At the same time, this move could
also result in a lowering of sales volumes on the secondary sale market.
TDS applicable on the purchase and sale of property will have a moderate impact in
the short term. It certainly adds another level of belt-tightening to buyers who are
already stretched. However, considering that various economic negatives such as
inflation are now being addressed, this impact will be absorbed in the long term.
At first glance, indeed, elder tax abatements appear to create a win-win situation
reducing taxes for retirees on fixed incomes while, at the same time, stimulating
aggregate economic demand for states and localities. However, there can also be
downsides for senior because, over time, tax abatements can shrink the revenues that
states need to fund care for aging residents.
As younger affluent retirees age, their private resources are apt to dwindle even as
they increasingly need expensive medical services and long-term care subsidized by
the public sector.
Perhaps the reintroduction of the Standard deductions say @ 20 % of gross income
subject to a ceiling of Rs50000 or may be even Rs1 lakh, may also mitigate the tax
burden on the one hand, and increase the surplus in the hands of the tax payer, which
she/he may either spend or save, which in turn would act as a boost to national
economy.
The decline in taxpayers can be explained partly by the changes in the basic
exemption limits for taxpayers, grant of additional exemptions, years of slowdown
resulting in a slowing trend growth rate, closure of business, demise of the taxpayer,
high incidence of retirement, huge unorganized (informal) sector, slack enforcement,
lack of proper taxpayer education and a growing culture of large-scale cash
transactions.
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A decrease in exemption limit on income from approved investments and reduction in

deductions on account of approved savings are also suggested for rationalization of
income tax system.
Another thing thats important to note is that giving tax exemptions to corporates
leads to huge loss in revenues as the profits are quite large. Also, the amount spent on
corporates is not just restricted to forgoing revenues but also includes other benefits
like subsidies in consumption of other resources like land, water, electricity. Hence,
the amount of money that the government actually spends for the corporates is much
more than the mere forgone revenues. In fact, it can be added that the labor reforms
initiated by the government, wherein contractual form of labor is being promoted, is
also a way of making the human resource cheaper for the corporates to use and afford.
Revenues foregone by tax incentives for investment such as tax holidays, partial
profit exemptions, free trade zones, etc. tend to exceed by a wide margin the
revenue costs expected before the concession is put in place. In particular, countries
frequently under-estimate tax planning opportunities for multinationals to extend the
coverage of tax relief to shelter non-targeted activities and profits. Increased reliance
on other taxes and the need for tax base protection measures place additional strains
on the tax system.
It is often better to lower tax rates while eliminating exemptions and expanding the
tax base to new payers. There is a limit, though, to the amount of taxes even the most
effective administration can collect. For countries with a high tax rate, the main road
to enhancing the fiscal share is to widen the tax base by pursuing private sector
development. Efficient, effective and fair taxation is a crucial condition for
development but fiscal reform is not a substitute for an effective development agenda
but it should be a priority. Finally, removing tax exemptions on aid-funded goods,
services and personnel could render aid more conducive to effective domestic
resource mobilization not only by generating new fiscal revenues, but also by sending
a signal that all economic activity should be subject to taxation.
A comprehensive review of exemptions is needed to deepen and widen the tax base.
Exemptions/deductions based on area and industry should be minimized, if not done
away with. If at all, investment incentives could receive a tax preference since they
directly affect growth; even such incentives should be for a specific period of time
and a sunset clause should be introduced to ensure a review of the benefit arising from
a lower rate of tax or development of an industry/area. For all other categories,

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including SSIs, every attempt should be made to reduce tax preferences even if the
likelihood of success in curbing the incentives may be expected to remain low.

7 CONCLUSION
We find that, while there is no doubt that tax policy can influence economic choices, it is
by no means obvious, on an ex ante basis, that tax rate cuts will ultimately lead to a larger
economy. (William G. Gale & Andrew A. Samwick)

8 REFERENCES
Kanoi, S. (2015). Income Tax Deductions for A.Y. 2014-15/ 2015-16 for Salaried. Tax
Guru. Retrieved from http://taxguru.in/income-tax/deductions-chapterapplicable-assessees-income-salaries.html
Ministry of Finance, G. O. (2014-2015). Economic Survey.
Ministry of Finance, G. O. (2015). The Fiscal Policy Strategy Statement. Retrieved
from http://indiabudget.nic.in/ub2015-16/frbm/frbm3.pdf
The Financial Express: Agencies. (n.d.). Retrieved from
http://www.financialexpress.com/article/economy/budget-2015-raises-taxdeduction-limit-to-rs-4-44-lakh-for-income-tax-payer/48930/
William G. Gale, T. B., & Andrew A. Samwick, D. C. (n.d.). Effects of Income Tax
Changes on Economic Growth . Economic Studies at Brookings.

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