Income Tax Exemptions for Salaried Employees

Income tax exemptions for salaried employees are special financial benefits that help lower the amount of tax they have to pay. These benefits aim to encourage economic growth, encourage people to save money and support certain sectors of the economy. There are various exemptions available under the Income Tax Act of 1961, but they might change over time based on government rules. In this article, we'll talk about the tax exemptions that salaried individuals can get.

What is an Income Tax Exemption?

Income Tax Exemption in India is like a special benefit that helps individuals and businesses to lower the amount of money they have to pay as taxes. This means they might end up paying less or even no tax for certain types of income according to the rules set by the Government of India.

It's important to know that these tax deductions and exemptions are mostly available under the old tax rules. However, there are a few deductions you can still get under the new tax rules for the financial year 2024-25. When you file your Income Tax Returns you'll need to choose between the old and new tax rules. It's a good idea to compare them first to see which one works better for you.
 

List of Income Tax Exemptions for Salaried Employees

1. Standard Deduction

In both the old and new tax regimes, salaried employees are eligible for a standard deduction of Rs. 50,000. This deduction reduces the taxable income directly.

2. Exempted Allowances under Income Tax Act Section 10

House Rent Allowance (HRA)

House Rent Allowance is a benefit for people who live in rented homes and work as salaried employees. It helps reduce the taxable portion of their salary. However, under a new tax system you might have to pay taxes on the HRA you receive.

Whether or not you need to provide rent receipts to your employer, you can still claim tax deductions for HRA. The deduction is calculated based on whichever amount is the least among these three:

1. The total HRA you receive from your employer.
2. Actual Rent paid less than 10% of basic salary + any dearness allowance you get.
3. You can get either half of your salary if you live in a metro area or 40% if you're in a non-metro area.

The smallest of these three amounts will be considered for tax deductions.

Transport Allowance

This allowance helps cover commuting costs between your home and workplace. It's tax free under Section 10(14)(ii) of the Income Tax Act, 1961, up to a maximum of Rs. 1,600 per month.

Children Education Allowance

Employers may provide CEA to assist with children's education expenses. It's exempt from tax under Section 10(14)(i) of the Income Tax Act, 1961, You can receive Rs 100 per child each month for up to two children.

Subsidy on Hostel Facility

A subsidy on hostel facility is money given by the government or schools to students to help cover the expenses of living in a hostel. This subsidy is not taxed as income according to Section 10(14)(i) of the Income Tax Act, 1961, but there are specific conditions that must be met.

3. Tax Benefits for Home Loans

• Interest Payment (Section 24(b))
You are eligible to avail a deduction of up to Rs 2 lakhs per year for the interest you pay on your housing loan. This rule is applicable regardless whether you live in the house or rent it out.

• Principal Repayment (Section 80C)
Salaried employees have the opportunity to claim a deduction of up to Rs. 1.5 lakhs per year for the amount they repay towards the principal of the housing loan. This deduction is available regardless of whether you live in the house or rent it out.

4. Income Tax Exemption Sections in the IT Act, 1961

The Income Tax Act of 1961 offers various tax breaks and deductions to support specific social and economic goals, like encouraging savings, investments, and charitable contributions. Here are some important sections for tax exemptions under this Act

Section 80C

The government aims to incentivize individuals to invest in various financial avenues or make specific payments particularly under the old tax regime. Section 80C of the Income Tax Act, 1961 allows for a deduction of up to Rs. 1.5 lakh annually for certain investments and payments. These eligible investments and payments include:

1. Child Plans
2. Unit Linked Insurance Plans (ULIP)
3. Capital Guarantee Plans
4. Employee Provident Fund (EPF)
5. Home Loan Principal Payment
6. Equity Linked Savings Scheme (ELSS)
7. Life Insurance Premium
8. Sukanya Samriddhi Yojana (SSY)
9. Public Provident Fund (PPF)
10. Tax Saving Fixed Deposit
11. Tuition Fees for Children
12. National Saving Certificate

Section 80CCC

Section 80CCC, within the Income Tax Act of India, 1961, is an extension of Section 80C. It allows individuals to claim an additional deduction of up to Rs. 1.5 lakhs annually from their taxable income. This deduction is for contributions made to specific pension plans offered by life insurance companies.

The pension plans eligible for this deduction include:

1. Annuity plans and pension plans provided by life insurance companies.
2. Pension plans offered by the Government of India or any State Government such as the National Pension Scheme.

Section 80CCD(1)

Allows a deduction of up to 10% of salary for contributions to NPS, available for both employee and employer contributions under the old tax regime.

Section 80CCD(2)

Section 80CCD(2) of the Income Tax Act permits you to receive a deduction from your taxable income for contributions made by your employer towards the National Pension System. The deduction can be up to 14% of your salary (basic salary + DA) if you are a central government employee or up to 10% if you are any other employee.

Section 80CCG

Offers a deduction of up to 50% of the amount invested in equity shares or equity oriented funds, with a maximum deduction limit of Rs. 25,000 per year. This benefits first time equity investors.