Salaried employees form the major chunk of the overall taxpayers in the country and the contribution they make to the tax collection is quite significant. Income tax deductions offer a gamut of opportunities for saving tax for the salaried class. With the help of these deductions and exemptions, one could reduce their tax substantially.
In this article, we try to list some of the major deductions and allowances available to the salaried persons, using which one can reduce their income tax liability.
Exemption of Allowances
House Rent Allowance
A salaried individual having a rented accommodation can get the benefit of HRA (House Rent Allowance). This could be totally or partially exempted from income tax. However, it will be taxable if you don’t live in any rented accommodation and continue receiving HRA. If you couldn’t submit rent receipts to your employer as proof to claim HRA, you can still claim the exemption while filing your income tax return. So, please keep rent receipts and evidence of any payment made towards rent.
You may claim the least of the following as an HRA exemption
a. Total HRA received from your employer
b. (Rent paid) (-) (10% of basic salary +DA)
c. 40% of salary (Basic salary+DA) for non-metros and 50% of salary (Basic salary+DA) for metros
Note :
- Employees need to submit the PAN details of the house owner if the rent payment exceeds 1 lakh per annum.
- This exemption can be claimed by the individuals who choose to pay taxes under the old regime. If he opts for the new regime, the entire HRA received is taxable and cannot avail any exemption.
Read more about how to claim HRA exemption.
Standard Deduction
For FY 2023-24, the limit of the standard deduction is Rs. 50,000 for both the old and the new regime. As per Budget 2023, salaried taxpayers are now eligible for a standard deduction of Rs.50,000 under the new tax regime also from the financial year 2023-24.
Read more on Standard Deduction
Leave Travel Allowance (LTA) or Leave Travel Concession (LTC)
The income tax law also provides for an LTA/LTC exemption to salaried employees, restricted to travel expenses incurred during leaves by them. Please note that the exemption doesn’t include costs incurred for the entire trip such as shopping, food expenses, entertainment and leisure among others. You can claim LTA/LTC twice in a block of four years. In case an individual doesn’t use this exemption within a block, he/she could carry the same to the next block. Below are the restrictions which are applicable to LTA:
- LTA/LTC only covers domestic travel and not the cost of international travel
- The mode of such travel must be either railway, air travel, or public transport through the shortest route to the destination.
Read more about how to claim LTA.
Mobile Reimbursement
A taxpayer may incur expenses on mobile and telephone used at residence. The income tax law allows an employee to claim a tax-free reimbursement of expenses incurred.
An employee can claim reimbursement of the actual bill amount paid or the amount provided in the salary package, whichever is lower.
Books and Periodicals
Employees incur expenses on books, newspapers, periodicals, journals and so on. The income tax law allows an employee to claim a tax-free reimbursement of the expenses incurred.
The reimbursement allowed to an employee is the lower of the bill amount or the amount provided in the salary package.
Food Coupons
Your employer may provide you with meal coupons such as Sodexo. Such food coupons are taxable as perquisite in the hands of the employee. However, such meal coupons are tax-exempt up to Rs 50 per meal.
A calculation based on 22 working days and 2 meals a day results in a monthly benefit of Rs 2,200 (22*100).
Consequently, the yearly exemption works up to Rs 26,400.
Relocation Allowance
Businesses, these days operate in multiple locations across the country. There is a possibility that you will be asked to shift to a different city for business reasons. Such a relocation can cause expenses such as shifting to a new house, moving furniture, car transportation cost, car registration charges, getting your kids admitted to a new school, and more. Fortunately, these expenses are to be borne by the employer. Sometimes, the employer makes a direct payment for such expenses.
Here is a summary of the tax liability of these expenses:
- Car transportation cost: An employee may incur expenses on transportation of the car to the new place. The employer may reimburse the transportation expenses to the employee against actual bills submitted by the employee. For example, expenses may be incurred on movers and packers. Such expenses whether reimbursed to the employee or directly paid to the transporters are exempt from tax for the employee.
