Salaried employees constitute a substantial portion of the country’s taxpayer base, contributing significantly to overall tax collections. Income tax deductions and allowances present numerous opportunities for tax savings, providing avenues for salaried individuals to reduce their tax liabilities. In this article, we will explore some of the major deductions and allowances available to salaried individuals that can help lower their income tax burdens.
Income Tax Allowances for Salaried Individuals
Salaried individuals residing in rented accommodations can benefit from a House Rent Allowance (HRA), which can be partially or fully exempt from income tax. It’s essential to maintain rent receipts and provide evidence of rent payments when claiming HRA exemptions. The exemption amount for HRA is calculated as the least of the following:
- Total HRA received from your employer
- Rent paid minus 10% of the basic salary + DA
- 40% of salary (Basic salary + DA) for non-metros or 50% of salary (Basic salary + DA) for metros
For the financial year 2022-23, the standard deduction limit is Rs. 50,000 in the old tax regime. The Budget 2023 extended this benefit to the new tax regime for the financial year 2023-24, allowing salaried taxpayers to claim a standard deduction of Rs. 50,000.
Leave Travel Allowance (LTA)
LTA provides exemptions for travel expenses incurred during leaves by salaried employees. However, it does not cover costs related to shopping, food, entertainment, or leisure activities. LTA can be claimed twice in a block of four years, and any unutilized exemption can be carried forward to the next block. Some restrictions apply to LTA, including coverage for domestic travel only and using railway, air travel, or public transport for the journey.
Salaried individuals can claim tax-free reimbursement for mobile and telephone expenses used at their residences. The reimbursement amount can be either the actual bill paid or the amount specified in the salary package, whichever is lower.
Books and Periodicals
The income tax law allows employees to claim tax-free reimbursement for expenses related to books, newspapers, periodicals, journals, and similar items. The reimbursement amount is the lower of the bill or the amount provided in the salary package.
Employers may provide meal coupons like Sodexo, which are generally tax-exempt up to Rs. 50 per meal. Based on an average of 22 working days and two meals a day, this translates to a monthly benefit of Rs. 2,200 and a yearly exemption of Rs. 26,400.
In case an employer asks an employee to relocate for business reasons, expenses related to moving, car transportation, car registration, furniture, and accommodation can be borne by the employer. The tax treatment of these expenses is as follows:
- Car transportation cost: Exempt from tax for the employee if reimbursed against actual bills.
- Car registration charges: Exempt from tax if specific conditions are met.
- Packaging charges: Exempt from tax, whether reimbursed or directly paid by the employer.
- Accommodation: Expenses for the first 15 days of relocation are exempt.
- Train/air tickets: Travel expenses for the employee and family are exempt from tax.
- Brokerage paid on a rented house: Taxable as salary income.
- School admission fees: Taxable beyond the initial 15 days.
Employers may provide education allowances for employees’ children as part of their salary. The exemption for such allowances is up to Rs. 100 per month per child, with a maximum of two children, or Rs. 1,200 annually.
Income Tax Deductions for Salaried Individuals
Section 80C, 80CCC, and 80CCD(1)
Section 80C offers deductions of up to Rs. 1.5 lakh for investments and expenses in specified tax-saving avenues, such as life insurance premiums, ELSS, EPF, home loan principal, tuition fees, PPF, and more.
Medical Expenditure and Insurance Premium (Section 80D)
Section 80D allows deductions for medical insurance premiums, with limits of Rs. 25,000 for self/family and Rs. 50,000 for senior citizen parents. Additionally, up to Rs. 5,000 for health checkups is allowed.
Interest on Home Loan (Section 80C and Section 24)
Interest paid on home loans is eligible for deductions. Homeowners can claim up to Rs. 2 lakh for self-occupied property or the entire interest for a rented property. The principal component of the housing loan can also be claimed under section 80C up to a maximum limit of Rs 1.5 lakh.
Deduction for Loan for Higher Studies (Section 80E)
Section 80E provides deductions for interest on education loans, subject to conditions, for pursuing higher studies in India or abroad. The deduction can be claimed for up to eight assessment years.
Donations (Section 80G)
Section 80G offers deductions for donations made to charitable organizations, with varying percentages depending on the recipient.
Deduction on Savings Account Interest (Section 80TTA)
Section 80TTA allows a deduction of up to Rs. 10,000 on income earned from savings account interest for individuals and HUFs.
Interest on Home Loan (Section 80EE)
Section 80EE allows homeowners to claim an additional deduction of Rs. 50,000 for the interest component of the home loan EMI, subject to specific conditions.
Tax Treatment on Notice Pay and Joining Bonus
If you leave your organization before completing a specified period, the organization may recover the notice pay or joining bonus paid to you initially.
Exemptions on Perquisites
Certain perquisites employers provide, such as cab facilities, health club memberships, gifts or vouchers, and medical expenditures incurred outside India, can be exempt from tax, subject to specified conditions.
Salaried individuals have various options to optimize their tax liabilities through exemptions and deductions. It is essential to understand these provisions and take advantage of them to minimize the income tax burden legally. Consulting with a tax expert or financial advisor can help in optimizing your tax planning and ensuring compliance with tax laws.