Salaried employees form the major chunk of the overall taxpayers in the country and the contribution they make to the tax collection is quite significant. Income tax deductions offer a gamut of opportunities for saving tax for the salaried class. With the help of these deductions and exemptions and, one could reduce his/her tax substantially.
In this article, we try to list some of the major deductions and allowances, available to the salaried persons, using which one can reduce their income tax liability.
A salaried individual having a rented accommodation can get the benefit of HRA (House Rent Allowance). This could be totally or partially exempted from income tax. However, if you aren’t living in any rented accommodation and still continue to receive HRA, it will be taxable.If you couldn’t submit rent receipts to your employer as proof to claim HRA, you can still claim the exemption while filing your income tax return. So, please keep rent receipts and evidence of any payment made towards rent. You may claim the least of the following as HRA exemption.a. Total HRA received from your employerb. Rent paid less 10% of (Basic salary +DA)c. 40% of salary (Basic+DA) for non-metros and 50% of salary (Basic+DA) for metrosRead more about how to claim HRA exemption.
2. Standard Deduction
The Indian Finance Minister, while presenting the Union Budget 2018, announced a standard deduction amounting to Rs. 40,000 for salaried employees. This was in the place of the transport allowance (Rs. 19,200) and medical reimbursement (Rs. 15,000). As a result, salaried people could avail an additional income tax exemption of Rs. 5,800 in FY 2018-19. The limit of Rs. 40,000 has been increased to Rs. 50,000 in the Interim Budget 2019.Read more on Standard Deduction
3. Leave Travel Allowance (LTA)
The income tax law also provides for an LTA exemption to salaried employees, restricted to travel expenses incurred during leaves by them. Please note that the exemption doesn’t include costs incurred for the entire trip such as shopping, food expenses, entertainment and leisure among others.You can claim LTA twice in a block of four years. In case an individual doesn’t use this exemption within a block, he/she could carry the same to the next block.Below are the restrictions which are applicable to LTA:
LTA only covers domestic travel and not the cost of international travel
The mode of such travel must be either railway, air travel, or public transport
4. Mobile reimbursement
A taxpayer may incur expenses on mobile and telephone used at residence. The income tax law allows an employee to claim a tax free reimbursement of expenses incurred. An employee can claim reimbursement of the actual bill amount paid or amount provided in the salary package, whichever is lower.
5. Books and Periodicals
Employees incur expenses on books, newspapers, periodicals, journals and so on. The income tax law allows an employee to claim a tax free reimbursement of the expenses incurred. The reimbursement allowed to an employee is the lower of the bill amount or the amount provided in the salary package.
6. Food coupons
Your employer may provide you with meal coupons such as sodexo. Such food coupons are taxable as perquisite in the hands of the employee. However, such meal coupons are tax exempt up to Rs 50 per meal. A calculation based on 22 working days and 2 meals a day results in a monthly benefit of Rs 2,200 (22*100). Consequently, the yearly exemption works up to Rs 26,400.
Read more about how to claim LTA
7. Section 80C, 80CCC and 80CCD(1)
Section 80C is the most extensively used option for saving income tax. Here, an individual or a HUF (Hindu Undivided Families) who invests or spends on stipulated tax-saving avenues can claim deduction up to Rs. 1.5 lakh for tax deduction. The Indian government too supports a few as the tax saving instruments (PPF, NPS etc.) to encourage individuals to save and invest towards retirement.Expenditures/investment u/s 80C isn’t allowed as a deduction from income arising due to capital gains. It means that if the income of an individual comprises of capital gains alone, then Section 80C cannot be used for saving tax. Some of such investments are given below which are eligible for an exemption under Section 80C, 80CCC and 80CCD(1) up to a maximum of Rs 1.5 lakh.
