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Income Tax Allowances and Deductions

With the filing season hurrying up, the salaried class starts worrying about its taxes. Since, the salaried class contributes a major share in the tax collected overall, it becomes significantly important to understand the tax system, slabs and the tax breakups to ascertain the tax to be paid. This also helps in figuring out how to save taxes through deductions and allowances. Income tax deductions and allowances offer huge opportunities to reduce the tax substantially for the salaried taxpayers.

In this article, some major allowances and deductions have been listed which are available for salaried taxpayers, and using these can help one reduce their tax liability.

Exemption of HRA or House Rent Allowance

A salaried person who stays in a rented accommodation can get the benefit of this allowance. House Rent Allowance or HRA can be totally exempted or partially exempted. This does not apply, if one is not living in rented accommodation and still receives House Rent Allowance. Then, the amount received as HRA falls under taxable income.

House Rent Allowance is claimed by presenting proof of payment of rent by the taxpayer. Rent receipts and agreement or any transaction which proves that payment of rent has taken place and is acceptable for the exemption during the income tax return filing.

The following is claimed for HRA exemption

  • Total House Rent Allowance received from the employer
  • Actual Rent that is paid - 10% of Basic Salary + Daily Allowance
  • 40% of Basic Salary + Daily Allowance for taxpayers living in non-metros and 50% of Basic Salary + Daily Allowance for taxpayers living in metros.

Standard Deductions

It was announced in the Union Budget 2018 that a standard deduction of INR 40,000 for salaried employees is applicable. This deduction replaced the transport allowance of INR 19,200 and medical reimbursement of INR 15,000. This deduction allowed the taxpayers to get an extra exemption of INR 5,800 from the financial year 2018-19. The same limit of standard deduction was raised to INR 50,000 from INR 40,000 in the interim budget of 2019. The standard deductions are deducted from the gross salary as an exemption. If a taxpayer receives a pension from a former employer, it is taxable under salaries head. The taxpayer can claim a standard deduction of INR 50,000 (which was earlier INR 40,000) or the amount of pension or whichever is lesser.

Leave Travel Allowance or LTA

According to the Income Tax laws, every salaried employee gets a Leave Travel Allowance exemption. This allowance is restricted to only travel expenses incurred during leaves taken by the taxpayer. The allowance does not include any cost incurred during the entire trip for shopping, food, leisure expenses or entertainment expenses and others. This allowance can be claimed twice in a block of four years and if an individual does not use this exemption within the block of four years, then it is carried to the next block. The restrictions that are implied on Leave Travel Allowance are

  • Leave Travel Allowance only covers the cost of domestic travel and not of international travel.
  • The travel mode should be either of the following- railways, air travel or public transport.
  • The exemption for travel is available for the employee alone and for his/her family when traveling with him. The family includes spouse, children, and dependents like parents, brothers and sisters of the employee. Also, the exemption is not available for more than two children born after 1st October 1988. Children born before 1988 do not have any restrictions on the numbers.

Section 80C, 80CCC and 80CCD (1)

This is one of the most widely used tax saving options. Section 80C allows any individual or a Hindu Undivided Families or HUF, who are investing or are spending on tax saving plans can claim a deduction of up to 1.5 lakh. Through instruments like NPS, PPF and more, any individual of HUF can claim exemption under Section 80C. Some of these instruments are supported by the Indian Government to encourage savings and investments towards retirement. But this also has certain restrictions. The expenses and investments arising out of capital gains are not allowed as deduction while calculating taxable income. If the HUF or individual only has capital gains as income, then exemption under Section 80C cannot be claimed for saving tax.

Section 80C: Deductions on investments

A deduction of INR 1.5 lakh of the total income can be claimed under Section 80C. Some of the popular investments which are eligible for exemption of up to a maximum of INR 1.5 lakh under Section 80C are mentioned below:

  • School tuition fees for children
  • Life insurance premium
  • Contribution to PPF Account
  • Fixed Deposit (Tax Savings)
  • Principal payment on home loans
  • Post office time deposits
  • Sukanya Samriddhi Account
  • NSC (National Saving Certificate)
  • Equity Linked Savings Scheme (ELSS)

Section 80CCC: Deduction for payment of premium for annuity plan of LIC or any other Insurer

Section 80CCC provides a deduction for any amount paid in any annuity plan of LIC or any other insurer. The plan must be for receiving a pension from a fund referred to in Section 10 (23AAB). The pension, however, is taxable when received upon the surrender of the annuity, including the interest and bonus accrued on the annuity.

Section 80CCD (1): Employees contribution towards pension

This is claimed if the employee pays or makes a deposit in the pension account. The maximum deduction that can be availed is 10% of the salary (in case taxpayer is an employee) or 20% of gross total income (if the taxpayer is self-employed) or Rs. 1.5 lakh – whichever is less.

Insurance Premium Deduction

Life Insurance: 80C

As mentioned earlier, Life Insurance premium paid till INR 1.5 lakhs per annum is tax eligible for tax deduction U/S 80C. Premium paid for self, spouse and dependent children is eligible for this deduction.

Health Insurance: 80D

However, premium paid toward Health Insurance is eligible for tax deduction under Section 80D. This allows an individual to save tax on medical insurance premiums paid towards health insurance of self or for family or dependents like parents.

