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.
Here are some of the income tax exemptions available if you are salaried.
House Rent Allowance (HRA)
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)
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
The standard deduction replaced medical reimbursement and transport allowance exemptions. The total amount available is INR 50,000 per year.
Interest on home loan
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
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.
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.
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.
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 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 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 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.
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.
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