- Car registration charges: Most of the states within India charge car registration charges for entry of the vehicle in their state.
- Packaging charges: The expenditure on the packaging and moving of the furniture, irrespective of reimbursement or direct payment by the employer, is exempt from tax for the employee.
- Accommodation: The employer may provide accommodation facilities for the initial 15 days once you relocate. Such expenses will include boarding and lodging expenses including any meals forming part of such expenses. The expenses reimbursed or met by the employer will be exempt from tax for the employee.
- Train/air tickets: The travelling expenses for the employee and his family from the current place of residence to the place of new employment are exempt from tax.
- Brokerage paid on a rented house: If the employee has paid brokerage charges for finding a house for rent, the expenses incurred are considered to be towards the personal obligation of the employee. The reimbursement, if any received, by an employer is taxable as the salary income of the employee.
- School admission fees: Though your employer reimburses the school admission fees for your kids, this type of expense is considered to be a monetary benefit to the employee.
Children Education Allowances
The employer may provide you education allowance for your children as part of your salary. Such allowance received by the employee towards children's education is exempt from tax.
However, the employee can claim a maximum of Rs.100 per month as an exemption or Rs.1,200 per annum. The exemption is allowed for a maximum of 2 children.
Children's Hostel Allowances
The employer may provide children hostel allowance as a part of the salary. Employees can claim a maximum of Rs. 300 per month per child up to a maximum of two children.
Gratuity
Gratuity is a voluntary payment made by an employer for the services rendered by the employee.
Exemption in respect of Gratuity :
Gratuity received during the service :
If an employee (government or non-government) receives gratuity during the service, it is fully taxable.
Gratuity received during the time of retirement or death :
- If gratuity is received at the time of retirement or death by an employee of the government, defence services, local authority, members of civil services, etc., will be fully exempted.
- If gratuity received at the time of retirement or death by other employees :
- If covered under the Payment of Gratuity Act 1972, the least of the following will be exempted:
- Rs. 20 lakhs
- Actual gratuity received
- 15 days salary (based on last drawn salary) for every completed year of service. (No. of days in a month to be taken as 26)
- If not covered under the Payment of Gratuity Act 1972, the least of the following will be exempted:
- Rs. 20 lakhs
- Actual gratuity received
- Half-month salary (based on last drawn salary) for every completed year of service. (No. of days in a month to be taken as 26)
*Salary = (Basic salary + DA if provided in terms of employment + commission as a fixed percentage of turnover)
Click here to know more about gratuity.
Leave Encashment
As per labour law, every salaried person is entitled to a minimum number of paid leave every year. However, it is not necessary for an individual employee to utilise all the leave he is entitled to in a year. In fact, most employers allow employees to carry forward such unutilised paid leaves.
This would invariably leave the employee with an accumulated unutilised leave balance at the time of retirement or resignation from the company, as the case may be. This compels the employer to compensate the employees for unutilised paid leave. This concept is better known as leave encashment.
Exemption in respect of leave encashment :
Leave encashment received during the service :
If leave encashment is received during the service by any employee ( either government or non-government), it is fully taxable.
Leave encashment received during the time of retirement :
- If leave encashment is received at the time of retirement by a government employee, it will be fully exempted.
- If leave encashment is received at the time of retirement by non-government employees, the least of the following will be exempted:
- Rs. 25 lakhs
- Actual leave encashment received
- 10 months salary (on the basis of average salary of last 10 months preceding retirement)
- Cash equivalent of unavailed leave (Based on last 10 months average salary) to his credit at the time of retirement.
*Salary = (Basic salary + DA if provided in terms of employment + commission as a fixed percentage of turnover)
Click here to know more about leave encashment.
