It wouldn’t be a hyperbole to say that the salaried individuals are the backbone of the Indian revenue system as the taxpayers are mostly constituted by them. As a salaried employee, one might have thought about the methods you can employ to save on taxes.In this article, we will comprehensively outline the major tax exemptions and tax deductions that are available under the Income Tax act 1961.
What are Tax Exemptions and Deductions?
In the simplest definition, Tax exemptions as well as deductions are legal tools that you can use to reduce the tax you pay.
How is Tax Exemption different from Tax Deduction?
Although both sound the same, the way they both function is different. An income tax exemption means a component of your income that cannot be taxed from the get go. That is, a certain part of your income is free from tax liability from the beginning itself. Contrarily, a tax deduction is something you can avail after you have spent your money on an investment/ expenditure that makes you eligible for the deduction.
For example, Let’s say you have 5 lakh rupees with you. You made a generous donation of 2 lakhs to the National Defence Fund. Now you only have to pay tax for the remaining 3 lakhs, as a donation to this specific fund qualifies you for a 100% tax deduction.
Section 80G of the Income Tax Act is a provision that allows taxpayers to claim deductions on donations made to eligible charitable institutions and funds. The purpose of this section is to incentivise philanthropy and support organisations engaged in social, cultural, or economic development activities.
Read More: Case digest on Deduction u/s 80 G of Income Tax Act
Now let’s take a look at some of the major Tax Exemptions and Deductions that you can make use of.
Tax Exemptions
As already explained, exemptions are parts of your income that can be excluded from tax from the very beginning. They can be broadly distinguished into two, Allowance exemption and Perquisite exemptions.
An allowance is an amount permitted to the employee by the employer for a specific purpose.
The following are some of the major allowance exemptions you can claim as a salaried employee.
According to section 16(ia), A standard deduction is a flat deduction you can avail on your salary. This can be claimed by both salaried individuals and pensioners except business owners. To put it simply, this is the amount of money you can keep from your gross salary without paying taxes. Let’s say you earn 9 lakhs per annum. You can claim a deduction up to rupees 50,000, which makes your taxable income 8.5 lakh rupees.
The standard deduction of Rs 50,000, previously applicable only under the old regime, is now applicable under the new regime as well. This will lower taxable income for salaried individuals and pensioners who don’t utilise various deductions.
What if you earned 7 lakhs per annum or less
Individuals opting for the new tax regime will benefit from an increased tax rebate under Section 87A of the Income-tax Act, 1961. A Tax Rebate is a refund you’ll receive if you pay more taxes than you owe. Those with taxable income up to Rs 7 lakh under the new regime will receive a full tax rebate, exempting them from income tax.
Read More: Know the Income Tax Regime Changes Effective from April 1, 2024
Home Rent Allowance is a part of your salary that is allowed by your employer to look after your accommodation expenses if you live in a rented house. It should be noted that this is only claimable under the old tax regime and not under the new regime. You can claim a tax exemption either – partially or wholly under Section 10(13A) of the Income Tax Act. If you don’t live in a rented accommodation, this allowance is fully taxable.
Read More: Here’s How You can Claim HRA Exemption on Rent Paid to Spouse
How to calculate HRA
HRA can be calculated on the basis of three indicators;
Example
You live in a rented home with a monthly rent of 12,000 rupees in a metro city. Your monthly salary is 30,000 and the HRA allowed is 9,000 per month. Here,
Your total HRA= 9,000* 12 months= Rs. 1,0,8000
50% of your gross salary = Rs. 3,60,000
Total rent paid would be Rs 144,000, and if you subtract 10% of your salary from that you’ll get Rs. 1,20,000
From the above we can see that the HRA is the least of the three indicators, so that’s the amount that will get exempted from your taxable income.
Leave Travel Allowance (LTA) is an allowance given by employers to employees for travel within India. It can be used for vacation travel, travel after retirement, or after termination of service. It is strictly restricted to travel expenses such as bus, air and railway fare domestically, not internationally. It doesn’t cover expenses such as food, accommodation, leisurely activities and so forth incurred during the trip.
This exemption cannot be claimed under the new tax regime.
Read More: Income Tax Exemption for Salaried Employees: All You Need to Know about Leave Travel Allowance (LTA)
The Children Education Allowance is a fixed education allowance received by the salaried individual that can be exempted from tax.The salaried individual should submit the fee receipt from the schools to their employer. They should also declare it in Form 12BB
Form 12BB is a statement of claims by an employee for deduction of tax. With effect from 1st June 2016, a salaried employee is required to submit Form 12BB to his or her employee to claim tax benefits or rebates on investments and expenses. Form 12BB has to be submitted at the end of the financial year. Form 12BB applies to all salaried taxpayers.
Read More: Form 12BB: Things to know about investment declaration tool for tax saving
Once again it should be noted that this can be availed only under the old tax regime and not the new one.
In the old personal tax regime, the current exemption limits in respect of children’s education allowance is ₹100 per child per month and in respect of their hostel expenditure allowance is ₹300 per child per month, for a maximum of two children in a nuclear family. These exemption limits, in respect of the basic necessity of primary education of the children, have not been revised since ages.
