Income Tax Exemptions for Salaried Employees

What is an Income Tax Exemption?

Income Tax Exemption in India is the benefit that allows individuals and businesses to reduce their taxable income. This results in lower or no tax liability for certain income sources as per the income tax regime and regulations set by the Government of India.

It must be noted that tax deductions and exemptions are available with the old tax regime. But, you can avail of a few tax deductions under the new tax regime for FY 2023-23 (AY 2024-25). You should decide the income tax regime while filing your Income Tax Returns (ITR) after making a comparison between the Old vs. New Tax Regime.

Common income tax exemptions in India include deductions for investing in tax-saving instruments such as follows:

• Standard Deduction under New and Old Tax Regime

• Allowances Exempted as per Income Tax Act Section 10

• Income Tax Exemption on Housing Loan

• Various Sections for Income Tax Exemption under the IT Act, 1961

• Deductions Mentioned below Chapter VIA of the Income Tax Act

It is important to stay updated with the latest income tax rules and regulations, as they may change over time.

1. Standard Deduction under New and Old Tax Regime

   In the financial year 2022-23, the standard deduction limit in the old tax regime is Rs. 50,000. 

   Also, the new tax regime introduced in the Budget 2023 also provides a standard deduction of Rs. 50,000 to the salaried employees, starting from the financial year 2023-24.

2. Allowances Exempted as per Income Tax Act Section 10

   The following allowances are exempted from taxable income under Section 10:

   • House Rent Allowance (HRA)

   • Allowance on Transportation

   • Children Education Allowance

   • Subsidy on Hostel Facility

   • Income Tax Exemption on Housing Loan

   Details of Exemptions Provided under Section 10:

   • House Rent Allowance (HRA)

     House Rent Allowance (HRA) is a type of allowance that is provided by employers to their employees to help them meet the cost of renting accommodation. HRA is exempt from income tax under Section 10(13A) of the Income Tax Act, 1961, subject to certain conditions.

     Eligibility for HRA exemption

     • You must be a salaried employee.

     • You must have received HRA from your employer.

     • You must be actually paying rent for their accommodation.

     • The rented accommodation must be situated in India.

     Amount of HRA exemption

     • Actual HRA received from the employer.

     • 50% of the basic salary (for employees living in metro cities) or 40% of the basic salary (for employees living in non-metro cities).

     • Excess of actual rent paid over 10% of the basic salary.

   • Allowance on Transportation

     Allowance on transportation, also known as transport allowance, is an allowance that is provided by employers to their employees to help them meet the cost of commuting between their residence and place of work. Transport allowance is exempt from income tax under Section 10(14)(ii) of the Income Tax Act, 1961, subject to a maximum limit of Rs. 1,600 per month.

   • Children Education Allowance

     Children Education Allowance (CEA) is an allowance that is provided by employers to their employees to help them meet the cost of educating their children. CEA is exempt from income tax under Section 10(14)(i) of the Income Tax Act, 1961, subject to a maximum limit of Rs. 100 per month per child, up to a maximum of two children.

   • Subsidy on Hostel Facility

     A subsidy on a hostel facility is financial assistance provided by the government or an educational institution to students to help them meet the cost of staying in a hostel. Subsidy on hostel facilities is exempt from income tax under Section 10(14)(i) of the Income Tax Act, 1961, subject to certain conditions.

     Other Allowances That Provide Income Tax Exemptions:

     • High Altitude Allowance

     • Special Compensatory Allowance

     • Counter Insurgency Allowance

     • Island Duty Allowance

     • Allowances applicable to North East

     • High Active Field Area Allowance

     • Compensatory Field Area Allowance

     • Tribal Allowance

     • Uniform allowance, etc.

     The allowances mentioned above are tax-free, but make sure that you submit genuine proof of the expense.

