Income Tax Exemptions for Salaried Employees – Deductions, 80C, HRA, NPS, PPF
Income tax is an inevitable part of every salaried employee’s financial life. However, the Indian Income Tax Act provides several exemptions and deductions that can help reduce the tax burden for salaried employees. By taking advantage of these tax benefits, salaried employees can not only save money but also invest in their financial future. In this article, we will explore the various Income Tax Exemptions for Salaried Employees in India. From standard deductions to exemptions for medical bills and travel allowances, we will cover everything you need to know to optimize your tax savings.
Income Tax Exemptions for Salaried Employees
Key details of Income Tax Exemptions and Deductions for Salaried Employees in India:
|Standard Deduction||All salaried employees||Rs. 50,000 (FY 2020-21)||Available as a deduction from the gross salary|
|House Rent Allowance (HRA)||Salaried employees receiving HRA||Actual HRA received or 50% or 40% of salary (depending on the city of residence) or Rent paid minus 10% of salary||The employee must be paying rent for the accommodation occupied|
|Leave Travel Allowance (LTA)||All salaried employees||Actual expenses incurred on travel or LTA amount received from the employer||Travel must be within India and only for the employee and their family|
|Medical Reimbursement||All salaried employees||Rs. 15,000 per annum||Reimbursement for medical expenses incurred|
|Section 80C||All taxpayers||Rs. 1.5 Lakhs per annum||Investment in tax-saving instruments such as PPF, EPF, life insurance premiums, ELSS, etc.|
|Section 80D||All taxpayers||Rs. 25,000 per annum (Rs. 50,000 for senior citizens)||Investment in health insurance premiums|
|Section 80E||All taxpayers||No limit||Interest paid on education loan|
|Section 80GG||Salaried employees who do not receive HRA||Rs. 5,000 per month or 25% of total income or Rent paid minus 10% of total income||The employee must not own any accommodation and must file a declaration in Form No. 10BA regarding the expenditure incurred towards rent|
Note: The maximum limit and conditions are subject to change based on the latest tax laws and regulations. Please consult with a tax advisor or the relevant authorities for accurate and up-to-date information.
What is the Difference between Exemption and Deduction?
If an income is exempt from tax, then it is not included in the computation of income. However, the deduction is given from income chargeable to tax. Exempt income will never exceed the amount of income. However, the deduction may be less than or equal to or more than the amount of income.
Exemptions Available to Save Tax on Salary Income
First, let us consider the allowances which give you an exemption in your salary.
If your employer offers you the mobile/telephone connection or internet connection which requires for work, then you can claim 100% of such cost. However, you have to produce the bill. Only post-paid connections are allowed for reimbursement.
Leave Travel Allowance
The bills for your travel against LTA can be claimed for exemption. It is allowed to be claimed twice in a block of four years. The current block for LTA is from 2022 to 2025. You can carry forward your unclaimed LTA to the next year. You can request your employer to not deduct tax on it and allow you to claim it next year.
You may be getting this allowance. However, the exemption is available only for Government employees. The amount of exemption is the least of the following:
- Rs 5,000
- 1/5th of salary (excluding any allowance, benefits or other perquisites)
- Actual entertainment allowance received
House Rent Allowance (HRA)
This is the famous exemption that is used by many salaried individuals. However, the wrong belief is that whatever the rent they pay is actually exempted from their income. The reality is different. The amount of exemption is the least of the following.
HRA Calculation for Tax Exemption
Below is the HRA calculation for tax exemption –
- Actual HRA Received
- 40% of Salary (50%, if the house is situated in Mumbai, Calcutta, Delhi, or Madras)
- Rent paid minus 10% of salary
(Salary= Basic + DA (if part of retirement benefit) + Turnover based Commission)
Children Education Allowance
If your employer provides this allowance, then you can take an exemption of up to Rs.100 per month per child (maximum of up to 2 children). Therefore, monthly you can save Rs.200 from this allowance. The exemption may seem so low. But why pay the tax?
Hostel Expenditure Allowance
If your employer provides this allowance, then you can take exemption Up to Rs. 300 per month per child up to a maximum of 2 children exempt. Therefore, you can save around a maximum of Rs.600 from this allowance.
This is a different allowance than a transport allowance. It is the expenditure granted to an employee to meet the expenses on conveyance in performing his official duties. There is no limit for this. If such a conveyance allowance is Rs.5,000 a month, then the whole allowance is exempt. Hence, you may may be exempt from the extent of expenditure incurred for official purposes.
Any Allowance to Meet the Cost of Travel on Tour or on Transfer
Here also no limit. The employee can claim exemption to the extent of expenditure incurred for official purposes.
Allowance to Meet the Cost of Travel on Tour or on Transfer
Here also no limit. The employee can claim exemption to the extent of expenditure incurred for official purposes.
