Income tax exemptions for salaried employees – 5min guide to help you plan tax saving

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Income tax exemptions for salaried employees

Income tax exemptions

Before you start thinking about saving income tax via deductions and exemptions; use this new and old income tax comparison calculator to check which income tax regime is best for you.

Let’s have a look at what all available options are available for you to claim

income tax benefits.

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.

Deductions/Allowances available to save tax on salary income

First, let us consider the allowances which give you an exemption in your salary.

Mobile/Telephone Reimbursement

If your employer offering 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 the 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 is 2018 to 2021. 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.

Entertainment Allowances

You may be getting this allowance. However, the exemption is available only for Government employees. The amount of exemption is least of the following.

a) Rs 5,000

b) 1/5th of salary (excluding any allowance, benefits or other perquisites)

c) Actual entertainment allowance received

House Rent Allowance (HRA)

This is the famous exemption which 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 least of the following.

a) Actual HRA Received

b) 40% of Salary (50%, if house situated in Mumbai, Calcutta, Delhi or Madras)

c) Rent paid minus 10% of salary

(Salary= Basic + DA (if part of retirement benefit) + Turnover based Commission)

Children Education Allowance

If your employer providing this allowance, then you can take exemption 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 to pay the tax?

Hostel Expenditure Allowance

If your employer providing this allowance, then you can take exemption Up to Rs. 300 per month per child up to a maximum of 2 children is exempt. Therefore, you can save around a maximum of Rs.600 from this allowance.

Conveyance 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 this 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 exempt 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 exempt to the extent of expenditure incurred for official purposes.

Daily Allowance

If you are not placed in normal duty place, then your employer may provide you such allowance. The employee can claim exempt 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 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. 

Standard deductions

Govt has allowed Rs. 50000 standard deductions from assessment year 2020-21(FY 19-20). So your net income is reduced by Rs.50000 without you to provide any documents. This replaced Transport Allowance and Medical Allowance which existed before.

Sec.80C

This is the famous section which often used by all of 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

  1. Life Insurance premium (Paid by an individual, spouse, and child. In the case of HUF, on the life of any member of HUF).
  2. EPF-Employee contribution can be claimed for deduction.
  3. Public Provident Fund (Paid by an individual, spouse, and child. In the case of HUF, on the life of any member of HUF).
  4. National Savings Certificate (NSC).
  5. Sukanya Samriddhi Account
  6. ELSS or Tax Saving Mutual Funds.
  7. Senior Citizen Savings Scheme.
  8. 5-Years Post Office or Bank Deposits.
  9. Tuition fee of kids.
  10. Principal payment towards a home loan.

Sec.80CCC

Contributions to certain pension plans of LIC or any other insurers. The limit is Rs.1,50,000.

Sec.80CCD

(i) Section 80CCD (1)

This subsection defines the rules related to income tax deduction 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, 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):  

  1. The maximum deduction permissible under this section is 10% of the salary (basic + DA) or 10% of the gross income of the individual.
  2. From FY 2017-18, this limit has been increased for the 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).

(ii) Section 80CCD (2)

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)

From financial year 2015-16, an additional benefit of Rs.50,000 is available for NPS contributors. This will not form the part of Sec.80 CCD 1.

Sec.80D

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 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

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

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 the 80 years of age) the limit is Rs.80,000.

For claiming deductions you need to obtain a doctor Certificate or prescription from a specialist working in a Govt or Private hospital. The following diseases are eligible for claiming under this section as the deduction.

1) Neurological Diseases where the disability level has been certified to be of 40% and above;

(a) Dementia
(b) Dystonia Musculorum Deformans
(c) Motor Neuron Disease
(d) Ataxia
(e) Chorea
(f) Hemiballismus
(g) Aphasia
(h) Parkinson’s Disease

2) Malignant Cancers

3) Full Blown Acquired Immuno-Deficiency Syndrome (AIDS) ;

4) Chronic Renal failure

5) Hematological disorders) Hemophilia

a) Hemophilia

b) Thalassaemia

Sec.80E

Educational loan taken on self, spouse, children or for the student of whom you are legal guardian can be claimed under this section for deduction. Only interest paid can be claimed but there is no benefit on the principal payout. If you took the loan from financial institutions or approved charitable trust for pursuing higher education, then only you can claim the deduction. 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 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 home loan can be claimed for deduction.

Sec.80EE

Earlier any interest payment towards home loans will be available for tax benefit under Sec.24 of 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 loan will be available for below categories of loans.

1.     This deduction would be allowed only if the value of the property purchased is less than Rs. 50 Lakhs and the value of loan taken is less than Rs. 35 Lakhs.

2.     The benefit of this deduction would be available up to the time the repayment of the loan continues.

3.     This Deduction would be available from Financial Year 2016-17 onwards.

Sec.80G

Donations to certain approved funds, trusts, charitable institutions/donations for renovation or repairs of notified temples, etc will form the part of this deduction. You have to pay either through cheque or DD if your contribution is more than Rs.10,000.

Sec.80GG

This section is only for employees who do not get HRA.

·         This section is only applicable to Individual or HUF.

·         Tax Payer may be either salaried or a self-employed. However, must not be getting HRA.

·         Tax Payer may be either salaried or a self-employed. However, must not be getting HRA.

·         Tax Payer himself or spouse/Minor Child/HUF of which he is a member should not own any accommodation at a place where he is doing a job or business

·         If Tax Payer owns house at a place other than the place noted above, then the concession in respect of self-occupied property is not claimed by him [Under Section 23 (2) (a) or 23 (4) (a)].Tax Payer has to file a declaration in

·         Tax Payer 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 least of the following.

·         Rs.5, 000 per month (earlier it was Rs.2,000 per month. But from Budget 2016, it was raised to Rs.5,000 per month);

·         25% of total income of taxpayer for the year; or

·         Rent Paid less 10% of total income (Rent Paid-10% of Total Income).

Sec.87A

You can claim tax rebate under this provision if you meet the following conditions:

  1. You must be a RESIDENT INDIVIDUAL; and
  2. Your Total Income after Deductions (under Section 80) doesn’t exceed Rs 5 lakh.
  3. 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:  

Total Income

Tax payable before cess

Rebate u/s 87A

Tax Payable + 4% Cess

2,70,000

1,000

1,000

0

3,60,000

3,000

3,000

0

4,90,000

12,000

12,000

0

Sec.80TTA

You can claim the deduction of up to Rs.10,000 on interest earned from your savings bank, post office, or co-operative society. However, please note that such deduction is not available for interest earned on your FDs. This is only for interest earned from SAVINGS account.


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