Income Tax Exemptions and Deductions for Salaried Individuals
Income Tax is a direct tax that is levied on any individual’s or entity’s income during a financial year. It is directly paid to the government, like all the other direct taxes. Provisions in the Income Tax Act 1961 also provide for various Exemptions and Deductions under specified sections. Deductions can be claimed against Investments, Allowances, etc., which can reduce the taxable amount of an individual.
Income Tax Exemptions of Allowances:
1. Exemption on House Rent Allowance (HRA)
Expenses incurred by employees on staying in rented accommodations can be claimed for deduction under the old tax regime. However, the whole amount of HRA can not be claimed for deduction. The amount for which deduction can be claimed is the least of the following:
- Total HRA paid/received by an employee
- Actual rent paid less 10% of basic salary
- 50% of the salary for metro cities and 40% of the salary for non-metro cities
Any amount exceeding the limit will be taxable at the prescribed rate.
2. Exemption on Leave Travel Allowance (LTA)
Leave Travel Allowance provided by the employer to travel for professional work is also taxable under the Income Tax Act. Deduction on the amount received as LTA can be claimed by the employees up to the amount of actual expense incurred (bills should be produced) only twice in 4 years. It doesn’t include any expenses for personal travel.
Leave Travel Allowance is restricted to:
- It should be domestic travel only.
- Mode of travel should be rail, air, or any other public transport.
3. Exemption on Income from Gratuity
At the time of retirement of the employee or when an employee works for 5 continuous years for the same employer and then resigns, he/she is liable to receive a certain sum of amount from the employer as gratuity. Gratuity is a financial reward provided by the employer as gratitude towards their employees. It is calculated on the employee’s last drawn salary and the number of years they worked. Tax treatment of gratuity is decided according to the employer’s coverage under the Payment of Gratuity Act.
4. Exemption on Leave Encashment
A certain number of days are provided as leaves by the employer to their employees. When the employees don’t claim the total number of leaves credited to them in a year, the leaves can be carried for the next year or can be encashed. The amount received as compensation for the number of days of leave accumulated is called leave encashment. It is taxable under the provisions of income tax but there are some conditions when it is exempted for employees.
The full amount of leave encashment is tax-exempt for central and state government employees. For non-government employees, the least of the following three is exempt:
- 10 months average salary preceding retirement or resignation
- Leave encashment actually received.
- An amount equal to the salary for the leave earned
- Amount notified by the government ₹25 lakhs (the limit for leave encashment has been increased from ₹3lakh to ₹25 lakhs in the Budget 2023)
5. Exemption on Relocation Allowance
A Relocation allowance is provided to bear the relocation expenses of the employees moving from one place to another. Exemptions can be claimed on various expenses incurred including travel costs, packaging costs, transportation of personal goods, etc. The point to be noted here is that the amount of actual expense incurred on relocation is liable for exemption and not the total amount provided as relocation allowance. The remaining excess portion of the relocation allowance not claimed will be taxable as per the income slab of the taxpayer.
6. Exemption on VRS Received
Before the actual age of retirement (i.e., 60 years), if any employee chooses to voluntarily retire, some amount of money is received by the employee from the employer on their voluntary retirement. Under the Golden Handshake Scheme [Section 10 (10C)], the amount received or receivable is exempted from taxation.
7. Exemption on Pension Income
On the retirement of an employee, many employers pay pensions to their employees. The Pension can be provided by the employer directly to the employee or can be paid by an organisation from which an annuity has been purchased by the employer. Up to a certain limit, pension is exempted from taxation.
8. Exemption on Other Allowances [Section 10 (14)(i)]
Various other allowances are provided to the employees in an organisation. Here is the list of other allowances that are exempt under section [Section 10 (14)(i)] upto the actual amount spent on the performance of duties in the office:
A. Travelling Allowance: Allowance provided to meet the expenses incurred on the cost of travel for office purposes or on the transfer of duty.
B. Daily Allowance: Any allowance provided by the employer in the name of daily allowance for the purpose of ordinary daily charges incurred by the employee on account of absence from his normal place of duty.
C. Conveyance Allowance: Any amount provided to the employees for the purpose of using conveyance in the performance of duties of the employment.
