Income Tax Allowances and Deductions for Salaried Employees
Updated: 6 days ago
Understanding how income tax allowances and deductions for salaried employees work can make a significant difference in tax planning. Salary packages, often called Cost to Company (CTC), include both taxable and non-taxable components. Tax Deducted at Source (TDS) is generally withheld by employers on the taxable portion of income, but understanding the components can help employees optimize their tax expenses. These deductions and allowances are thoroughly explained in this article.
Table of content
What is Allowance?
An allowance is a fixed monetary sum provided by employers to cover specific expenses beyond the basic salary. These may be fully, partially, or non-taxable under the Income Tax Act of 1961. Common allowances include House Rent Allowance (HRA), Leave Travel Allowance (LTA), and Education Allowances, each carrying distinct tax rules. By understanding the tax treatment of various allowances, salaried employees can make tax-efficient financial decisions.
What is Income Tax Deduction?
Tax deductions are financial benefits that reduce the taxable income of an individual or business, subject to specific conditions. Deductions under sections like 80C, 80D, and others, allow salaried employees to significantly lower their taxable income. Maximizing these deductions requires understanding each section’s provisions and the types of expenses or investments that qualify.
Types of Income Tax Allowances and Deductions for Salaried Employees
Fully Exempted Allowances
Certain allowances provided to employees may be fully exempt from tax if specific conditions are met. Examples include the employer-provided health club facility and certain employer-provided gifts within limits.
Partially Exempted Allowances
Partially exempted allowances reduce taxable income based on conditions. House Rent Allowance (HRA), Leave Travel Allowance (LTA), and children’s education allowance fall into this category, with specific exemption limits.
Fully Taxable Allowances
Some allowances, like dearness allowance and fixed travel allowance, are fully taxable under the Income Tax Act. Employees should be aware of these to avoid overestimating their tax-exempt income.
House Rent Allowance
HRA (House Rent Allowance) is a benefit available to salaried individuals who rent a home. Income tax may not apply to this in whole or in part. However, if you continue to get HRA while not renting a house, it will be taxable. You still have the option to claim the HRA exemption when completing your income tax return. It is possible even if you were unable to provide your employer with rent receipts as evidence. Thus, you must preserve any proof of payments received for rent, including rent receipts.
You can claim least as an HRA exemption-
The total amount of HRA received from an employer
The rent paid is equal to 10% of the basic salary
40% of the basic salary plus DA for non-metros and 50% of the salary for metros
Leave Travel Allowance
A salaried employee's travel expenses during leaves of absence are the only expenses for which they are excluded from paying income tax under the Income Tax law. You need to be aware that expenses for shopping, dining, entertainment, and leisure that are incurred over the entire vacation are not covered by the exemption. LTA/LTC may be claimed twice in a four year period. A person may carry over this exemption to the following block if they do not utilize it inside that one. The following are the limitations applicable to LTA:
Foreign travel expenses are not covered by LTA/LTC. It only covers domestic travel.
The fastest route to the destination must be taken via rail, aircraft, or public transportation for this type of travel.
Relocation Allowance
Nowadays, businesses are spread out across the entire nation. It is required to relocate for work purposes to a different city. Moving to a new home, rearranging furniture, transporting a car, paying for auto insurance, enrolling your children in a new school, and other costs can all result from such a move. Fortunately, the employer is required to cover these costs. Occasionally, the company pays these costs directly.
Children’s Education Allowances
As part of your pay, your employer might include an education allowance for your kids. Taxes are not applied to an employee's educational allowance for their children. However, the employee is eligible to receive an exemption of up to INR 100 per month or INR 1,200 annually. There can be no more than two children eligible for the exemption.
Children’s Hostel Allowances
As part of the remuneration, the company may offer a children's hostel allowance. Maximum benefits for employees are two children at a time, with a monthly cap of INR 300 per child.
Food Coupons
You might receive meal coupons from your employer, like Sodexo. These food coupons are taxable in the employee's possession as a perquisite. However, these meal coupons exempt tax up to INR 50 per meal. An analysis based on two meals per day and 22 working days yields a monthly amount of INR 2,200 (22*100). As a result, the annual exemption is valid for INR 26,400.
