India applies a multi-bracket personal income tax regime, with tax rates ranging from 0% to 30%, which are applied progressively on the tax residents of the country. In order to reduce taxable income, individuals have a number of tools in their arsenal to utilize. In this article we provide an overview of general deductions that tax residents can apply to optimize their personal income tax in India.

Firstly, a standard deduction of INR 50,000 is applied when tax residents compute and file their taxable income received as salary. This is a general deduction applied uniformly across the entire country.

Secondly, there are a number of additional deductions individuals can apply on a case-by-case basis. Personal deductions up to INR 150,000 include:

-          Investments made into life the insurance premium of children, spouse, or oneself;

-          Investments made into the national pension system;

-          Contributions made to an Indian mutual fund;

-          Payments of tuition fees for university, college, or school in India for the purpose of education of children, spouse, or oneself;

-          Repayment of the principal of a housing loan.

As for additional education expenses that could be used to reduce taxable income, a person who has taken a loan in order to finance the education of his/her children, spouse, or oneself can use the interest paid on the loan as a deduction of taxable income.

Furthermore, donations of a specific amount to approved charitable funds and institutions can be treated as a deduction of either 50% or 100% of the total amount donated, according to the amount of the donation. Additionally, a special fund (PM CARES Fund) was set up in India in order to assist citizens affected by the Covid-19 pandemic. Donations to this fund can be 100% deductible and no upper limit has been specified.

Finally, some of the losses occurred in a given year are allowed to be carried forward to future years, such types of losses include the following:

-          Short-term capital loss;

-          Long-term capital loss;

-          Speculation business loss;

-          Losses from house property.

To sum up, a number of deductions can be used in combination in order to optimize the personal tax liability in a given year. At PHC Advisory we constantly monitor the regulatory and fiscal updates in the Indian market. If you would like to know more about the most recent tax developments in India, please contact us at info@phcadvisory.com.