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Income Tax Exemptions with Limits for Salaried Employees
As the end of the financial year comes closer, it is time to look at your tax liabilities and start preparing to file the Income Tax Returns (ITRs). Knowing about the basic rules, income tax slab rates, and exemptions can help you plan your taxes well.
Income is classified under five categories, which include salary, capital gains, profession or business, house property, and other sources. All categories except capital gains are taxed at your applicable income tax slab rate.
What are income tax exemptions for salaried employees?
The Income Tax Act, 1961 provides several exemptions for salaried individuals. These help to reduce your taxable income and your tax liability. The provisions for tax exemptions encourage people to save more and build wealth for their financial stability. Remember that Most of the exemptions and deductions mentioned here are available for Old Tax Regime.
Here are some of the income tax exemptions available if you are salaried.
House Rent Allowance (HRA) – [Section 10(13A)]
If you live in a rented home, you can benefit from HRA, which is partially or fully exempted from tax. However, if you receive HRA but do not live in a rented home, the entire amount is taxable.
The least of the following received as HRA in salary is exempt:
- Total amount received from your employer
- 40% of salary, which includes basic + dearness allowance (DA) for non-metros and 50% of salary for metro cities
- Rent paid – 10% of basic salary + DA
Leave Travel Allowance (LTA) – [Section 10(5)]
According to the Income Tax Department guidelines, you are eligible for LTA for travel expenses incurred while on leave. The exemption does not include expenses like food, shopping, leisure, and entertainment.
You can claim LTA exemption two times during a block of four financial years. If you do not use the exemption during a particular block, you can carry it forward to the next block.
Some of the applicable restrictions are as follows:
- Available only for domestic travel
- You should travel either by airway, railway, or public transportation system
Standard deduction
The standard deduction replaced medical reimbursement and transport allowance exemptions. The total amount available is INR 50,000 per year.
Interest on home loan – [Section 24(b)]
Another beneficial income tax exemption for salaried employees is the interest paid on home loans.
Under section 24 of the Income Tax Act, 1961, you can claim up to INR 2 lakhs as an exemption towards home loan interest for a self-occupied property.
Moreover, if you rent out the property, the entire amount paid as interest is eligible for deduction.
Section 80EE also allows you to claim an additional deduction of INR 50,000 paid as the home loan interest.
However, it is subject to the following conditions:
- You should not own any other registered property in your name at the time of availing of the loan
- The borrowed amount should not exceed INR 35 lakhs
- The property value must be below INR 50 lakhs
Professional tax
Various states levy professional tax on employees in India. An amount of INR 2,500 is directly deducted from your salary and paid to the State Government.
Professional tax is paid to the government by the employers and failing to make this payment entails penalties.
Employees’ Provident Fund (EPF)
Companies employing 20 or more employees must contribute towards EPF on behalf of their personnel. Employers contribute 12% of the employees’ salaries to EPF and other eligible funds.
For the financial year (FY) 2021, the interest on these contributions is 8.50% per annum. EPF contributions reduce the taxable income and help you save the total tax payable.
Food expenses
Some companies may offer meal coupons to their employees. These food coupons are tax-exempt up to INR 50 per meal.
Considering 22 working days and two meals per day, the benefit per month is INR 2,200 and the yearly tax exemption is up to INR 26,400.
Children’s allowance
As a component of your total salary, your company may provide an allowance for your children’s education. This allowance for children’s education is exempted from tax. The maximum exemption is limited to INR 1,200 per year for up to two children.
Reimbursement for mobile and telephone expenses
If your employer reimburses your mobile phone and residence telephone expenses, the Income Tax Act, 1961 allows you to claim these as exempted income.
The maximum exemption is limited to the lower of the actual bill amount paid or the amount included in your salary package.
Relocation allowance
Your company may ask you to relocate to another region for work. You may incur relocation expenses, which are either paid directly to the service providers or reimbursed.
Some of the expenses that are eligible for exemptions include car transportation and registration costs, packaging charges, accommodation, train or airplane tickets, school admission fees, and brokerage paid for renting a house.
Section 80C
Section 80C of the Income Tax Act, 1961 is one of the commonly used options to reduce your tax liability.
When you invest in certain eligible financial instruments, you can claim a deduction of up to INR 1.50 lakhs per annum. The primary objective of these exemptions is to encourage savings and help you plan your retirement.
Some of the eligible investment options under this section include the following.
- Premium paid for a life insurance plan
- National Pension System (NPS)
- Employees’ Provident Fund (EPF)
- Post office time deposits
- Equity-linked savings scheme (ELSS)
- Tax-saving fixed deposits (FDs)
- Annuity or pension schemes
- National Savings Certificate (NSC)
- Home loan principal repayment
- Sukanya Samriddhi Yojana (SSY)
- Children’s tuition fees
- Contributions made to Public Provident Fund (PPF)
- Senior Citizens’ Savings Scheme (SCSS)
However, while claiming income tax 80C deductions, you must remember that you cannot claim these exemptions from any profits earned as capital gains.
Section 80D
Section 80D of the Income Tax Act, 1961 provides tax benefits on the premium paid for the health insurance policy for self, spouse, children, and parents.
