There are certain deductions and allowances that allow people to reduce their taxable income under different circumstances. Many taxpayers are unaware of these taxation policies and end up making mistakes when filing income tax returns.
Income tax deductions for salaried employees consist of investments that are eligible for deduction from their gross annual income. This allows them to lower their income tax liability. On the other hand, income tax allowances are benefits offered to salaried employees over and above their monthly salaries.
Read along to find various means of reducing your income tax liability.
Many employers provide House Rent Allowance (HRA) for employees living in rented accommodation. Under Section 10(13A), you can get an exemption of this amount from your income tax. You will need to submit receipts of your rent to your employer or any other evidence to claim HRA.
The least of the following amounts is eligible for this tax exemption.
Many employers also provide allowances for their employers for vacation with their families. Employees can get tax exemptions to a certain extent for the amount received to go on a vacation. The following limitations are applicable for tax exemption in the case of LTA.
This is a social security initiative where the employer and employee contribute an equal amount (12% of the employee’s salary). Contributions to EPF can be claimed as tax exemption under Section 80C of the Income Tax Act. Upon maturity, the amount received can be claimed as an exemption when filing income tax returns.
Many employees opt for voluntary retirement before they reach 60 years of age. In such cases, the employer can provide a certain sum to the employee under the golden handshake scheme. The amount received upon voluntary retirement is exempted from income tax under Section 10(10C).
The maximum compensation exempted from tax for VRS (voluntary retirement scheme) is Rs. 5,00,000.
An employer may provide an education allowance for your children as part of your salary. This allowance is exempt from income tax for up to 2 children. You can get tax exemptions of up to Rs. 200 for education fees and Rs. 300 for hostel fees for up to 2 children.
Convenience and transport allowance
This is the amount granted by your employer for your commute to the office from home. You can get tax benefits of up to Rs. 1600 on this allowance.
Some employers provide meal coupons like Sodexo or Zeta. These are partially exempted from taxes by Rs. 50 per meal. For 2 meals per day and 22 working days, this amounts to a monthly benefit of Rs. 2200 per month.
The Union Budget of 2018 introduced a standard deduction for salaried persons. This would allow them to claim Rs. 40,000 as a standard deduction from their taxable income. It replaced the earlier system of medical reimbursement (Rs. 15,000) and transport allowance (Rs. 19,200), allowing additional tax deductions of Rs. 5,800.
Since 2019, the flat deduction of Rs. 40,000 has been increased to Rs. 50,000. Salaried individuals and pensioners can claim this deduction without the need for any investments or spending.
Individuals and HUFs (Hindu Undivided Families) can claim tax deductions of up to Rs. 1.5 lakh in a financial year under Section 80C, 80CCC and 80CCD. This income tax deduction is provided for investing in popular investment options such as:
Income tax deduction for salaried employees under sections 80C, 80CCC and 80CCD is not allowed for income from capital gains. Section 80CCD (1B) allows the additional tax-saving benefit of up to Rs. 50,000 for contributions to NPS over and above the Rs. 1.5 lakh limit.
Section 80D is a popular option of an income tax deduction for salaried employees allowing deductions for health insurance premiums and other medical expenses. You can get deductions of up to Rs. 25,000 for payment of health insurance premium for self, spouse and dependent children.
You can get an additional deduction of up to Rs. 25,000 for paying health insurance premiums for your parents. For senior citizen parents, you can get deductions of up to Rs. 50,000. If both the taxpayer and parents are above 60 years of age, you can claim deductions of up to Rs. 1 lakhs.
Section 80DD allows you to claim deductions for medical expenditure on a differently-abled person. Depending on their extent of disability, you can claim a maximum deduction of Rs. 1.25 lakhs. Section 80DDB allows deduction against medical treatment expenses of certain diseases.
Homeowners can get income tax deductions on repayment of principal and interest components of their home loans. Section 80C allows deduction of up to Rs. 1.5 lakhs for principal repayment. Section 24 allows deduction of up to Rs. 2 lakhs on interest paid for home loans with regard to self-occupied properties.
Section 80EE allows an additional deduction of up to Rs. 50,000 on home loan interest repayment over and above Section 24. However, this is available for home loans sanctioned in or after FY2016-17 and for home loans of less than Rs. 35 lakhs.
Interest paid on an education loan is eligible for deduction under Section 80E. Interest paid on loans for higher education can be deducted from one’s gross taxable income. The deductions can be claimed for a maximum of 8 years from the year of starting repayment.
You can claim the deduction for repaying an education loan for self, spouse or children. Even a legal guardian can avail income tax deduction for paying this loan.
Section 80G offers income tax deductions for donations to notified relief funds and charitable organisations. You can get deductions of 50% to 100% of the amount donated subject to limits stated in the IT Act.
Donations can be made in cash or via bank channels, but cash donations have a limit of Rs. 2000. You will also need to show the receipt containing the name, address, PAN and registration number of the trust and donor.
Section 80TTA offers a deduction of Rs. 10,000 on income earned from savings account interest for individuals and HUFs. Section 80 TTB allows deduction of up to Rs. 50,000 for interest earned from bank and post office deposits.
This section allows a tax deduction for interest earned from various types of accounts, including savings accounts, fixed deposits, recurring deposits etc.
Also read: Income Tax in India
The tax calculation for salaried employees involves summing up all your income sources, followed by adding all the deductions and tax-exempted allowances. Various options for income tax deductions for salaried employees such as NPS, ELSS, fixed deposits etc., encourage people to save money while reducing their tax liability.
Ans: Investment into certain instruments can be offset against your gross annual income under the Income Tax Act. These are income tax deductions that lower your taxable income, which in turn reduces your tax liability.
Income tax allowances/exemptions are components of your gross income that have no taxes applicable. These are covered under various Sections of the IT Act, and any taxpayer can avail it.
Ans: Section 10(10) divides employees into three categories for the purpose of taxation of gratuity:
Employees of Central and State Governments, local authorities and the Defence sector have a full exemption.
For employees paid gratuity under the Payment of Gratuity Act, tax is exempted up to Rs. 20 lakh.
For any employee, tax exemption is limited to half a month’s salary for every year of service or Rs. 10 lakh.
Ans: ELSS (Equity Linked Savings Scheme) is the only tax-saving mutual fund allowing deductions of up to Rs. 1.5 lakhs under Section 80C. It invests at least 80% of its corpus in stocks and equity-related instruments.
Ans: The Union Budget 2019 announced an income tax rebate under Section 87A of the IT Act. It allows Indian residents with an annual income not exceeding Rs. 5 lakh to claim a tax rebate of up to Rs. 12,500.
Ans: Yes, Section 80GG allows individuals living on rent and not receiving HRA to receive tax deductions. It allows a deduction up to a limit of Rs. 5000, 25% of your total income or rent paid above 10% of your total income, whichever is less.
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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