Mobile Reimbursement
Taxpayers may have to pay for their home phone and mobile devices. An employee is entitled to a tax-free reimbursement of incurred expenses under the income tax law. The employee is entitled to compensation for the lesser of the amount included in their salary package or the actual amount they paid on their bills.
Books and Periodicals
Books, newspapers, periodicals, journals, and other items cost money for employees. An employee may be eligible for a tax-free reimbursement of incurred costs under the terms of the income tax law. The employee's allowable reimbursement is the lesser of the amount shown in their salary package or the amount on their bill.
Standard Deduction
The standard deduction cap for FY 2023–2024 is INR 50,000 under the old and new regimes. Salaried taxpayers are now qualified for a standard deduction of INR 50,000 under the new tax regime beginning with the financial year 2023–2024, as per the Budget of 2023. For FY 2024–2025, the standard deduction limit under the new tax regime has been increased to INR 75,000, providing additional relief to salaried individuals.
Leave Encashment
Every salaried individual gets a minimum amount of paid leave each year. It is not required, though, for a single employee to take all the leave to which he is entitled in a given year. These unused paid leaves can really be carried over by most employers. This would inevitably result in the worker having accrued unused leave balance when they retired or quit the company, whichever comes first. This forces the business to reimburse the workers for any paid time off that is not used.
Gratuity
Employers sometimes choose to give gratuities to their staff members as a token of appreciation for their work. A gratuity given to a government or non-government employee during a service is fully taxable. However, the rules differ for the gratuity given at the time of retirement or passing away. Gratuities received by the government, defence, local government, civil service, and other employees at the time of retirement or death are exempt. If other employees' gratuities were received at the time of their retirement or death, The minimum of the following will be excluded if it falls under the purview of the Payment of Gratuity Act of 1972:
Rs. 20 lakh
The actual amount of the gratuity
For each full year of service, a half-month salary (calculated from the most recent wage received). (Days in a month are counted as 26.)
Permissible Income Tax Deductions for Salaried Employees
Section 80C, 80CCC and 80CCD(1)
The most popular method for avoiding income tax is Section 80C. An individual or Hindu Undivided Family (HUF) may deduct up to INR 1.5 lakh from their taxes if they invest or use certain tax-saving options. Furthermore, the Indian government encourages people to save and invest for their retirement by supporting a few tax-saving options (NPS, PPF, etc.). It is not permitted to deduct capital gain-related expenses or investments under Section 80C from income. This implies that Section 80C cannot be utilized to save taxes if capital gains are the only source of income for a particular person. A maximum amount of INR 1.5 lakh can be excused from certain investments under Sections 80C, 80CCC, and 80CCD (1).
Section 80C and Section 24: Interest on Home Loan
Home loan interest is another important tax-saving strategy. Homeowners can deduct up to INR 2 lakhs from the rate of interest which is paid on loans for self-occupied real estate. You may deduct all of the interest associated with a home loan if the property is rented out. There is a limit of INR 2 lakhs on the amount of loss from residential property that can be deducted from other sources of income. Furthermore, the main portion of the home loan repayment may be deducted under section 80C, with a cap of INR 1.5 lakh, in addition to the aforementioned benefits.
Section 80D: Medical Expenditure and Insurance Premium
You can deduct medical expenses under Section 80D. Tax savings are available on medical insurance premiums paid for the dependent parents, family members, and oneself. As a senior citizen (60 years or older), the taxpayer is eligible for a maximum deduction of INR .50,000. It includes both the premium amount and expenses on medications. Furthermore, he is eligible to receive a deduction of up to INR 50,000 if he has fulfilled the medical bills of his elderly parents.
Section 80E: Deduction on Higher Education Loan
Interest on student loans is deductible under the Income Tax Act. The important requirements for claiming this kind of deduction are that the borrower, their spouse, or their children must have obtained the loan from a bank or other financial institution in order to pursue higher education (in India or elsewhere).
