In India, the taxation system is governed by the Income Tax Act of 1961, which lays down the rules for how income is taxed. It defines different types of income, along with various exemptions and deductions that taxpayers can claim. The central government collects income tax in India on the basis of tax imposed on individuals, including salaried employees, HUF, corporate, charitable, and religious entities. For salaried employees, tax is usually deducted directly by the employer, known as Tax Deducted at Source (TDS). The employer calculates the tax based on the employee’s total income, which includes salary, bonuses, allowances, and any other perks they may receive.
In this blog, we will understand the tax rate for salaried employees, including key deductions and tax-saving tips.
Income Tax Slabs for Salaried Individuals
The Finance Act,2024, has amended Section 115BAC, making the new tax regime the default tax regime for individuals, Hindu Undivided Families (HUFs), Associations of Persons (AOPs), Bodies of Individuals (BOIs), and Artificial Juridical Persons for the Assessment Year (AY) 2024-25 and onwards. However, eligible taxpayers still have the option to opt for the old tax regime, which allows them to claim various deductions and exemptions.
- Non-Business Cases: Individuals can choose between the old and new tax regimes each year while filing an Income Tax Return (ITR) before the due date under Section 139(1) of the Income
- Business Income: For taxpayers with income from business or profession, the new tax regime is mandatory. However, if they wish to opt for the old tax regime, they must submit Form 10-IEA before the due date under Section 139(1) of the Income Tax Act, 1961.
- Switching Regimes: For taxpayers with business income, the option to switch between the old and new regimes is available only once in a lifetime.
| Old Tax Regime | New Tax Regime u/s 115BAC | ||||
| Income Tax Slab | Income Tax Rate | Surcharge | Income Tax Slab | Income Tax Rate | Surcharge |
| Up to ₹ 2,50,000 | Nil | Nil | Up to ₹ 3,00,000 | Nil | Nil |
| ₹ 2,50,001 – ₹ 5,00,000 | 5% above ₹ 2,50,000 | Nil | ₹ 3,00,001 – ₹ 7,00,000** | 5% above ₹ 3,00,000 | Nil |
| ₹ 5,00,001 – ₹ 10,00,000 | ₹ 12,500 + 20% above ₹ 5,00,000 | Nil | ₹ 7,00,001 – ₹ 10,00,000 | ₹ 20,000 + 10% above ₹ 7,00,000 | Nil |
| ₹ 10,00,001- ₹ 50,00,000 | ₹ 1,12,500 + 30% above ₹ 10,00,000 | Nil | ₹ 10,00,001 – ₹ 12,00,000 | ₹ 50,000 + 15% above ₹ 10,00,000 | Nil |
| ₹ 50,00,001- ₹ 100,00,000 | ₹ 1,12,500 + 30% above ₹ 10,00,000 | 10% | ₹ 12,00,001 – ₹ 15,00,000 | ₹ 80,000 + 20% above ₹ 12,00,000 | Nil |
| ₹ 100,00,001- ₹ 200,00,000 | ₹ 1,12,500 + 30% above ₹ 10,00,000 | 15% | ₹ 15,00,001- ₹ 50,00,000 | ₹ 1,40,000 + 30% above ₹ 15,00,000 | Nil |
| ₹ 200,00,001- ₹ 500,00,000 | ₹ 1,12,500 + 30% above ₹ 10,00,000 | 25% | ₹ 50,00,001- ₹ 100,00,000 | ₹ 1,40,000 + 30% above ₹ 15,00,000 | 10% |
| Above ₹ 500,00,000 | ₹ 1,12,500 + 30% above ₹ 10,00,000 | 37% | ₹ 100,00,001- ₹ 200,00,000 | ₹ 1,40,000 + 30% above ₹ 15,00,000 | 15% |
| Above ₹ ₹ 200,00,001 | ₹ 1,40,000 + 30% above ₹ 15,00,000 | 25% | |||
Deductions and Exemptions for Salaried Employees
Salaried employees are eligible for various exemptions and deductions to reduce their taxable income. These deductions are a key part of tax planning, and understanding them can significantly lower the overall tax liability. Below are the major deductions and exemptions available:
1. Section 80C – Deductions on Investments
Under Section 80C of the Income Tax Act, 1961, the salaried employees can claim deductions for the following investments:
- Employees’ Provident Fund (EPF)
- Public Provident Fund (PPF)
- National Savings Certificate (NSC)
- 5-year fixed deposit with banks
- Tax-saving Fixed Deposit
- Life insurance premiums
- Sukanya Samriddhi Yojana
The total annual deduction limit under this section is ₹1.5 lakhs.