Section 80D allows the maximum limit of deduction of INR 25,000 for health premiums paid for self, spouse and dependent children. For parents, an additional amount of INR 25,000 per annum is eligible for tax deduction. Premium paid for indemnity health insurance plans as well as fixed benefit health insurance plans, like Critical Illness, Personal Accident, etc. is also eligible for deduction U/S 80D under the above limits.

However, if an individual is more than 60 years of age, the limit is enhanced to INR 50,000 per annum. The table clarifies the same.

Self, Spouse, Dependent Children Premium paid towards Self, Spouse and Dependent Children Health Plan Premium paid towards Parents Health Plan Total Deduction U/S 80D
<60 years INR 25,000 0 INR 25,000
<60 years + parents <60 years INR 25,000 INR 25,000 INR 50,000
<60 years + any one or both Dependent parents >= 60 years INR 25,000 INR 50,000 INR 75,000
>=60 years + Dependent parents >=60 years INR 50,000 INR 50,000 INR 1,00,000

Interest and deduction on Home Loan

Interest on home loan in another good way to save taxes. The owner of the house can claim up to INR 200,000 as a deduction for the interest on the home loans for a property occupied by the taxpayer. If the property is let out to tenants, the deduction for the entire interest on such home loan can be claimed.

From the financial year 2017-18, INR 2,00,000 has been restricted for any loss from house property which can be set off against other sources. One can also claim a deduction under Section 80C on the principal component of the property loan repayment restricted to maximum of INR 1.5 lakh. The deduction limit has been reduced to INR 30,000 if one fails to meet any of the following conditions:

  • The home loan must be for the purchase and construction of a property
  • The loan must be taken on or after 1st April, 1999
  • The purchase or construction must be completed within 5 years from the end of the financial year when the loan was taken.

Deduction on Interest Income

Under Section 80TTA, a deduction of up to INR 40,000 is allowed on the income earned from the interest of savings bank account. Individuals and HUF, both can claim this deduction under Section 80TTA of the Income Tax Act, 1961. If the individual is a senior citizen, the limit stands at Rs. 50,000.

In the cases where the income from bank account interest is less than INR 40,000, the entire amount is allowed as deduction. In case, the income exceeds INR 40,000, the amount exceeding INR 40,000 will be taxed. The deductions are allowed on the following

  • The savings bank account
  • The saving account with a co-operative society carrying on the business of banking
  • The saving account with the post office

Frequently Asked Questions

What is a salaried income?

According to Section 17 of the Income Tax Act, salaried income is what an employee receives from an employer in cash, kind or perquisites.

Under how many heads the income of the taxpayer is classified?

According to Section 14 of the Income Tax Act, the income of the taxpayer is classified under five different heads of income which are:

  • Salaries
  • Profits and Gains of business or profession
  • Capital gains
  • Income from house property
  • Income from any other source

What are allowances?

Allowances are fixed amounts paid to employee, apart from salary, by the employer for meeting particular requirements like food, transport, uniform allowances, etc. For the purpose of income tax, there are three types of allowances- fully exempted, partially exempt allowances and taxable allowances.

Perquisites, on the other hand, are the benefits received by an employee as a result of the position held officially and are given above the salary. These are also taxable and non-taxable depending upon its nature.

When do I have to pay taxes on my income?

The taxes are calculated on the income of the previous financial year. To enable ease of process and regular flow of funds, the Income Tax Act has provision of payment of taxes in advance during the year in which the income is earned. This is generally known as Pay as you earn.

The tax is collected by the government through the following ways

  • Voluntary payment by taxpayers into various designated banks as Advance tax, Self-assessment tax, etc.
  • Tax deducted at source
  • Tax collected at source

What is the difference between Gross total income and Total income?

The taxable income or the income on which tax liability is determined is known as Total income. For computing the tax liability, total income is necessary. Certain deductions, under Section 80C to 80U, are claimed from the gross income to calculate the total income.

What is the rebate under section 87A and who can claim it?

Anyone who is a resident of the Indian subcontinent and whose total income is below INR 5,00,000 can claim the rebate under Section 87A. This rebate is available as a deduction from tax under Section 87A. The rebate is allowed on the amount lower of 100% of the income tax liability or INR 12,500. No rebate can be claimed if the total income exceeds INR 500,000 and, on the amount, exceeding the INR 12,500.

Can a non-resident claim rebate under Section 87A?

Rebate under Section 87A is only available to an individual who is an Indian resident and hence, non-residents cannot claim a rebate under Section 87A.

Are retirement benefits like PF and gratuity taxable?

As a government employee, PF and Gratuity receipts are exempted from tax on retirement. For non-government employees, this is subjected to the limits prescribed in case of gratuity and for PF, it is exempted from taxation if received from recognized PF after continuously rendering service of more than 5 years.

Are receipts from life insurance policy upon maturity taxable?

Any amount received from insurance policy, including bonus is exempted from tax under Section 10(10D). However, the following receipts are subjected to taxation-

  • Sum received under sub-section (3) of Section 80DD
  • Sum received under Keyman insurance policy
  • Sum received in respect of policies issued after 1st April, 2012 in which the amount of premium paid on insurance policy exceeds 10% of the actual capital sum assured and 20% of the sum assured on insurance policies before 1st April 2012.
  • Sum received for insurance on the life of a person with disability or disease on or after 1st April 2013, in respect of which the amount of premium does not exceed 15% of the actual capital assured.