Section 80EE: Interest on Home Loan
Homeowners can deduct an additional INR . 50,000 (Section 24) from their taxes under Section 80EE for the interest paid on their mortgage.
Section 80G: Donation
Donations to charitable organisations are eligible for an income tax deduction under Section 80G of the Income Tax Act of 1961. It can be taken advantage of to deduct 50% or 100% of the donation amount, with or without limitations. This deduction is contingent upon the recipient organisation.
Section 80TTA: Deduction on Savings Account Interest
Income from savings account interest can be deductible up to INR 10,000 under Section 80TTA of the Income Tax Act, 1961. Individuals and HUFs come under the eligibility criteria for this exemption. The full amount of bank interest income is deductible if it is less than INR 10,000.
Income Tax on Notice Pay and Joining Bonus
Certain organisations need you to sign a bond or contract committing you to work for them for a predetermined amount of time. The company may be able to recoup your notice pay and/or your original joining bonus if you decide to leave before this time frame is over. The following examples show the tax treatment of these components:
Notice Pay:
Notice pay compensation is subject to tax, depending on how it is reported in Form 16. Employees should confirm that deductions are properly documented for accurate tax returns.
With a two-year contract, Mr. X, who had one year and six months of work experience, was employed by Organisation A. As per the arrangement, he would have to pay three months' salary as notice if he were to leave the company during the agreed-upon period. Mr. X desired to leave his position and join Company B. To enable Mr. X to start working with them sooner, the new company promised to cover the notice cost. Because he hasn't received his pay cheque from Organisation 1, Mr. X requests a refund on TDS for the notice paid. Under no circumstances may the former organisation include notice pay in Form 16 under the "total salary paid" category. This aids in Mr. C's TDS reimbursement for notice pay. If the organisation fails to make the required modifications in Form 16, Mr. C will not be eligible for reimbursement.
Joining Bonus:
Joining bonuses are taxable. If returned due to early exit from a company, employees must ensure Form 16 adjustments to avoid unnecessary TDS deductions.
In the same instance, say that upon joining, Mr. X was given an INR 100,000 joining bonus by Organisation 1. He is required to return the joining bonus when he leaves the company because he hasn't finished the agreement period. Let's assume that he requests that his new employer reimburse his joining bonus and that firm does so. Mr. X. needs to verify Form 16 provided by both organizations in this instance. If Organisation 1 has additionally included the joining bonus in Form 16, Mr. X will not be eligible to get a TDS refund from the income tax division. The TDS in this instance is a dead loss that cannot be modified in the ITR or recovered.
Exemptions on Perquisites Provided by Employers
Employer-Provided Health Club Facility
Employees who receive a health club facility from their company on a par with other employees are not entitled to taxation on the facility as a prerequisite.
Employer-Provided Cab for Transport
Most of the time, employers offer taxi services to and from the workplace and employees' homes. Such a facility is not subject to taxes as an employee perk. The employer needs to pay for the facilities.
Employer-Provided Gifts and Vouchers
Up to Rs 5,000 in gifts or badges, provided in cash or in kind by an employer, are free from taxes.
Training Expenses by Employer
Employer-funded employee training or refresher management course fees, including travel and accommodation costs, are not subject to taxes as perks.
Employer-Provided Refreshment
Employee-provided refreshments that are offered to all staff members on office property during working hours are excluded.
Employer-Provided Medical Expenses Outside India
In the event that the employer must pay for medical care received outside of India:
Regarding the worker
Anybody in the employee's family
Any overseas lodging or travel for an employee or family member in connection with medical care
Visit and remain overseas with a single companion who goes with the patient for the purpose of receiving medical care.
Income Tax Allowances and Deductions for Salaried Employees Under New Tax Regime
The current deductions and exemptions have been eliminated according to the new tax law. Investors who choose to adopt the new tax system by forfeiting the majority of their exemptions and deductions will be rewarded with reduced tax rates and slabs. A new tax regime that is now the default tax regime will take effect in FY 2023–2024. This saves the taxpayer a great deal of effort when it comes to investment declaration.