You may claim a maximum amount of INR 25,000 if you are less than 60 years old. The maximum limit is INR 50,000 for senior citizens.
Section 80DD
Section 80DD provides relief for treatment costs incurred on behalf of disabled dependents. You may claim a tax deduction if you pay for treating your spouse, parents, children, or dependent siblings for the listed medical conditions.
If the severity of the disability is between 40% and 80%, the maximum limit is INR 75,000 per annum. However, if the disability is more than 80%, the limit is higher and capped at INR 1.25 lakhs per year.
An additional provision for treating dependents who suffer from certain specified ailments is provided under section 80DDB of the Income Tax Act, 1961.
If your dependent is below 60 years, the maximum deduction is the lesser of INR 40,000 and actual expense. If the person suffering from the ailment is over 60 years, the maximum limit is the lesser of actual expenses and INR 1 lakh.
The exemptions discussed above help in reducing taxable income if you are salaried, thus encouraging you to save a significant amount. To maximise the benefits of these provisions, you may consult a professional financial expert.
Deduction for Interest on Education Loan [Section 80E]
There is no limit on the deduction for interest paid on loans for higher education.
Donations to Charitable Institutions [Section 80G]
Taxpayers can claim deductions for donations made to certain approved charitable institutions and relief funds under section 80G. The deduction can be completely of 100% or 50% of the donation amount, with or without restrictions, depending on the organization or purpose. To claim the deduction, donations must be made in cash (up to ₹2,000), cheque, or digital modes, and the organization must be registered under Section 80G.
Savings Account Interest [Section 80TTA]
Individuals and Hindu Undivided Families (HUFs) can claim a deduction of up to ₹10,000 on interest earned from a savings bank account under section 80TTA. This deduction applies to interest earned from accounts held in Banks (including cooperative banks) & Post offices. Remember that this deduction is available only on savings account interest, not on interest earned from fixed deposits (FDs), recurring deposits (RDs), or any other term deposits.
Deduction for Senior Citizens [Section 80TTB]
Under Section 80TTB, senior citizens (aged 60 years or above) can claim a deduction of up to ₹50,000 on interest income (Savings account interest, Fixed deposit (FD) interest, Recurring deposit (RD) interest, Interest from post office schemes) earned during a financial year. This deduction replaces Section 80TTA for senior citizens and provides them with a higher benefit. Maximum deduction is ₹50,000, even if the actual interest income exceeds this amount.
Preventive Health Check-up
You can claim a deduction for expenses incurred on preventive health check-ups for yourself, your spouse, dependent children, and parents. This deduction is a part of the overall limit specified under Section 80D for health insurance premiums. This deduction is up to ₹5,000 in a financial year. So, you can couple this deduction with insurance premiums and the health check-up amount up to the said limit of the overall Section 80D limits (₹25,000 for non-senior citizens and ₹50,000 for senior citizens).
Expenses for Specified Diseases [Section 80DDB]
Under Section 80DDB, taxpayers can claim a deduction for medical expenses incurred for the treatment of specified diseases (Diseases such as cancer, chronic renal failure, hemophilia, Parkinson’s disease, thalassemia, AIDS, and other serious illnesses listed under Rule 11DD of the Income Tax Act)or ailments for themselves or their dependents. This benefit is designed to provide relief for high-cost medical treatments. One thing to note is that a certificate in Form 10I should be issued by a specialist working in a government or private hospital to claim this deduction.
Interest on Loan for First-Time Homebuyers [Section 80EE]
Section 80EE provides an additional deduction on the interest paid on home loans for first-time homebuyers. This deduction is over and above the ₹2,00,000 limit under Section 24(b). It aims to encourage home ownership among individuals purchasing affordable housing. Additional ₹50,000 deduction for interest on loans up to ₹35 lakh (property value ≤ ₹50 lakh).
Interest on Electric Vehicle Loan [Section 80EEB]
You can claim a deduction of up to ₹1,50,000 for interest on loans taken for Both two-wheelers and four-wheelers classified as electric vehicles (which runs exclusively on electric motors using energy stored in batteries). Do note that the loan must be sanctioned between April 1, 2019, and March 31, 2025.
Disability Benefits
There are two disability benefits deduction available – Section 80DD and Section 80U for a taxpaying individual.
Section 80DD: Up to ₹75,000 (Criteria is 40%-79% disability) or up to ₹1,25,000 (for severe disability of 80% or more) for dependent care.
Section 80U: Up to ₹75,000 (₹1,25,000 for severe disability) for self-disability.
Note: This deduction requires a certificate from a medical authority as defined under the Persons with Disabilities Act, 1995.