Section 80D is a deduction you can claim on medical expenses. One could save tax on medical insurance premiums paid for the health of self, family and dependent parents. The limit for Section 80D deduction is Rs 25,000 for premiums paid for self/family. For premiums paid for senior citizen parents, you can claim deductions of up to Rs 50,000. Additionally, health checkups to the extent of Rs 5,000 are also allowed and covered within the overall limit.
Your employer may pay premium on your behalf and deduct it from your salaries. Such premium paid is also eligible for deduction under section 80D.
9. Interest on Home Loan (Section 80C and Section 24)
Another key tax saving tool is the interest paid on home loans. Homeowners have the option to claim up to Rs. 2 lakh as a deduction for interest on home loan for self-occupied property. If the house property is let out, you can claim a deduction for the entire interest pertaining to such a home loan.Please note that from FY 2017-18, the loss from house property that can be set off against other sources of income has been restricted to Rs. 2 lakh. In addition to the above, one can also claim the principal component of the housing loan repayment as a deduction under 80C up to a maximum limit of Rs 1.5 lakh.Read more about deductions from house property
10. Deduction for Loan for Higher Studies (Section 80E)
Income Tax Act provides a deduction for interest on education loans. The significant conditions attached to claiming such deduction are that the loan should have been taken from a bank or a financial institution for pursuing higher studies (in India or abroad) by the individual himself or his spouse or children.One may begin claiming this deduction beginning from the year in which the loan starts getting repaid and up to the next seven years (i.e. total of 8 assessment years) or before repayment of the loan, whichever is earlier. Even a legal guardian could avail this income tax deduction.Read more about deductions from Section 80E
11. Deduction for Donations (Section 80G)
Section 80G of the Income Tax Act, 1961 offers income tax deduction to an assessee, who makes donations to charitable organizations. This deduction varies based on the receiving organisation, which implies that one may avail deduction of 50% or 100% of the amount donated, with or without restriction.
Read more about Section 80G
12. Deduction on Savings Account Interest (Section 80TTA)
Section 80TTA of the Income Tax Act, 1961 offers a deduction of up to INR 10,000 on income earned from savings account interest. This exemption is available for Individuals and HUFs.In case the income from bank interest is less than INR 10,000, the whole amount will be allowed as a deduction. However, in case the income from bank interest exceeds INR 10,000, the amount after that would be taxable.Read more about deduction from Section 80TTA
13. Additional Deduction for Interest on Home Loan (Section 80EE)
Section 80EE allows homeowners to claim an additional deduction of Rs.50,000 (Section 24) for interest component of the home loan EMI.Provided, the loan must not be for more than Rs 35,00,000 and the value of the property must not be more than Rs 50,00,000. Furthermore, the individual must not have any other property registered under his name at the time the loan is sanctioned.Read more about deduction from Section 80EE
14. Income tax exemption on relocation allowance
Businesses, these days operate in multiple locations across the country. There are possibilities that you are asked to shift to a different city for business reasons. Such a relocation can cause expenses such as shifting to a new house, moving furniture, car transportation cost, car registration charges, getting your kids admitted to a new school, and more.
Fortunately, these expenses are to be borne by the employer. Sometimes, the employer makes a direct payment for such expenses. Here is a summary of the tax liability of these expenses.
Car transportation cost: An employee may incur expenses on transportation of the car to the new place. The employer may reimburse the transportation expenses to the employee against actual bills submitted by the employee. For example, expenses may be incurred on movers and packers. Such expenses whether reimbursed to the employee or directly paid to the transporters are exempt from tax for the employee.
Car registration charges: Most of the states within India charge car registration charges for entry of the vehicle in their state. Certain conditions must be met for the car registration charges to be exempt from taxes. That is, the car must be registered in the name of the employee. The same car must be used to travel on transfer to be considered as part of packaging and transportation cost. Upon meeting the above conditions, any expenses reimbursed by the employer to the employee are exempt from tax for the employee.
Packaging charges: The expenditure on the packaging and moving of the furniture, irrespective of reimbursement or direct payment by the employer, are exempt from tax for the employee.