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This is the part of your salary permitted by your employer for your relocation. Sometimes a job might require an employee to shift from one place to another. This would mean moving into a new city, renting a new house, new car, transferring your children to a new school and so forth. Overall, relocation is an expensive feat, and your employer would typically cover it. The payment made towards your relocation can be exempted from your taxable income.
Gifts from employers that do not exceed 50,000 rupees are exempt from tax.
Perquisites are financial benefits an employer provides an employee due to the position the employee holds in the organisation. It is different from an allowance, as allowances are strictly paid in cash while perquisites can be in cash or in kind. If paid in cash, it is called a reimbursement. Here are some of the common perquisites that are exempt from tax
Up to Rs. 15,000 spent on medical expenses are exempt from tax. If it exceeds 15,000 then it is considered as taxable income
Contributions made by the employers towards the employee’s provident fund are exempt from taxes.
Employer’s contribution towards the employee’s National Pension System ( NPS ) account is exempt from tax up to 10% of the basic salary.
The Interim Budget 2024 which was presented by FM Nirmala Sitharaman, was expected to make certain changes to the National Pension System ( NPS ). Experts suggest increasing the additional deduction for the NPS.
Read More: Budget 2024: Expects Additional Deduction for NPS
Cost of Refreshments provided during working hours are exempt from tax
Tax Deductions
Under Sections 80 of the Income Tax Act, There are various tax deductions available for the salaried employees if they are to make specific investment/ expenditure.
Important Section 80 Tax Deductions
Section 80C allows for tax exemptions on specific investments and expenses. By strategically diversifying investments across options like NSC, ULIP, PPF, etc., individuals can claim deductions of up to Rs 1,50,000. Utilising tax benefits under 80C helps in reducing the overall tax burden effectively.
Read More: Understanding Section 80C Tax Deductions in India
The following are some of the popular investments/expenses that qualifies for deduction:
Payments towards pension funds that is mentioned under section
10 (23AAB) can help you avail a tax deduction up to Rs.1,50,000
Section 80TTA of the Income Tax Act, 1961 provides a deduction of up to Rs 10,000 on the income earned from interest on savings made in a bank, co-operative society or post office. There is no deduction for interest earned from fixed deposits.
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As previously explained, if you make a donation to a specific organisation/ fund then that amount will be deducted from your taxable income.
If you do not have HRA, you can still claim tax deduction for your rented home under this section.
The amount deducted could be based on either of the three indicators given below, whichever is lesser:
In the event that a person had taken an education loan to fund their higher studies, the education loan exemption comes in as a useful tax saving option on the interests paid towards the aforementioned loan. Under section 80E of the income Tax Act, 1961 the taxpayer can deduct the whole interest amount paid towards the loan from their net taxable income at the time of filing income tax returns. However, one must note that this deduction is only allowed for a period of 8 years.
Read More: 5 Tax Saving Options for Young Professionals
For first time home owners, interest on home loan can see a deduction up to Rs 50,000 ( Section 24)
The conditions for this are:
If you are a salaried individual who has bought health insurance plans for your spouse, parents or for yourself then you can claim a deduction up to Rs. 25,000 if you are under the age of 60.If your parents are also under the age of 60 then an additional claim of Rs. 25.000 can be made.
This is only claimable under the old tax regime.
If you are the guardian of a severely disabled dependent, you can claim a deduction up to Rs.50,000 on expenses made towards medical bills, transportation and care taking of the disabled individual.
You can claim a tax deduction up to 40,000 rupees for expenses incurred for the treatment of serious ailment. It can be claimed for the treatment of yourself or someone dependent on you.
If you are disabled, you can claim a tax deduction varying from Rs. 75,000 to Rs.1,20,000 depending upon the percentage of the disability. The claim can be made for expenses made towards:
Conclusion
For the taxpayers looking to reduce their tax burden, the Indian tax regimes,both old and new, offer numerous tax exemptions and tax deductions that can be effectively leveraged for one’s benefit.
The old tax regime provides exemptions and deductions such as HRA, Children’s Educational Allowances, LTA, Deductions on home loan interests, health insurance plans e.t.c., which are not available under the new tax regime.
Additionally, Divergence exists in the basic exemption limit between the old and new tax regimes. Under the new tax regime, all individuals enjoy a tax exemption for income up to Rs 3 lakh. Conversely, the old tax regime’s exemption limit varies by age: Rs 2.5 lakh for individuals below 60 years, Rs 3 lakh for seniors aged 60 to 80 years, and Rs 5 lakh for super senior citizens aged 80 years and above.
Read More: Understanding Income Tax Rules for FY 2024-25: A Comprehensive Guide for Salaried Employees
Still, the new tax regime might be preferred by people due to its straightforwardness unlike the old regime as it is designed to simplify tax filings, which is appealing to taxpayers who were not very fond of the old tax regime’s complexities.
Ultimately the choice between both the regimes boils down to the taxpayer’s particular tax planning strategy. It is up to the individual to opt the best- suited regime for their financial situation.
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