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VOOZH | about |
Income Tax is a direct tax that is levied on any individual's or entity's income during a financial year. It is directly paid to the government, like all the other direct taxes. Provisions in the Income Tax Act 1961 also provide for various Exemptions and Deductions under specified sections.
Deductions can be claimed against Investments, Allowances, etc., which can reduce the taxable amount of an individual. In this article, we will discuss some of the major allowances and deductions, available to salaried individuals.
👁 Income Tax Allowance and Deductions for Salaries IndividualsAll the Income Tax Exemptions of Allowances are listed below:
Expenses incurred by employees on staying in rented accommodations can be claimed for deduction under the old tax regime. However, the whole amount of HRA can not be claimed for deduction. The amount for which deduction can be claimed is the least of the following:
Any amount exceeding the limit will be taxable at the prescribed rate.
Leave Travel Allowance provided by the employer to travel for professional work is also taxable under the Income Tax Act. Deduction on the amount received as LTA can be claimed by the employees up to the amount of actual expense incurred (bills should be produced) only twice in 4 years. It doesn't include any expenses for personal travel.
Leave Travel Allowance is restricted to:
At the time of retirement of the employee or when an employee works for 5 continuous years for the same employer and then resigns, he/she is liable to receive a certain sum of amount from the employer as gratuity. Gratuity is a financial reward provided by the employer as gratitude towards their employees.
It is calculated on the employee's last drawn salary and the number of years they worked. Tax treatment of gratuity is decided according to the employer's coverage under the Payment of Gratuity Act.
A certain number of days are provided as leaves by the employer to their employees. When the employees don't claim the total number of leaves credited to them in a year, the leaves can be carried for the next year or can be encashed. The amount received as compensation for the number of days of leave accumulated is called leave encashment. It is taxable under the provisions of income tax but there are some conditions when it is exempted for employees.
The full amount of leave encashment is tax-exempt for central and state government employees. For non-government employees, the least of the following three is exempt:
A Relocation allowance is provided to bear the relocation expenses of the employees moving from one place to another. Allowances can be claimed on various expenses incurred including travel costs, packaging costs, transportation of personal goods, etc.
The point to be noted here is that the amount of actual expense incurred on relocation is liable for exemption and not the total amount provided as relocation allowance. The remaining excess portion of the relocation allowance not claimed will be taxable as per the income slab of the taxpayer.
Before the actual age of retirement (i.e., 60 years), if any employee chooses to voluntarily retire, some amount of money is received by the employee from the employer on their voluntary retirement. Under the Golden Handshake Scheme [Section 10 (10C)], the amount received or receivable is exempted from taxation.
On the retirement of an employee, many employers pay pensions to their employees. The Pension can be provided by the employer directly to the employee or can be paid by an organisation from which an annuity has been purchased by the employer. Up to a certain limit, pension is exempted from taxation.
Various other allowances are provided to the employees in an organisation. Here is the list of other allowances that are exempt under section [Section 10 (14)(i)] upto the actual amount spent on the performance of duties in the office:
Provisions in the Income Tax Act 1961 also provide for various deductions under specified sections. Deductions can be claimed against Investments, Allowances, etc., which can reduce the taxable amount of an individual. Here is the list of various deductions available under different sections mentioned under the Income Tax Act 1961:
A flat deduction of ₹50,000 to all individuals earning a salary is known as standard deduction. From 2023-24, it is offered to all individuals opting for the old tax regime as well as the new tax regime.
A maximum deduction of ₹1,50,000 (including 80CCC and 80 CCD) can be claimed under this section. Certain investments, saving schemes, and some expenditures are allowed under this section. Some of them are:
Some of the investment options available under Section 80C with Rate of Returns and Lock-in Period:
| Investment | Returns | Lock-In Period |
|---|---|---|
| Unit Linked Insurance Plan (ULIP) | Varies with Plan Chosen | 5 years |
| Sukanya Samriddhi Yojana (SSY) | 7.60% | N/A |
| Senior Citizen Saving Scheme (SCSS) | 8% | 5 years |
| Public Provident Fund (PPF) | 7% to 8% | 15 years |
| National Savings Certificate | 7% to 8% | 5 years |
| National Pension System (NPS) | 9% to 12% | Till Retirement |
| ELSS Funds | 15% to 18% | 3 years |
| 5-Year Bank Fixed Deposit | 6% to 7% | 5 years |
Tax benefits are provided by the government to individuals to stimulate them to buy Insurance policies. Section 80D of the Income Tax Act 1961 provides for deductions that can be claimed for an amount varying from ₹25,000 to ₹1,00,000 on medical insurance. It further states:
| Eligibility | Deduction Under Section 80D |
|---|---|
| Health insurance for individuals, spouse, children (below 60 years) | Up to ₹25,000 |
| For individuals and parents (below 60 years) | Up to ₹50,000 (₹25,000 + ₹25,000) |
| For individuals (below 60 years) and Senior Citizen parents | Up to ₹75,000 (₹25,000 + 50,000) |
| For individuals and parents (both above 60 years) | Up to 1,00,000 (₹50,000 + 550,000) |
Besides this, Individuals can opt for Life Insurance Plans. Tax waivers are offered to individuals on life insurance policies purchased by them. Rebate can be claimed on both premium payments and the amount disbursed on maturity.
Deductions under this section are mainly
Note: Premium paid in those plans must be kept deposited in order to avail a deduction.
Any contribution made in a pension scheme notified by the central government by the assessee or the employee comes under this section. The limit under this section is:
In this section, deductions can be claimed on the amount not exceeding ₹40,000 spent on medical expenses that arise for treatment of a disease or ailment mentioned in Rule 11DD of the Act.
Under this section, a claim can be made on the amount paid as interest on loans taken for the cause of higher education for self or a relative.
Under this section, first-time homeowners can claim a deduction on their taxable income. Individuals having their first home purchased of value not more than ₹40 Lakh and the loan taken for which is ₹25 Lakh or less are eligible to claim a deduction under this section.
Under this section, tax can be saved up to an amount of ₹3,00,000 on receiving any income by way of royalties or patents registered under the Patents Act, 1970.
Under this section, any income earned through an interest in a savings bank account, post office, or cooperative society up to ₹10,000 can be claimed for deduction.
This section specifically provides a flat deduction on income tax only applied to disabled people. Up to ₹1,00,000 can be claimed for deduction depending on the severity of the disability.
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