Accommodation: The employer may provide accommodation facilities for the initial 15 days once you relocate. Such expense will include boarding and lodging expenses including any meals forming part of such expenses. The expenses reimbursed or met by the employer will be exempt from tax for the employee.
Train/air tickets: The travelling expenses for the employee and his family from the current place of residence to the place of new employment are exempt from tax.
Brokerage paid on rented house: If the employee has paid brokerage charges for finding a house for rent, the expenses incurred are considered to be towards personal obligation of the employee. The reimbursed if any received by an employer is taxable as salary income of the employee.
School admission fees: Though your employer reimburses the school admission fees for your kids, this type of expense is considered to be a monetary benefit of the employee. Therefore, the reimbursement is taxable as salary income of the employee.
Any expenses incurred beyond the period of 15 days will be taxable.
15. Tax treatment on Notice Pay and Joining Bonus
Some companies ask you to sign a bond or agreement stating you will serve the company for a specified period of time. If you happen to leave the organisation before completing this period, the organisation may recover the notice pay or the joining bonus paid to you initially. The tax liabilities for these components are explained with illustrations below:
Notice Pay: Consider that Mr C, with a work experience of 1 year 6 months, was working with Organisation A with an agreement of 2 years. The agreement stated that if he quits the job within the agreement period, he must pay the salary of 3 months as notice pay.
Mr C wanted to quit the job and join the Organisation B. The new firm agreed to pay the notice amount so that Mr C could join them sooner. Mr C wants a refund on TDS for the notice pay as he has not received the salary from Organisation 1.
In this case, the former organisation must not include the notice pay under the ‘total salary paid’ category in Form 16. This helps Mr C get a TDS refund on the notice pay. If the organisation does not make necessary adjustments in Form 16, Mr C cannot get a refund.
Joining Bonus: Consider the case of Mr C. Say, he had received a joining bonus of Rs.100,000 from Organisation 1 while joining. Since he has not completed the agreement period, he must pay back the joining bonus while leaving the company. Let us consider that he asks the new company to reimburse the joining bonus for him and the new organisation does reimburse.
In this case, Mr C must check the Form 16 given by both the organisations. If Organisation 1 has also included the joining bonus in Form 16, then Mr C will not be able to obtain a refund of the TDS from the income tax department. In this case, the TDS is a dead loss that can neither be recovered or adjusted in ITR.
16. Cab facility transport provided by employer
Employers generally provide cab facility to and from the office and residence of the employees. Such a facility is not taxed as a perquisite for the employee. The facility would be an expense for the employer.
As per the Indian Income Tax Act, use of any vehicle provided by a company or an employer for a journey by the employee from his residence to his office or another place of work, shall not be regarded as a taxable perquisite, even if provided to him free of cost or at a concessional rate.
17. Health club facility provided by employer
In the case of a health club facility provided by employer uniformly to all employees, the facility is not taxable as a perquisite in the hands of the employee.
18. Gifts or vouchers provided by employer
Gifts or vouchers given by an employer in cash or in kind are tax exempt up to Rs 5,000 per year.
19. Medical expenditure incurred outside India on employee
In a case where the employer incurs expenditure on medical treatment outside India:
On the employee
Any member of the family of such employee
Travel and stay abroad of the employee or any member of the family in connection with the medical treatment
Travel and stay abroad of one attendant who accompanies the patient in connection with the medical treatment
‘Family’ means the spouse and children of the individual. Also the parents, brothers and sisters of the individual or any of them, wholly or mainly dependent on the individual.
The above expenditure would be exempt from tax for the employee subject to the condition that –
a. The expenditure on medical treatment and stay abroad shall be exempted only to the extent permitted by the Reserve Bank of India; and
b. The expenditure on travel shall be excluded from perquisite only in the case of an employee whose gross total income, as computed before including therein the said expenditure, does not exceed two lakh rupees.