Conclusion
Tax deductions, exemptions, and allowances offer salaried individuals significant savings potential. By optimizing investments in sections like 80C, 80D, and others, employees can reduce their taxable income, maximize savings, and build a secure financial future.
FAQ
Q1. What is allowance under the Income Tax Act?
Benefits provided by a company above and beyond an employee's base pay are known as allowances. For instance, housing and recreation allowances, travel reimbursements, children's education allowances, and so on.
Q2. What are the deductions in income tax?
There are several advantages to the income tax deductions listed, including those under Sections 80C, 80D, 80G, and 80E. Some of them are charitable contributions, medical insurance payments, interest on student loans, and deductions for investments like PPF and ELSS. These income tax deduction choices lessen taxable income, which lowers a person's or business's tax obligations.
Q3. Am I eligible to claim an HRA exemption if I am staying in my own house?
No, HRA is fully taxable if someone resides in his own home.
Q4. Can I claim a Leave travel concession if I have not claimed it in the previous block?
Yes, only one of these unclaimed LTCs will be carried over to the next block of four years and will be exempt. This happens if the individual does not take advantage of the travel concession or assistance during that block of four years.
Q5. How much of HRA is exempt from tax?
10% of the base pay is exempt from taxes. The exemption is 50% rather than 10% if lodging is found inside a metro area. About 40% of accommodations are exempt if they are not located in a major city.
Q6. Are all allowances taxable for salaried individuals?
No, not all allowances are taxable for those who are salaried. Certain allowances are totally taxable. Conversely, others are either fully or partially tax-exempt. For instance, if specific requirements are satisfied, the House Rent Allowance (HRA) may be partially exempt. Furthermore, the Leave Travel Allowance (LTA) and specific purpose allowances may also be excused up to the allowed limitations.
Q7. Can self-employed individuals claim the HRA benefit?
No, self-employed people are not eligible for the House Rent Allowance (HRA) benefit. Only those with salaries are eligible. Self-employed people are not eligible to claim HRA deductions since they do not receive a fixed wage from their employer, which is a requirement for doing so.
Q8. What deductions can I claim on tax?
Tax deductions are available to taxpayers for a variety of expenditures, donations, and investments made during the fiscal year. Section 80C (for investments such as PPF, ELSS, etc.), Section 80D (health insurance premiums), Section 80E (interest on education loans), Section 80G (donations to charitable organisations), and other sections are among the frequently mentioned deductions. You must understand the eligibility conditions and compliance standards specified in the Income Tax Act to properly claim deductions.
Q10. How much deduction in total is allowed in income tax?
Investments, outlays, and donations made during the fiscal year are only a few of the variables that determine the overall income tax deduction that can be claimed in India. Section 80C (up to INR 1.5 lakhs), Section 80D (health insurance premiums), Section 80E (interest on education loans), and other sections are common deductions. Deductions are available to taxpayers subject to their eligibility and adherence to the Income Tax Act.
Q11. What are the tax-saving alternatives for salaried employees?
You can make use of the Income Tax Act's deductions and exemptions to reduce the amount of tax on your pay. These consist of the Standard Deduction in addition to allowances like HRA and LTA.
Q12. What is taxable income?
Taxable income is the amount of basic salary paid by the employer, wages, bonuses, income from investments, or any other sources. Income tax for salaried employees is calculated based on the pre-determined tax liability according to slabs.
Q13. What is income from other sources?
Income tax for salaried people includes income from other sources like gifts, interest income, dividend income, and similar.
Q14. What are the rules for standard deduction on salary for FY 2024-2025?
The standard deduction is the flat deduction of INR 50,000 under the old tax regime and INR 75,000 under the new tax regime on income taxable of salaried employees. It does not need any evidence of investment.
Q15. How to reduce tax deductions from salary?
Investments in the products applicable under section 80C can be used to reduce tax deductions. Like PPF, tax saving FDs, Life insurance premiums, home loan repayment, and so on.
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