If you are not placed in a normal duty place, then your employer may provide you with such allowance. The employee can claim exemption to the extent of expenditure incurred for official purposes.
These are the major allowances, which can be utilized to save tax on salary income. There are a few other allowances also to claim the exemption. But many of such allowances are not so famous. Hence, I left them to list.
Deductions Available to Save Tax on Salary Income
Now let us consider deductions which will save tax on salary income.
Govt has allowed Rs. 50000 standard deductions from the assessment year 2020-21(FY 19-20). So your net income is reduced by Rs.50000 without you providing any documents. This replaced Transport Allowance and Medical Allowance which existed before.
This is the famous section that is often used by all salaried. The maximum limit for the current year is Rs.1,50,000. Therefore, up to Rs.1,50,000, you can save tax on salary income from this section alone. The different investments you do and can also be claimed under Sec.80C are listed below
- Life Insurance premium (Paid by an individual, spouse, and child. In the case of HUF, on the life of any member of HUF).
- EPF-Employee contribution can be claimed for deduction.
- Public Provident Fund (Paid by an individual, spouse, and child. In the case of HUF, on the life of any member of HUF).
- National Savings Certificate (NSC).
- Sukanya Samriddhi Account
- ELSS or Tax Saving Mutual Funds.
- Senior Citizen Savings Scheme.
- 5-Years Post Office FD or Bank Deposits.
- The tuition fee of kids.
- Principal payment towards a home loan.
Contributions to certain pension plans of LIC or any other insurers. The limit is Rs.1,50,000.
Sec. 80CCD – NPS
Section 80CCD (1) – NPS
This subsection defines the rules related to income tax deductions available to individuals for contributions made to the NPS. It is irrespective of the fact whether the contribution has been made by a government employee, a private employee, or a self-employed individual. The provisions of this section apply to all Indian citizens who are contributing to the NPS and are between the age of 18 to 60 years. This also applies to NRIs.
Following are the key provisions of Section 80 CCD (1):
- The maximum deduction permissible under this section is 10% of the salary (basic + DA) or 10% of the gross income of the individual.
- From FY 2017-18, this limit has been increased for self-employed individuals to 20% of the Gross total income with the maximum limit being capped at Rs. 1,50,000/- for a given financial year.
A new amendment to the Section 80 CCD has been introduced in the Union budget of the year 2015 as sub-section 1B. Under these new provisions, individuals can claim an additional deduction of Rs. 50,000/-. This is available to both salaried as well as self-employed individuals. This has thereby raised the maximum deduction available under Section 80CCD to Rs. 2,00,000/-. Tax benefits under Section 80CCD (1B) can be claimed over and above the deductions available under Section 80CCD (1).
Section 80CCD (2) – NPS
The provisions under Section 80 CCD (2) come into effect when an employer is contributing to the NPS of an employee. The contributions towards NPS can be made by an employer in addition to those made towards PPF and EPF. The contribution made by the employer can be equal to or higher than the contribution of the employee. This section applies to only salaried individuals and not to self-employed individuals. The deductions under this Section can be availed over and above those of Section 80 CCD (1).
Section 80CCD (2) allows salaried individuals to claim deductions up to 10% of their salary which includes the basic pay and dearness allowance or is equal to the contributions made by the employer towards the NPS.
Sec.80CCD 1(B) – NPS Additional 50 Thousand Tax Benefits
From the financial year 2015-16, an additional benefit of Rs.50,000 is available for NPS contributors. This will not form part of Sec.80 CCD 1.
Sec.80D – Health Insurance Premium
You (as an individual or HUF) can claim a deduction of Rs.25,000 under section 80D on insurance for self, spouse, and dependent children. An additional deduction for the insurance of parents is available up to Rs 25,000 if they are less than 60 years of age. If the parents are aged above 60, the deduction amount is Rs 50,000, which has been increased in Budget 2018 from Rs 30,000.
In case, both taxpayer and parent(s) are 60 years or above, the maximum deduction available under this section is up to Rs.1 lakh.
Sec.80DD – Medical Expense Tax Exemption
You can claim up to Rs.75,000 as medical expenses on treatment of your dependents (spouse, parents, kids or siblings) who have 40% disability. If it is a severe disability, then the limit is Rs.1,25,000.
Sec.80DDB – Treatment for Critical Ailments
An individual (less than 60 years of age) can claim up to Rs 40,000 for the treatment of specified critical ailments. You can also claim on behalf of the dependents. For senior citizens, it is Rs.60,000 and for very senior citizens (above 80 years of age) the limit is Rs.80,000.
For claiming deductions you need to obtain a doctor’s Certificate or prescription from a specialist working in a Govt or Private hospital. The following diseases are eligible for claim under this section as the deduction.