   

3. Income Tax Exemption on Home Loan

   You can claim income tax exemption on housing loans under two sections of the Income Tax Act 1961:

   • Section 24(b) for interest paid on housing loan

   • Section 80C for principal repayment of housing loan

   • Section 24(b)

     Section 24(b) allows you to claim a deduction of up to Rs. 2 lakhs per annum for the interest paid on a housing loan. This deduction is available for both self-occupied and rented houses.

   • Section 80C

     Section 80C allows salaried employees to claim a deduction of up to Rs. 1.5 lakhs per annum for the principal repayment of the housing loan. This deduction is also available for both self-occupied and rented houses.

4. Sections for Income Tax Exemption under IT Act, 1961

   The Income Tax Act, 1961 provides you with a number of income tax exemptions and deductions. These exemptions are granted to promote certain social or economic objectives, such as encouraging savings, investment, or charitable giving.

   Some of the key sections for income tax exemption under the IT Act 1961 are as follows:

• Section 80C

  The government wishes to encourage you to invest in the best investment options or other payments if you choose the old tax regime. Subsequently, Section 80C of the Income Tax Act, 1961 provides for a deduction of up to Rs. 1.5 lakh per annum for certain investments and payments. The investments and payments that are eligible for deduction under Section 80C are as follows:

  • Unit Linked Insurance Plans (ULIP)

  • Child Plans

  • Capital Guarantee Plans

  • Employee Provident Fund (EPF)

  • Life Insurance Premium

  • Equity Linked Savings Scheme (ELSS)

  • Home Loan Principal Payment

  • Sukanya Samriddhi Yojana (SSY)

  • Tuition Fees for Children

  • Public Provident Fund (PPF)

  • National Saving Certificate (NSC)

  • Tax-Saving Fixed Deposit (Tax-Saver FD)

• Section 80CCC

  Section 80CCC of the Income Tax Act of India, 1961, is a subsection of Section 80C. It allows you to claim an additional deduction of up to Rs. 1.5 lakhs per annum from your total taxable income for contributions made to certain pension plans provided by life insurance companies.

  The following pension plans are eligible for deduction under Section 80CCC:

  • Annuity plans and pension plans offered by life insurance companies

  • Pension plans offered by the Government of India or any State Government, like the National Pension Scheme (NPS)

• Section 80CCD(1)

  This section of the IT Act allows you to claim a deduction of up to 10% of their salary (basic salary + DA) made by them towards the National Pension System (NPS). The deduction is available for both the employer’s contribution and the employee’s contribution in the old tax regime. 

  NOTE: The employee’s contribution to NPS is not eligible for income tax exemptions under Section 80CCD(1) in the new tax regime.

• Section 80CCD(2)

  Section 80CCD(2) of the IT Act allows you to claim a deduction of up to 14% (in the case of central government employees) or 10% (in the case of any other employee) of their salary (basic salary + DA) made by their employer towards the National Pension System (NPS). 

  NOTE: The tax exemption under Section 80CCD(2) is also available with the new tax regime.

• Section 80CCG

  This is a tax-saving provision for first-time equity investors. It allows you to claim a deduction of up to 50% of the amount invested in equity shares or units of an equity-oriented fund, subject to a maximum deduction of Rs. 25,000 per annum.

1. Deductions Mentioned below Chapter VIA of the Income Tax Act

   The deductions under Chapter VIA are designed to reduce your taxable income and encourage you to save and invest.

   The following are the deductions mentioned below in Chapter VIA of the Income Tax Act:

   • Section 80D: Medical Insurance Deduction

     As per section 80D, the income tax exemption is applicable for those who have taken medical insurance for themselves, their family as well as their parents. Under Section 80D of the IT Act, one can claim a deduction on medical expenses. The limit of 80D exemption is Rs. 25,000 for the premium paid for family/self. In the case of senior citizens, tax exemption claims can be made up to Rs. 50,000. Moreover, health check-ups to the limit of Rs. 5,000 are also allowed and covered within the overall limit.

   • Section 80DD: Income Tax Exemption for Maintenance of Disabled Dependent

     This section offers an additional income tax exemption of about Rs 50,000. Following are the conditions that you need to fulfil in order to avail the benefits of this section:

     • You must be the guardian of a differently abled individual. That person can be physically or mentally disabled.

