Major Contribution to the tax collection comes from the salaried class. Income tax deductions offers great opportunities for saving tax for the salaried class. With the help of these deductions one could reduce his/her tax substantially.
Here we try to list some of the major deductions and allowances which available to the salaried persons, using which one can reduce their income tax liability.
Table of Contents
1. Standard Deduction
Finance Minister of India, in 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.
Standard deduction is also available on Pension income of an individual
2. House Rent Allowance (HRA)
A salaried individual having a rented accommodation can get the benefit of HRA (House Rent Allowance). This could be completely 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 employer
b. Rent paid less 10% of (Basic salary +DA)
c. 40% of salary (Basic+DA) for non-metros and 50% of salary (Basic+DA) for metros
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. Sections 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.
- Life insurance premium
- National Pension Scheme
- Tution fees of children
- Equity Linked Savings Scheme (ELSS)
- Contributions to Public Provident Fund (PPF)
- Employee Provident Fund (EPF)
- Annuity/ Pension Schemes
- Principal payment on home loans
- Sukanya Samriddhi Account
- NSC (National Saving Certificate)
- Fixed Deposit (Tax Savings)
- Post office time deposits
5. Interest on Home Loan (80C & 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.
6. Medical Insurance (80D)
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.
7. Loan for Higher Studies (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.
8. Donations (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.
9. Deductions on Savings Account Interest (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.
10. Deductions for Senior Citizens (80TTB)
Section 80TTB is a provision whereby a taxpayer who is a resident senior citizen, aged 60 years and above at any time during a Financial Year (FY), can claim a specified amount as a deduction from his gross total income for that FY. This section is applicable w.e.f 1 April 2018.
A deduction of lower than Rs 50,000 or an amount from a specified income is allowed from the gross total income. Specified income is any of the following income in aggregate:
- Interest on bank deposits (savings or fixed);
- Interest on deposits held in a co-operative society engaged in the business of banking, including a co-operative land mortgage bank or a co-operative land development bank; or
- Interest on post office deposits
If the specified deposits are held by or on behalf of a partnership firm, an association of persons (AOP) or a body of individuals (BOI), Section 80TTB deduction is not available for the partner of such a firm or for any member of such an AOP or BOI, while computing their total income.
Section 80TTA provides deductions similar to Section 80TTB. However, it provides deductions of interest only on savings account held in a bank, co-operative bank or a post office, from the gross total income of the individual taxpayer or a hindu undivided family upto Rs 10,000.
With the introduction of Section 80TTB exclusively for senior citizens, deductions under Section 80TTA is not available to senior citizens.
11. Deductions for Interest on Home Loan (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.