Allowable Deductions
Section 80C, 80CCC and 80CCD(1)
Section 80C is the most extensively used option for saving income tax. Here, an individual or a HUF (Hindu Undivided Families) who invests or spends on stipulated tax-saving avenues can claim a deduction of up to Rs 1.5 lakh. The Indian government also supports a few tax-saving instruments (PPF, NPS, etc.) to encourage individuals to save and invest towards retirement. Expenditures/investment u/s 80C isn’t allowed as a deduction from income arising due to capital gains. It means that if an individual's income comprises capital gains alone, then Section 80C cannot be used for saving tax. Some of such investments are given below and are eligible for an exemption under Section 80C, 80CCC, and 80CCD(1) up to a maximum of Rs 1.5 lakh.
- Life insurance premium
- Equity Linked Savings Scheme (ELSS)
- Employee Provident Fund (EPF)
- Annuity/ Pension Schemes
- Principal payment on home loans
- Tuition fees for children
- Contribution to PPF Account
- Sukanya Samriddhi Account
- NSC (National Saving Certificate)
- Fixed Deposit (Tax Savings)
- Post office time deposits
- National Pension Scheme
Read more on these deductions.
Medical Expenditure and Insurance Premium (Section 80D)
Section 80D is a deduction you can claim on medical expenses. One could save tax on medical insurance premiums paid for the health of self, family and dependent parents.
The limit for Section 80D deduction is:
- Rs 25,000 for premiums paid for self/family
- Rs. 50,000 for premiums paid for senior citizen parents.
- Additionally, health checkups to the extent of Rs 5,000 are also allowed and covered within the overall limit.
- Deduction of up to Rs.50,000 with respect to medical expenditure incurred by the senior citizen (60 years or above) or towards senior citizen parents, provided they are not covered under any Mediclaim policy.
The taxpayer can claim a maximum deduction of Rs.50,000 including the premium amount and medical expenditure if he is a senior citizen (60 years or above). In addition to that, if he has paid the medical bills of his senior citizen parents, he can claim an additional deduction of up to Rs.50,000.
Your employer may pay the premium on your behalf and deduct it from your salary. Such premium paid is also eligible for deduction under section 80D.
Interest on Home Loan (Section 80C and Section 24)
Another key tax-saving tool is the interest paid on home loans. Homeowners have the option to claim up to Rs.2 lakh as a deduction for interest on home loans for self-occupied property. If the house property is let out, you can claim a deduction for the entire interest pertaining to such a home loan.
The loss from house property that can be set off against other sources of income has been restricted to Rs.2 lakh.
In addition to the above, one can also claim the principal component of the housing loan repayment as a deduction under section 80C up to a maximum limit of Rs 1.5 lakh.
Read more about deductions from house property
Deduction for Loan for Higher Studies (Section 80E)
The Income Tax Act provides a deduction for interest on education loans. The significant conditions attached to claiming such a deduction are that the loan should have been taken from a bank or a financial institution for pursuing higher studies (in India or abroad) by the individual himself or his spouse or children.
One may begin claiming this deduction beginning from the year in which the loan starts getting repaid and up to the next seven years (i.e. total of 8 assessment years) or before repayment of the loan, whichever is earlier. Even a legal guardian could avail this income tax deduction.
Read more about deductions from Section 80E
Donations (Section 80G)
Section 80G of the Income Tax Act, 1961 offers income tax deduction to an assessee, who makes donations to charitable organisations. This deduction varies based on the receiving organisation, which implies that one may avail a deduction of 50% or 100% of the amount donated, with or without restriction.
Read more about Section 80G
Deduction on Savings Account Interest (Section 80TTA)
Section 80TTA of the Income Tax Act, 1961 offers a deduction of up to Rs 10,000 on income earned from savings account interest. This exemption is available for Individuals and HUFs. In case the income from bank interest is less than Rs 10,000, the whole amount will be allowed as a deduction.
However, in case the income from bank interest exceeds Rs 10,000, the amount after that would be taxable.
In case of senior citizens (age of more than 60 years), Rs. 50,000 will be available as deduction if he receive interest on savings account, recurring deposits as well as fixed deposits.