D. Helper Allowance: Any allowance granted to meet the expenses incurred on a helper only if such a helper is engaged in performing the duties of the office or employment of profit.
E. Academic Allowance: Any allowance provided for encouraging academic, research, and training pursuits in educational and research institutions.
F. Uniform Allowance: An amount provided for purchasing and maintaining the uniform in the office or while performing any duty related to duties of an office or employment of profit.
Deductions Allowed Under Different Sections of the Income Tax Act 1961:
Provisions in the Income Tax Act 1961 also provide for various deductions under specified sections. Deductions can be claimed against Investments, Allowances, etc., which can reduce the taxable amount of an individual. Here is the list of various options available under different sections mentioned under the Income Tax Act 1961:
1. Standard Deduction:
A flat deduction of ₹50,000 to all individuals earning a salary is known as standard deduction. From 2023-24, it is offered to all individuals opting for the old tax regime as well as the new tax regime.
2. Tax Saving Investment and Expenditure Options Under Section 80C:
A maximum deduction of ₹1,50,000 (including 80CCC and 80 CCD) can be claimed under this section. Certain investments, saving schemes, and some expenditures are allowed under this section. Some of them are:
A. Undertake Market Investments:
- Investments done in Equity Linked Savings Scheme (ELSS)
- Investments done in Post Office Savings Bank (deposits) for 10 years or 15 years
- Investments made to ULIPs (Unit Linked Insurance Plans) of any Mutual Fund
B. Investment in Specific Government Schemes:
- Investments made to any recognised securities or deposits scheme (E.g. National Savings Scheme)
- Investments made to any notified savings certificate, Unit Linked Savings Certificate (E.g. NSC VIII)
- Contribution made to the fund set up by the National Housing Scheme
- Contribution made to Employee’s Provident Fund Scheme
- Contribution made to Public Provident Fund
- Contribution made to any recognised provident fund
C. Certain Expenditure:
- Amount paid towards premium of life insurance
- Amount paid towards premium or subscription for deferred annuity for self or immediate family
- Payments against the principal of any housing loan
- Payments towards the tuition fees of any two children’s full-time education in institutes based in India
Some of the investment options available under Section 80C with Rate of Returns and Lock-in Period:
3. Buy a Health Insurance Policy:
Tax benefits are provided by the government to individuals to stimulate them to buy Insurance policies. Section 80D of the Income Tax Act 1961 provides for deductions that can be claimed for an amount varying from ₹25,000 to ₹1,00,000 on medical insurance. It further states:
Besides this, Individuals can opt for Life Insurance Plans. Tax waivers are offered to individuals on life insurance policies purchased by them. Rebate can be claimed on both premium payments and the amount disbursed on maturity.
4. Various Deductions Available Under Different Sections:
A. Section 80CCC: Deductions under this section are mainly:
- Payment of premium to any insurance company towards annuity plans.
- Payment of premium for annuity plan of LIC or any other insurer (maximum cap of ₹1,00,000)
Premium paid in those plans must be kept deposited in order to avail a deduction.
B. Section 80CCD: Any contribution made in a pension scheme notified by the central government by the assessee or the employee comes under this section. The limit under this section is:
- In the case of an employee, 10% of the salary in the previous year.
- 10% of gross total income in any other case.
C. Section 80DDB: In this section, deductions can be claimed on the amount not exceeding ₹40,000 spent on medical expenses that arise for treatment of a disease or ailment mentioned in Rule 11DD of the Act.
D. Section 80E: Under this section, a claim can be made on the amount paid as interest on loans taken for the cause of higher education for self or a relative.
E. Section 80EE: Under this section, first-time homeowners can claim a deduction on their taxable income. Individuals having their first home purchased of value not more than ₹40 Lakh and the loan taken for which is ₹25 Lakh or less are eligible to claim a deduction under this section.
F. Section 80RRB: Under this section, tax can be saved up to an amount of ₹3,00,000 on receiving any income by way of royalties or patents registered under the Patents Act, 1970
G. Section 80TTA: Under this section, any income earned through an interest in a savings bank account, post office, or cooperative society up to ₹10,000 can be claimed for deduction.
H. Section 80U: This section specifically provides a flat deduction on income tax only applied to disabled people. Up to ₹1,00,000 can be claimed for deduction depending on the severity of the disability.