2. House Rent Allowance (HRA)
If a salaried employee lives in rented accommodation, they can claim HRA exemption. The exempted amount is the minimum of the following:
- Actual HRA received
- Rent paid minus 10% of the basic salary
- 50% of salary if residing in a metro city (40% for non-metro cities)
3. Leave Travel Allowance (LTA)
LTA allows employees to claim tax exemption on travel expenses incurred for holidays within India. This exemption is available for the travel of the employee, spouse, children, and dependent parents. However, LTA is only available for travel expenses, not accommodation or food.
4. Standard Deduction
Salaried individuals are eligible for a standard deduction of ₹50,000 from their gross income. This deduction is available to all taxpayers.
5. Medical Insurance Premium (Section 80D)
The salary-earning individuals can claim deductions for medical insurance premiums paid for themselves, their spouse, children, and dependent parents. The maximum limit for deductions is:
- ₹25,000 for individuals below 60 years
- ₹50,000 for senior citizens (above 60 years)
6. Tax Benefits for Education Loan (Section 80E)
Interest on an education loan for higher studies is deductible under Section 80E of the Income Tax Act, 1961. This deduction is available for the employee (or their relative) and has no upper limit. However, the deduction is applicable only for a maximum of 8 years.
7. Other Deductions
- Section 80G: Donations to charitable organisations
- Section 80TTA/80TTB: Interest on savings accounts (up to ₹10,000 for non-senior citizens and ₹50,000 for senior citizens)
- Section 24(b): Deduction on home loan interest (up to ₹2 lakh)
Tax Exemptions for Salaried Employees
1. Pension and gratuity
Gratuity is a lump sum amount paid to an employee upon retirement. Under Section 10(10), gratuity is exempt from tax to a certain extent, depending on whether the employee is covered under the Payment of Gratuity Act, 1972. Pension received is taxable, but the commuted portion of the pension may be partially exempt.
2. Special allowances
Several special allowances provided by the employer may be exempt from tax, depending on their nature. Examples include:
- Conveyance allowance
- Uniform allowance
- Children’s education allowance
3. Perquisites (salary in kind)
In addition to cash salary, some employees receive non-cash benefits, also known as perquisites. These benefits may include company cars, accommodation, stock options, and more. Some of these perquisites are exempt from tax based on the rules specified under the Income Tax Act, 1961.
Tax Planning Tips for Salaried Employees
Follow these tips to maximise your deductions and save tax!
1. Invest in tax-saving instruments
- Section 80C: Take full advantage of the ₹1.5 lakh limit under Section 80C by investing in options like PPF, ELSS, National Savings Certificates, or a 5-year fixed deposit with banks. These investments not only offer tax relief but also help build long-term wealth.
- NPS (National Pension Scheme): Apart from Section 80C, you can invest in NPS under Section 80CCD(1B) for additional deductions of up to ₹50,000, which is over and above the ₹1.5 lakh limit.
2. Claim House Rent Allowance (HRA) and other exemptions
Ensure that you claim exemptions such as House Rent Allowance (HRA) if you are living in rented accommodation. Keep records of rent receipts and the landlord’s PAN number to substantiate your claim in case of an audit.
3. Consider Tax-Free Perquisites
Some benefits provided by employers, such as medical reimbursements, transport allowances, and certain special allowances, are tax-exempt under specific conditions. Make sure to understand the scope of these exemptions and claim them accordingly.
4. Save for Public Provident Fund (PPF) and National Pension Scheme (NPS)
Both PPF and NPS offer tax benefits while also building wealth for your retirement. With NPS, you get an additional benefit under Section 80CCD (1B), which can reduce your taxable income further.
5. Plan for tax rebates and exemptions
Make sure you are utilising rebates such as Section 87A of the Income Tax Act,1961, which can reduce your tax liability if your taxable income is below ₹5 lakhs. Similarly, explore the exemptions available under various sections, including Section 10 (which covers exemptions for retirement benefits, etc.).
6. Ensure proper Tax Deducted at Source (TDS)
Ensure that the tax deducted by your employer under TDS is in accordance with the applicable tax slabs. If there is any discrepancy in TDS deductions or if you believe that too much TDS is being deducted, you can file for a refund while filing your income tax return.
Conclusion
In conclusion, tax planning for salaried employees in India is not just about reducing the tax burden on them; rather, it is about making informed decisions that contribute to long-term financial stability. By understanding the available exemptions and deductions under the Income Tax Act, 1961, employees can optimise their tax liabilities while securing their financial future.
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