Read more about deduction from Section 80TTA and section 80TTB
Interest on Home Loan (Section 80EE)
Section 80EE allows homeowners to claim an additional deduction of Rs.50,000 (Section 24) for the interest component of the home loan EMI. Subject to the following:
- The loan must not be for more than Rs 35,00,000
- The value of the property must not be more than Rs 50,00,000.
- The individual must not have any other property registered under his name at the time the loan is sanctioned.
Read more about deduction from Section 80EE
Tax Treatment on Notice Pay and Joining Bonus
Some companies ask you to sign a bond or agreement stating you will serve the company for a specified period of time. If you happen to leave the organisation before completing this period, the organisation may recover the notice pay or the joining bonus paid to you initially.
The tax liabilities for these components are explained with illustrations below:
Illustration I
Notice Pay: Consider that Mr C, with a work experience of 1 year 6 months, was working with Organisation A with an agreement of 2 years. The agreement stated that if he quits the job within the agreement period, he must pay the salary of 3 months as notice pay. Mr C wanted to quit the job and join Organisation B. The new firm agreed to pay the notice amount so that Mr C could join them sooner. Mr C wants a refund on TDS for the notice pay as he has not received the salary from Organisation 1. In this case, the former organisation must not include the notice pay under the ‘total salary paid’ category in Form 16. This helps Mr C get a TDS refund on the notice pay. If the organisation does not make the necessary adjustments in Form 16, Mr C cannot get a refund.
Illustration II
Joining Bonus: Consider the case of Mr C. Say, he received a joining bonus of Rs.100,000 from Organisation 1 while joining. Since he has not completed the agreement period, he must pay back the joining bonus while leaving the company. Let us consider that he asks the new company to reimburse the joining bonus for him and the new organisation does reimburse. In this case, Mr C must check Form 16 given by both organisations. If Organisation 1 has also included the joining bonus in Form 16, then Mr C will not be able to obtain a refund of the TDS from the income tax department. In this case, the TDS is a dead loss that can neither be recovered or adjusted in ITR.
Exemptions on Perquisites
Cab Facility Transport Provided by the Employer
Employers generally provide cab facilities to and from the office to the residence of the employees. Such a facility is not taxed as a perquisite for the employee. The facility would be an expense for the employer.
As per the Indian Income Tax Act, use of any vehicle provided by a company or an employer for a journey by the employee from his residence to his office or another place of work, shall not be regarded as a taxable perquisite, even if provided to him free of cost or at a concessional rate.
Health Club Facility Provided by the Employer
In the case of a health club facility provided by employer uniformly to all employees, the facility is not taxable as a perquisite in the hands of the employee.
Gifts or Vouchers Provided by Employer
Gifts or vouchers given by an employer in cash or in kind are tax exempt up to Rs 5,000 per year.
Medical Expenditure Incurred outside India on Employee
In a case where the employer incurs expenditure on medical treatment outside India:
- On the employee
- Any member of the family of such employee
- Travel and stay abroad of the employee or any member of the family in connection with the medical treatment
- Travel and stay abroad with one attendant who accompanies the patient in connection with the medical treatment
‘Family’ means the spouse and children of the individual. Also the parents, brothers and sisters of the individual or any of them, wholly or mainly dependent on the individual. The above expenditure would be exempt from tax for the employee subject to the condition that –
- The expenditure on medical treatment and stay abroad shall be exempted only to the extent permitted by the Reserve Bank of India
- The expenditure on travel shall be excluded from perquisite only in the case of an employee whose gross total income,
Amount Spent on Training of Employees
Amount spent by the employer on the training of employees or the amount paid for refresher management course including expenses on boarding and lodging is not taxable as perquisites.
Perquisites Allowed outside India by the Government
Perquisites allowed outside India by the Government to a citizen of India for rendering services outside India are exempted in the hands of the employee.
Refreshment
Refreshment provided to all employees during working hours in office premises is exempted in the hands of employees.