Income Tax is a direct tax that is levied on any individual’s or entity’s income during a financial year. It is directly paid to the government, like all the other direct taxes. Provisions in the Income Tax Act 1961 also provide for various Exemptions and Deductions under specified sections. Deductions can be claimed against Investments, Allowances, etc., which can reduce the taxable amount of an individual.
Income Tax Exemptions of Allowances:
1. Exemption on House Rent Allowance (HRA)
Expenses incurred by employees on staying in rented accommodations can be claimed for deduction under the old tax regime. However, the whole amount of HRA can not be claimed for deduction. The amount for which deduction can be claimed is the least of the following:
- Total HRA paid/received by an employee
- Actual rent paid less 10% of basic salary
- 50% of the salary for metro cities and 40% of the salary for non-metro cities
Any amount exceeding the limit will be taxable at the prescribed rate.
2. Exemption on Leave Travel Allowance (LTA)
Leave Travel Allowance provided by the employer to travel for professional work is also taxable under the Income Tax Act. Deduction on the amount received as LTA can be claimed by the employees up to the amount of actual expense incurred (bills should be produced) only twice in 4 years. It doesn’t include any expenses for personal travel.
Leave Travel Allowance is restricted to:
- It should be domestic travel only.
- Mode of travel should be rail, air, or any other public transport.
3. Exemption on Income from Gratuity
At the time of retirement of the employee or when an employee works for 5 continuous years for the same employer and then resigns, he/she is liable to receive a certain sum of amount from the employer as gratuity. Gratuity is a financial reward provided by the employer as gratitude towards their employees. It is calculated on the employee’s last drawn salary and the number of years they worked. Tax treatment of gratuity is decided according to the employer’s coverage under the Payment of Gratuity Act.
4. Exemption on Leave Encashment
A certain number of days are provided as leaves by the employer to their employees. When the employees don’t claim the total number of leaves credited to them in a year, the leaves can be carried for the next year or can be encashed. The amount received as compensation for the number of days of leave accumulated is called leave encashment. It is taxable under the provisions of income tax but there are some conditions when it is exempted for employees.
The full amount of leave encashment is tax-exempt for central and state government employees. For non-government employees, the least of the following three is exempt:
- 10 months average salary preceding retirement or resignation
- Leave encashment actually received.
- An amount equal to the salary for the leave earned
- Amount notified by the government ₹25 lakhs (the limit for leave encashment has been increased from ₹3lakh to ₹25 lakhs in the Budget 2023)
5. Exemption on Relocation Allowance
A Relocation allowance is provided to bear the relocation expenses of the employees moving from one place to another. Exemptions can be claimed on various expenses incurred including travel costs, packaging costs, transportation of personal goods, etc. The point to be noted here is that the amount of actual expense incurred on relocation is liable for exemption and not the total amount provided as relocation allowance. The remaining excess portion of the relocation allowance not claimed will be taxable as per the income slab of the taxpayer.
6. Exemption on VRS Received
Before the actual age of retirement (i.e., 60 years), if any employee chooses to voluntarily retire, some amount of money is received by the employee from the employer on their voluntary retirement. Under the Golden Handshake Scheme [Section 10 (10C)], the amount received or receivable is exempted from taxation.
7. Exemption on Pension Income
On the retirement of an employee, many employers pay pensions to their employees. The Pension can be provided by the employer directly to the employee or can be paid by an organisation from which an annuity has been purchased by the employer. Up to a certain limit, pension is exempted from taxation.
8. Exemption on Other Allowances [Section 10 (14)(i)]
Various other allowances are provided to the employees in an organisation. Here is the list of other allowances that are exempt under section [Section 10 (14)(i)] upto the actual amount spent on the performance of duties in the office:
A. Travelling Allowance: Allowance provided to meet the expenses incurred on the cost of travel for office purposes or on the transfer of duty.
B. Daily Allowance: Any allowance provided by the employer in the name of daily allowance for the purpose of ordinary daily charges incurred by the employee on account of absence from his normal place of duty.
C. Conveyance Allowance: Any amount provided to the employees for the purpose of using conveyance in the performance of duties of the employment.
D. Helper Allowance: Any allowance granted to meet the expenses incurred on a helper only if such a helper is engaged in performing the duties of the office or employment of profit.
