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Introduction
Salaried employees form the major percentage of the overall taxpayers in the country and the contribution they make to the tax collection is quite significant. Income tax deductions offer the salaried class a wide range of opportunities to save tax. Deductions and exemptions can help one to reduce his/her tax substantially.
There are many great ways to save income tax. All it takes is, for you to make use of the tax-saving instruments wisely, to minimize your tax payments. There are several income tax exemptions available under the income tax act and here we will discuss all of the same.
About Income Tax Exemption For Salaried Individuals
Exemptions as Per Income Tax Act Section 10
House Rent Allowance (HRA) - Many people relocate from one city to another to seek new job opportunities. Consequently, they need to rent accommodation. As a result, the rent paid by the tenant is exempted from taxes by the Indian Government. On the other hand, the employer needs to provide a house rent allowance. The minimum of the following can be claimed as income tax exemption under house rent allowance:
- Total HRA received from the employer
- If the rent is less than 10% of the income, then the taxpayer can claim - Basic salary +Daily Allowance
- 40% of the income (Basic + Daily Allowance) and 50% of income (Basic + DA) in metropolitan cities.
Transportation Allowance - You may have to spend money to commute from your house to your workplace. Transport allowances of up to Rs.19,200 per annum or Rs. 1,600 per month can be exempted from being subject to income tax by the Indian Government if your employer provides you with an allowance for commuting which is known as the transport allowance. For this, you do not need to provide any receipt of the expenditure that you make on commuting to the office. On the other hand, Rs. 1,600 is the monthly income which needs to be paid. Before the exemption limit was capped at Rs. 9,600 per year and Rs. 800 per month.
Education Allowance for Children - Children Education Allowance is another form of expenditure on which income tax exemption is applicable. This benefit is given by the employer to their employees so that they can make use of them to get the income tax exemptions. The monthly limit of this plan is Rs. 100, for a maximum of 2 children.
Income Tax Exemption on Housing Loan - This type of income tax exemption is applicable because you need to change your place due to the job. After relocating you might opt to purchase a house on loan rather than renting one. In case of a home loan, the payment of interest is exempted from tax. This helps the person to get a maximum income tax exemption for about Rs 2 Lakh on interest levied on housing loan.
On top of this, certain conditions apply to this type of income tax exemption. One of them is that the house needs to be occupied by the owner. This exemption is applicable only if your house is still under construction. But the construction must be completed within 3 years. Moreover, an individual can also claim the principal component of the repayment of housing loan as a deduction under section 80C of IT Act up to the maximum limit of Rs.1.5 lakh.
List Of 10 Income Tax Exemptions and Deductions That You Can Claim Under the New Tax Regime for FY 2020-21 (AY 2021-22)
1) Withdrawal by an employee from the Employees' Provident Fund (EPF) is not taxable after 5 years of continuous service.
2) The amount received on the maturity of PPF (Public Provident Fund) account and the yearly interest credited to the PPF balance.
3) Withdrawal from National Pension Scheme (NPS) on maturity or premature closure up to 40% of the amount received on such withdrawal remains tax-free for all. In case of partial withdrawal from NPS, up to 25% of the contributions made by the individual will be tax-free. Employer’s contribution to NPS up to 10% of their basic salary and dearness allowance also remains tax-free.
4) Under Section 10 (10D) of the Income Tax Act, the sum assured and any bonus paid on maturity or surrender of the life insurance plan is tax-free. Maturity proceeds continue to be exempt under Section 10(10D) even in the new regime.
5) The maturity amount including interest received on the Sukanya Samriddhi Yojana will not attract any tax.
6) Conveyance Allowance granted to meet expenditure incurred on conveyance in performance of duties of an office and any allowance granted to an employee to meet the cost of travel on tour or transfer (including relocation) is tax-free.
7) Interest received from post office savings account balances up to Rs. 3,500 annually per individual will remain free from tax.
8) Any scholarship granted to meet education costs is tax-exempt under Section 10 (16) of the Income Tax Act.
9) Gratuity received from the employer up to Rs. 20 lakhs after rendering 5 years of continuous service.
10) Leave encashment received at the time of resignation or retirement up to Rs. 3 lakhs.
FAQS
1. How does Income Tax Exemption work?
Tax exemption is the fiscal exclusion, which lowers the taxable income. A wholesome relief from deceased tax rates or tax can be availed or the tax will be levied for a particular portion. Hence, tax exemption is more important to a general rule than the absence of taxation in some conditions. People are given tax exemptions as it boosts some economic activities.
2. What are the benefits of Tax Exemption?
Tax Exemption Act was revised and was effective April 1, 2017. According to this revision, donations exceeding Rs. 500 to an NGO will be eligible for tax exemption of 50 per cent under Section 80G of the Income Tax Act, 1961. If you contribute to an NGO, you’ll offer aid to feed school kids and also aid yourself with the benefit of a tax deduction.
3. What are allowances?
Allowances are fixed periodic amounts, apart from salary, which is paid by an employer to meet some particular requirements of the employee. E.g., Tiffin allowance, transport allowance, uniform allowance, etc. There are generally three types of allowances for Income-tax Act - taxable allowances, fully exempted allowances and partially exempted allowances.
4. Most of my income is given away in charity and I am left with just enough money to meet my requirements. What will be considered as my income?
What is done after the income is earned by you will not give you tax exemption? However, contribution to approved institutions will give you the benefit of deduction from taxable income under section 80G subject to limits specified therein.
5. Can I claim a deduction for my personal and household expenditure while calculating my taxable income or profit?
No, you cannot claim the deduction of personal expenses while computing the taxable income. While computing income under various heads, a deduction can be claimed only for those expenses which are provided under the Income-tax Act.
End Note
An individual taxpayer opting for the new tax regime announced in 2020 can choose to forgo 70 different tax exemptions and deductions. These include deductions under section 80C for a maximum of Rs 1.5 lakh claimed by investing in specified financial products, section 80D for health insurance premium paid, 80TTA for a deduction on savings account interest earned from a bank or post office etc. However, many tax-exemptions have been left unchanged in the Finance Bill, 2020.
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