Income Tax Exemptions for Salaried Individuals

21 June 2023
5 min read
Income Tax Exemptions for Salaried Individuals
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Salaried individuals work for a company but do not receive any form of payment from the company. Therefore, they are also known as "company employees." Salaried individuals may be self-employed or employed by a company. The term "salary" refers to the amount paid to an employee by their employer each pay period.

Income tax allowances and deductions allowed to salaried individuals depend on the type of income they earn, their filing status, and their situation. Income tax allowances and deductions allowed to salaried individuals rely on the kind of income they make. 

Deductions

The lower your taxable income, the lower your tax liability. There are multiple provisions by which you can lower your taxable income.

For example, under section 80C, you can save Rs 1.5 lakhs annually. Some of the instruments in 80C are EPF, PPF, five years fixed deposit, Equity Linked Savings Scheme, Insurance policies, etc.

Additionally, you can save taxes if you have a home loan, education loan, medical

insurance, children's tuition fees, and many more. So, it is advisable to put the best use of these deductions every year before paying taxes. Also, a part of total income tax is paid regularly when your employer debits the income tax. This tax is called TDS, or the Tax Deducted at Source.

TDS is the portion that your employer deducts every month on your behalf and is deposited with the Income Tax Department. TDS accounts for a significant portion of the yearly tax for a salaried employee. Your employer will provide a Form 16 (TDS certificate) that details the tax deducted. Based on this, you are entitled to make the remaining payment while filing returns.

The Slab At Which You Will Be Charged Taxes Are Detailed As Follows (Below 60 Years)

Income Tax Slab

Old Tax Regime

New Tax Regime

(until 31st March 2023)

New Tax Regime

(From 1st April 2023)

Rs 0 - Rs 2,50,000

-

-

-

Rs 2,50,000 - Rs 3,00,000

5%

5%

-

Rs 3,00,000 - Rs 5,00,000

5%

5%

5%

Rs 5,00,000 - Rs 6,00,000

20%

10%

5%

Rs 6,00,000 - Rs 7,50,000

20%

10%

10%

Rs 7,50,000 - Rs 9,00,000

20%

15%

10%

Rs 9,00,000 - Rs 10,00,000

20%

15%

15%

Rs 10,00,000 - Rs 12,00,000

30%

20%

15%

Rs 12,00,000 - Rs 12,50,000

30%

20%

20%

Rs 12,50,000 - Rs 15,00,000

30%

25%

20%

More than Rs 15,00,000

30%

30%

30%

Exemption of Allowances For Salaried Employees

  • House Rent Allowance (HRA)

Individuals who live in a rented house/apartment can claim HRA to lower tax outgo. HRA can be wholly or partially exempted from tax. House Rent Allowance (HRA) is a tax benefit provided to employees occupying government or statutory offices whose income does not exceed the prescribed limit. 

You can claim the following as HRA exemption-

  • Rent paid less than 10% of the Basic salary + DA.
  • Total HRA as received from the employer.
  • 40% of the salary for non-metros and 50% of wages for metro cities. 
  • Actual rent should be less than 10% of a person’s basic salary + DA.
  • Leave Travel Allowance

Salaried individuals can get their travel within India exempted from tax. This allowance is applicable for only short distances and can be availed once every year.

Salaried individuals can take only their spouse, children, and parents on this trip. The exemption is allowed on producing original bills of expense.

Leave travel exemption-

  • LTA covers domestic travel only.
  • The mode of travel should be railways, airways, or public transport.
  • An actual journey is a must to claim the exemption
  • The exemption for travel is allowed for the employee alone or with his immediate family only.
  • Standard Deduction

Re-introduced in the 2018 budget, this deduction has replaced the previously used conveyance allowance and medical allowance. As a result, an employee can claim a flat Rs. 40,000 deduction from the total income instead of stating the bifurcation between travel and health as done previously. 

Later, the limit of Rs. 40,000 was increased to Rs. 50,000 in the Interim Budget 2019.

  • Exemption Under Section 89(1) and 10 (10C)

If you have received a portion of your salary in advance, you are allowed some tax relief under Section 89(1).

The same is exempted from tax if you receive compensation for voluntary retirement or separation. This provision is detailed in Section 10(10C). However, the exemption is subjected to the pre-requisite that the receipts comply with rule 2BA and the maximum compensation received does not exceed Rs. 5,00,000.

Many government savings schemes are also included under the deduction of income tax for salaried individuals. These tax savings options are covered under sections 80C, 80CCC, 80CCD, and 80D.

  • Other Exemptions 

- Exemption from the Receipt Upon Opting for Voluntary Retirement

The same is exempted from tax if you receive any compensation on voluntary retirement or separation. This provision is detailed in Section 10(10C). However, the exemption is subjected to the pre-requisite that the receipts comply with rule 2BA and the maximum compensation received does not exceed Rs. 5,00,000.

- Pension: Pension received is considered as salary and thus is taxable. 

- Gratuity: Gratuity is a retirement benefit that an employer provides. An employee is entitled to gratuity upon completing five years of service in that company. However, the amount is paid upon retirement or resignation. Tax treatment of gratuity is complex and depends on the employer’s coverage under the Payment of Gratuity Act. Thus, you should coordinate with your HR for further information on this. 

Conclusion

These are some of the primary ways in which a salaried individual can save tax. You must ensure you are aware of these allowances and use them to your benefit.

With the above highlights, we can conclude that salaried employees have a set of tax-saving benefits which can give them at least some part of tax exemption. Therefore, this can be considered to be very attractive for salaried taxes.

Disclaimer: This blog is solely for educational purposes. The securities/investments quoted here are not recommendatory.

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