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Income Tax Allowances & Deductions for Salaried Employees in India

Income Tax Allowances & Deductions for Salaried Employees in India

Salaried individuals in India are one of the highest taxpaying citizens. Therefore, they are often in search of tax saving opportunities. A person whose salary falls in the highest income slab (income above Rs. 10 lakhs) has to pay tax @ 30% plus applicable surcharge and cess.

Therefore, tax planning is a crucial part of their finances. However, what are the ways in which salaried employees can save tax in India? Find out here!

A. Allowances and Deductions for Salaried Employees in India

Following are the allowances and deductions for salaried employees in order to reduce their income tax burden:

  1. Standard Deduction

The income tax law allows a flat standard deduction of Rs. 50,000 from the salary of the employees irrespective of the amount of salary.

  1. House Rent Allowance (HRA)

Companies usually provide employees with a house rent allowance for meeting expenses in relation to residential accommodation in the city of employment. This allowance is exempted from tax up to a certain limit which is lower of the following:

  • Actual HRA
  • 40% of salary. In the case of metro cities, the deduction shall be 50%.
  • Rent Paid – 10% of salary

Here, salary means basic salary + dearness allowance + commissions based on fixed percentage of turnover. Further, Mumbai, Delhi, Kolkata and Chennai shall be considered as the metro cities for deduction limit of 50%.

  1. Leave Travel Allowance (LTA)

Also known as Leave Travel Concession (LTC), it is provided to the employees for travel during their leave period either during their employment or after retirement or termination of service. The government has provided exemption for such allowance however, it is subject to certain conditions that includes:

  • The employee must undertake actual journey for claiming exemption of LTA.
  • No exemption is available for international travels. Only domestic travel is considered under LTA.

Exemption Limit

Exemption depends upon the mode of transportation used for travel i.e.,

Sr. No.

Particulars

Eligible Exemption

1

Journey through air

Economy class fare of the national carrier by the shortest route or the actual amount spent, whichever is less

2

Journey through rail

Or,

Where the origin and destination of journey is connected through rail and journey is performed by any mode other than air

AC first class rail fare by the shortest route or the actual amount spent, whichever is less

3

Where the origin and destination is not connected by rail but a recognised public transport exists

First class or deluxe class fare of such public transport by the shortest route or the actual amount spent, whichever is less

4

Where the origin and destination is not connected by rail and no recognised public transport exists

AC first class rail fare by the shortest route or the actual amount spent, whichever is less

  1. Other Allowances

Certain allowances have been prescribed under Section 10(14) read with rule 2BB of the Income Tax Rules, 1962 that have been exempted from tax. This includes:

  • Uniform Allowance
  • Conveyance Allowance
  • Allowance for Professional Development
  • Allowance for Daily Expenses
  • Helper Allowance
  • Allowance for Cost of Travel

The above-mentioned allowances are subjected to exemption upto the expenditure incurred or the amount of allowance received, whichever is less.

  1. Section 80C

Section 80C contains multiple avenues of deductions for salaried employees where they can invest and claim tax benefits. The amount of deduction allowed is up to Rs. 1,50,000 for each financial year. Following are some of the options available under section 80C:

  • ELSS and tax saver mutual funds
  • Life insurance premiums
  • Unit Linked Insurance Plans (ULIPs)
  • Principal repayment of home loan
  • Sukanya Samriddhi Yojana
  • 5-year term deposit with banks or post office
  • Provident funds and pension plans etc.
  1. Section 80CCC

Where the employee makes an investment in pension funds, he is eligible to claim deductions under Section 80CCC of the act.

  1. Section 80CCD

If a person invests any amount in the pension scheme as notified by the Central Government, then he can claim a deduction under Section 80CCD of the act. The deduction is available for contributions made by both the employer as well as the employee. Further, even self-employed people are eligible to claim deduction under this section. The amount of deduction that can be availed is as follows:

A. For self-contributions

  • In the case of an employee: 10% of his salary during the year
  • Other Case: 20% of his gross total income during the year

B. For contributions made by the employer:

  • Contributions made by the Central or State Government: 14%
  • Contributions made by other employers: 10%

Note: Section 80CCE provides an aggregate deduction limit of Rs. 1,50,000 under Section 80C, 80CCC and 80CCD(1) in a financial year.

Further, 80CCD(1B) allows an additional deduction towards the employee contribution amounting Rs. 50,000 over and above the deduction limit of Rs. 1,50,000 claimed by the employee u/s 80C, 80CCC and 80CCD(1).

  1. Section 80D

The amount paid as premium of medical insurance can be claimed as deduction from the salary. The deduction is allowed up to Rs. 25,000 for insurance premium paid for self, spouses and dependent children. In the case of medical insurance premiums paid for the parents, an additional deduction up to Rs. 25,000 can be claimed. In case, any of the person mentioned above is a senior citizen (i.e., resident in India and aged 60 years and above), the deduction limit gets increased to Rs. 50,000.

  1. Donations

If any person makes donations, then he is allowed to claim a deduction under the income tax act. These donations can be categorised as follows:

  • Section 80G: This includes donations made to charitable organizations and funds approved by the government. The amount of deduction will depend upon the organization or the fund to which you donate. However, for donations exceeding Rs. 2000, deduction shall be allowed only if it is made by any mode other than cash.
  • Section 80GGC: This includes donations made to the political parties or electoral trust. The entire amount of donation made to the political parties or electoral trust can be claimed as a deduction under this section. However, it should be ensured that the donation is not made in cash.
  1. Section 80E

Section 80E of the act allows deduction of interest paid on loans taken for higher education. There is no limit as to the amount of deduction that can be claimed. Further, the deduction can also be availed for interest on loans taken for higher education of relatives that includes spouse and children of the individual or student of whom he is a legal guardian.

B. New Taxation Regime – Section 115BAC

The government launched a new taxation scheme for the taxpayers, allowing them to pay tax at concessional rates. The scheme is available for all the individuals and HUF and they shall exercise the option to pay tax as per this new scheme by filing Form 10-IE. However, this scheme disallows most of the deductions that are otherwise available in the normal taxation regime. These disallowances include:

  • Standard deduction
  • Entertainment allowance
  • Leave Travel Allowance (LTA)
  • Children education allowance
  • Deduction from the family pension scheme
  • Interest on home loan in respect of the vacant property or self-occupied property
  • House Rent Allowance (HRA)
  • Other special allowances [as referred to in Section10(14)]
  • Chapter VI-A deductions
  • Exemption for income of minor
  • Deduction or exemption for any other allowance or other perquisite and so on

 Here’s a comparative analysis of the tax rates as per the old regime and new regime u/s 115BAC:

Total Income

Old Regime

New Regime as per 115BAC

Up to 2,50,000

Nil

Nil

From 2,50,001 to 5,00,000

5%

5%

From 5,00,000 to 7,50,000

20%

10%

From 7,50,001 to 10,00,000

15%

From 10,00,001 to Rs. 12,50,000

30%

20%

From 12,50,001 to Rs. 15,00,000

25%

Above Rs. 15,00,000

30%

It’s time you plan your taxes wisely by claiming benefit of the above allowances and deductions for salaried employees. In case of any assistance, please feel free to contact the ASC Group.

 

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