E. Academic Allowance: Any allowance provided for encouraging academic, research, and training pursuits in educational and research institutions.
F. Uniform Allowance: An amount provided for purchasing and maintaining the uniform in the office or while performing any duty related to duties of an office or employment of profit.
Deductions Allowed Under Different Sections of the Income Tax Act 1961:
Provisions in the Income Tax Act 1961 also provide for various deductions under specified sections. Deductions can be claimed against Investments, Allowances, etc., which can reduce the taxable amount of an individual. Here is the list of various options available under different sections mentioned under the Income Tax Act 1961:
1. Standard Deduction:
A flat deduction of ₹50,000 to all individuals earning a salary is known as standard deduction. From 2023-24, it is offered to all individuals opting for the old tax regime as well as the new tax regime.
2. Tax Saving Investment and Expenditure Options Under Section 80C:
A maximum deduction of ₹1,50,000 (including 80CCC and 80 CCD) can be claimed under this section. Certain investments, saving schemes, and some expenditures are allowed under this section. Some of them are:
A. Undertake Market Investments:
- Investments done in Equity Linked Savings Scheme (ELSS)
- Investments done in Post Office Savings Bank (deposits) for 10 years or 15 years
- Investments made to ULIPs (Unit Linked Insurance Plans) of any Mutual Fund
B. Investment in Specific Government Schemes:
- Investments made to any recognised securities or deposits scheme (E.g. National Savings Scheme)
- Investments made to any notified savings certificate, Unit Linked Savings Certificate (E.g. NSC VIII)
- Contribution made to the fund set up by the National Housing Scheme
- Contribution made to Employee’s Provident Fund Scheme
- Contribution made to Public Provident Fund
- Contribution made to any recognised provident fund
C. Certain Expenditure:
- Amount paid towards premium of life insurance
- Amount paid towards premium or subscription for deferred annuity for self or immediate family
- Payments against the principal of any housing loan
- Payments towards the tuition fees of any two children’s full-time education in institutes based in India
Some of the investment options available under Section 80C with Rate of Returns and Lock-in Period:
3. Buy a Health Insurance Policy:
Tax benefits are provided by the government to individuals to stimulate them to buy Insurance policies. Section 80D of the Income Tax Act 1961 provides for deductions that can be claimed for an amount varying from ₹25,000 to ₹1,00,000 on medical insurance. It further states:
Besides this, Individuals can opt for Life Insurance Plans. Tax waivers are offered to individuals on life insurance policies purchased by them. Rebate can be claimed on both premium payments and the amount disbursed on maturity.
4. Various Deductions Available Under Different Sections:
A. Section 80CCC: Deductions under this section are mainly:
- Payment of premium to any insurance company towards annuity plans.
- Payment of premium for annuity plan of LIC or any other insurer (maximum cap of ₹1,00,000)
Premium paid in those plans must be kept deposited in order to avail a deduction.
B. Section 80CCD: Any contribution made in a pension scheme notified by the central government by the assessee or the employee comes under this section. The limit under this section is:
- In the case of an employee, 10% of the salary in the previous year.
- 10% of gross total income in any other case.
C. Section 80DDB: In this section, deductions can be claimed on the amount not exceeding ₹40,000 spent on medical expenses that arise for treatment of a disease or ailment mentioned in Rule 11DD of the Act.
D. Section 80E: Under this section, a claim can be made on the amount paid as interest on loans taken for the cause of higher education for self or a relative.
E. Section 80EE: Under this section, first-time homeowners can claim a deduction on their taxable income. Individuals having their first home purchased of value not more than ₹40 Lakh and the loan taken for which is ₹25 Lakh or less are eligible to claim a deduction under this section.
F. Section 80RRB: Under this section, tax can be saved up to an amount of ₹3,00,000 on receiving any income by way of royalties or patents registered under the Patents Act, 1970
G. Section 80TTA: Under this section, any income earned through an interest in a savings bank account, post office, or cooperative society up to ₹10,000 can be claimed for deduction.
H. Section 80U: This section specifically provides a flat deduction on income tax only applied to disabled people. Up to ₹1,00,000 can be claimed for deduction depending on the severity of the disability.
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