Basic Difference between Section 80U and 80DD:
| Aspect | Section 80U (Self) | Section 80DD (Dependent) |
|---|---|---|
| Who can claim? | The disabled individual | The caregiver (taxpayer) |
| Proof of expenses? | Not required for self | Required for claims |
| Coverage | For the individual only | For dependent’s disability |
Deduction for House Rent Paid [Section 80GG]
Section 80GG provides a deduction for individuals who pay rent for accommodation but do not receive House Rent Allowance (HRA) as part of their salary. It benefits non-salaried individuals and those who are not eligible for HRA. The deduction is capped at ₹60,000 annually. There are certain conditions too:
The deduction is the least of the following:
a. ₹5,000 per month (₹60,000 annually).
b. 25% of the taxpayer’s total adjusted income.
c. Actual rent paid minus 10% of the taxpayer’s adjusted income.
Form 10BA must be submitted to claim this deduction.
*Adjusted income = Gross Total Income – Long-term capital gains – Short-term capital gains under Section 111A – Deductions under Sections 80C to 80U (except 80GG).
Exemptions for Agricultural Income
Agricultural income in India is fully exempt from income tax. Well, there’s a catch. Agricultural income should meet the specified conditions under the Income Tax Act. Agricultural income is defined as income derived from agricultural activities and includes income from:
- Cultivation of Land: Income from crops grown on agricultural land.
- Sale of Agricultural Produce: Income from the sale of produce grown on agricultural land.
- Income from Agricultural Operations: Includes income derived from activities such as plucking, drying, processing, or packaging agricultural products.
- Farmhouses: Income from a farmhouse (if the farm is used for agricultural purposes and the primary income is derived from agriculture).
Consider an example where a person earns ₹3,00,000 from farming on their agricultural land, and ₹2,00,000 from their salaried job. Here, agricultural income is fully exempt from tax. The ₹2,00,000 from their job will be taxed as per their applicable tax slab.
Frequently Asked Questions (FAQs)
What is the designated period for calculating income tax liability?
Income tax is calculated on an annual basis. As per the Income Tax Act, 1961, the period for calculating income tax liability is between 1st April and 31st March of the following calendar year.
Can section 80C benefits be claimed while filing ITR if you have not submitted investment proof to your employer?
Companies take into account the investment proofs to determine your taxable income. It is, therefore, advisable to provide these on time.
However, if have not submitted the proofs, you can still claim the eligible deductions while filing your ITR. Ensure you claim benefits only on investments made during the relevant financial year.
What is the income tax exemption for health insurance plans?
According to section 80D of the Income Tax Act, 1961, you can claim up to INR 25,000 per year paid as health insurance premiums. The deduction is valid for medical insurance plans for self, spouse, children, and parents.
If your parents are aged over 60 years, the deduction is increased to INR 50,000 per annum. Additionally, you may claim up to INR 5,000 for medical checkup expenses, which is within the overall limit available under this section.
Are section 80C benefits available for firms and companies?
No, section 80C benefits are not available for firms and companies. Only individual and Hindu Undivided Family (HUF) taxpayers can claim these deductions.
Can corporate entities claim tax benefits under section 80D?
This section provides tax exemption on premiums paid for health insurance. These are available only for individuals and HUFs. Corporate entities cannot claim benefits under this section.
Moreover, the benefit is available to eligible taxpayers only for payments made in cheques, demand draft, or electronic fund transfers. Premiums paid in cash will not be eligible for section 80D benefits.
What are the available exemptions under section 80DD of the Income Tax Act, 1961?
Section 80DD provides tax benefits of up to INR 50,000 per year for treating disabled dependents. The maximum exemption can also be increased to INR 1 lakh if the disability is severe.
Are all types of allowances taxable for salaried employees?
No, the nature of the allowance determines its taxability. Allowances like HRA, LTA, children’s allowance for education expenses, and hostel expenditures comprising a part of your total salary are partially eligible for tax exemptions. Other allowances like overtime pay, special allowance, and city compensatory allowance are taxable.
Can both co-applicants claim tax benefits on the home loan?
Yes, if both co-applicants are salaried, they can individually claim the benefits available on home loans.
The available benefits are interest of up to INR 2 lakhs and principal repayment of up to INR 1.50 lakhs under sections 24 and 80C of the Income Tax Act, 1961, respectively.
Is HRA benefit available for self-employed individuals?
No, HRA is available only for salaried employees. However, Section 80GG provides a deduction of up to Rs. 60,000 in a financial year for individuals who pay rent for accommodation and don’t have HRA benefit in their salary.
Written and Reviewed by:
Priyanka Rao is a content strategist for Jupiter.Money, and specializes in writing on topics related to finance, banking, budgeting, salary & wages, and other financial matters. She has a passion for creating engaging content that resonates with audiences across various digital platforms. In her free time, Priyanka enjoys traveling and reading, which allows her to gain new perspectives and inspiration for her work. With a keen eye for detail and a creative mindset, Priyanka is committed to creating content that connects well with her readers, enhancing their digital experiences.
Priyanka Rao
Priyanka Rao is a content strategist for Jupiter.Money, and specializes in writing on topics related to finance, banking, budgeting, salary & wages, and other financial matters. She has a passion for creating engaging content that resonates with audiences across various digital platforms. In her free time, Priyanka enjoys traveling and reading, which allows her to gain new perspectives and inspiration for her work. With a keen eye for detail and a creative mindset, Priyanka is committed to creating content that connects well with her readers, enhancing their digital experiences.
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