     • You have to get a certificate from an authorised medical practitioner.

     • All the expenses arising from rehabilitation, training, treatment, and nursing.

     Therefore, any amount deposited under any scheme taken for the differently abled dependent will be entitled to income tax exemption. Deductions of about Rs 1,00,000 can be claimed if the dependent is suffering from any severe disability.

   • Section 80DDB: Serious Ailment Deduction

     This deduction is primarily for those who need to get treatment for serious diseases. As per this section, you can avail a deduction of Rs 40,000 against your income tax. The income tax deduction limit for senior citizens is Rs. 1,00,000. Also, the tax deduction is applicable to the expenditure made to treat a disease of self or someone dependent.

   • Section 80E: Deduction on Loan for Higher Studies

     Similar to the home loan interest, income tax exemptions can also be claimed for interest on education loans.

     • An education loan can be taken from any financial institution.

     • The tax deduction can be availed for up to 7 years.

     • The advantage of this facility is that it can be utilised only in the case of higher education.

     • The benefit can be utilised only for the person or his spouse/children. Even the legal guardian of the scholar can reap the benefit of income tax exemption.

   • Section 80G: Deduction for Donations

     The donations made to the charitable organisation are entitled to income tax exemption under Section 80G of the Income Tax Act, 1961. The deductions vary depending on the nature of the receiving organisation, which means that it may be 100% or 50% of the donation made.

   • Section 80GG: Deduction on House Rent Paid

     You are eligible for deductions under Section 80GG if you are unable to leverage the benefits of House Rent Allowance (HRA) from your company. The income tax exemption for the eligible taxpayers is the lower of,

     • Rent is less than 10% of salary

     • Rs. 5000 per month, i.e. Maximum Deduction is 60,000.

     • 25% of the total income

     Conditions to Avail Tax Exemption under Section 80GG:

     • The employee or his partner or minor child must not possess an accommodation in the city they are working in.

     • House Rent Allowance (HRA) must not be provided by the employee.

     • The employee must not possess any self-occupied residential location in any place.

   • Section 80GGA

     Section 80GGA of the Income Tax Act of India, 1961, allows you to claim a deduction for donations made towards scientific research or rural development. The deduction is available for donations made to organisations that are approved by the Income Tax Department for this purpose.

   • Section 80GGC

     This section of the IT Act provides you with a tax exemption for donations made to registered political parties or electoral trusts. The deduction is available for donations made through any mode other than cash.

   • Section 80QQB

     Section 80QQB of the IT Act, 1961, allows you to claim a deduction for royalty income earned from the sale of books. The deduction is available for royalties earned on literary, artistic, and scientific books. However, royalties earned on textbooks, journals, and diaries are not eligible for deduction.

   • Section 80RRB

     This section allows you to claim a deduction for royalty income received from patents. The deduction is available for royalties received from the use of patents in India or abroad.

   • Section 80TTA: Saving Account Interest Deduction

     If you earn Rs. 10,000 or above in interest income from your savings account, then you can claim a deduction of up to Rs. 10,000 from your taxable income.

   • Section 80U: Deduction for Disabled

     If you are suffering from a disability, then you can claim a deduction for certain expenses related to your disability under Section 80U of the Income Tax Act of India, 1961. The maximum deduction that can be claimed under Section 80U is Rs. 75,000 per annum. The deduction is available for the following expenses:

     • Medical treatment, including the cost of medicines, hospital stays, and doctor’s fees.

     • Purchase of artificial limbs and appliances.

     • Education and training expenses.

     • Transportation expenses.

     • Other expenses incurred for the rehabilitation of the disabled person.

Conclusion

Income tax exemptions in India play a crucial role in reducing your tax burden and promoting economic growth. These exemptions are designed to incentivise savings, investment, and specific economic activities, benefiting both the taxpayer and the overall financial health of the nation.