1) Neurological Diseases where the disability level has been certified to be 40% and above;
- Dystonia Musculorum Deformans
- Motor Neuron Disease
- Parkinson’s Disease
2) Malignant Cancers
3) Full Blown Acquired Immuno-Deficiency Syndrome (AIDS) ;
4) Chronic Renal failure
5) Hematological disorders) Hemophilia
Sec.80E – Education Loan
An educational loan taken on self, spouse, children, or for the student of whom you are legal guardian can be claimed under this section for the deduction. Only interest paid can be claimed but there is no benefit on the principal payout. If you took a loan from financial institutions or approved charitable trusts for pursuing higher education, then only you can claim the deduction. A loan taken from relatives or friends will not be eligible for the claim. However, education may be in India or abroad.
Sec.24 (B) – Interest on Home Loan
The interest part of your home loan EMI will be claimed under this section. The maximum limit for the self-occupied property is Rs.2,00,000 per year. For let-out property, the entire interest payment of the home loan can be claimed for deduction.
Sec.80EE – Interest on Home Loan
Earlier any interest payment towards home loans will be available for tax benefit under Sec.24 of the IT Act up to Rs.2,00,000 in a financial year. Now, this is raised to another Rs.50,000. However, this additional Rs.50,000 tax benefit on the interest of home loans will be available for the below categories of loans.
- This deduction would be allowed only if the value of the property purchased is less than Rs. 50 Lakhs and the value of the loan taken is less than Rs. 35 Lakhs.
- The benefit of this deduction would be available up to the time the repayment of the loan continues.
- This Deduction would be available from Financial Year 2016-17 onwards.
Sec.80G – Donations
Donations to certain approved funds, trusts, charitable institutions/donations for renovation or repairs of notified temples, etc will form part of this deduction. You have to pay either through cheque or DD if your contribution is more than Rs.10,000.
Sec.80GG – HRA not in Salary Structure
Here are the key points related to the section that is only applicable to individuals or HUFs who do not receive HRA:
- This section is only applicable to individuals or HUFs who do not receive House Rent Allowance (HRA).
- The taxpayer may be either salaried or self-employed, but should not be receiving HRA.
- The taxpayer himself or his spouse/minor child/HUF of which he is a member should not own any accommodation at the place where he is doing a job or business.
- If the taxpayer owns a house at a place other than the place noted above, then he cannot claim the concession in respect of self-occupied property under Section 23 (2) (a) or 23 (4) (a).
- The taxpayer has to file a declaration in Form No.10BA regarding the expenditure incurred by him towards the payment of rent.
- If the above five conditions are satisfied, the amount deductible under Section 80GG is the least of the following:
- Rs. 5,000 per month (earlier it was Rs.2,000 per month, but it was raised to Rs.5,000 per month from the Budget 2016).
- 25% of the total income of the taxpayer for the year.
- Rent paid less 10% of total income (Rent Paid-10% of Total Income).
Sec.87A – Rebate for Income Under 5 Lakhs
You can claim a tax rebate under this provision if you meet the following conditions:
- You must be a RESIDENT INDIVIDUAL; and
- Your Total Income after Deductions (under Section 80) doesn’t exceed Rs 5 lakh.
- The rebate is limited to Rs 12,500. This means that if the total tax payable is lower than Rs 12,500, then that amount will be the rebate under section 87A. This rebate is applied to the total tax before adding the Education Cess (4%).
Following are a few examples of the 87A rebate allowed to Resident Individuals including Senior Citizens:
Tax payable before cess
Rebate u/s 87A
Tax Payable + 4% Cess
Sec.80TTA – Interest on the Savings Bank Account
You can claim a deduction of up to Rs.10,000 on interest earned from your savings bank, post office, or cooperative society. However, please note that such a deduction is not available for interest earned on your FDs. This is only for interest earned from the SAVINGS account.
Final Thoughts on Income Tax Exemptions for Salaried Employees
Being a salaried employee it’s most important that you save as much tax as possible to support your financial planning . But while you are planning to save tax, please make sure you understand the tax savings instrument you are planning to use which will not help you in saving tax but also helps in creating wealth in long term.
we have seen people invest in instruments without realizing it’s pros and cons and later realize that the tax saving option was not good.
FAQ on Income Tax Exemptions for Salaried Employees
What is the new standard deduction for 2021?
Rs 50000 is the standard deduction for income tax filing for FY 22-23.
How do I claim a 50000 standard deduction?
You don't need to do anything to claim 50000 standard deduction. The income tax software by default considers Rs 50000 as standard deductions while filing income tax returns if you are a salaried employee.
What are the exemptions for income tax 2022?
The most common tax exemptions in 2022 are –
Sec. 80C – 1.5 lakhs
Sec.80CCD 1(B) – Rs 50000 for NPS contributions
Sec.80D – Rs 50000 for health Insurance premiums
Sec. 24B – Rs 2Lakhs for interest on home loan
How to save maximum income tax?
If you wish to save maximum income tax then you should consider of utilizing all the deductions and exemptions available for your disposal.