Deductions Available to Salaried Persons

INTRODUCTION-

Tax planning is an essential aspect of financial management, as it helps you reduce your tax liability and optimize your savings. However, tax planning can be a complex and confusing task, especially with the multitude of tax provisions and exemptions available under the Income Tax Act. In this article, we will simplify the process of tax planning by highlighting some of the most common and beneficial allowances and deductions that you can claim to save tax in the fiscal year 2023-24. Whether you are a salaried employee, a self-employed professional, or a business owner, these tax-saving tips will help you make the most of your income and investments.

1. House Rent Allowance (HRA): House Rent Allowance (HRA) is a component of the salary provided by an employer to an employee to cover the expenses related to rented accommodation. The Income Tax Act, under Section 10(13A), provides provisions for tax exemptions on HRA

Taxability of HRA HRA is initially considered as part of your taxable income. However, if you live in a rented accommodation, you can claim a tax exemption either partially or wholly. If you don’t live in a rented accommodation, this allowance is fully taxable.

HRA for Self-Employed and Salaried Individuals While self-employed individuals cannot claim HRA, they can avail tax deductions towards the rented accommodation under Section 80GG. On the other hand, salaried individuals can claim exemptions for HRA under Section 10(13A) of the Income Tax Act.

Conditions to Claim HRA Exemption To claim HRA exemption, you must:

1. Live in rented accommodation.

2. Receive HRA as part of your salary.

3. Submit valid rent receipts and proof of rent payments.

Calculation of HRA Exemption The HRA exemption is calculated as the minimum of the following amounts:

1. Actual HRA received.

2. 50% of [basic salary + DA] for those living in metro cities (40% for non-metros).

3. Actual rent paid less 10% of basic salary + DA.

Landlord’s PAN If you are making a rent payment of over Rs.1 lakh annually, you need to provide the landlord’s PAN. Otherwise, you may lose out on the HRA exemption1.

2. Leave Travel Allowance (LTA): Under the Leave Travel Allowance (LTA), salaried taxpayers can seek reimbursement for expenses related to domestic vacations, including travel tickets for themselves and their families. However, it’s important to note that this exemption does not cover expenses incurred for the entirety of the trip, such as shopping, food, entertainment, and leisure activities. The LTA exemption falls under Section 10(5) and is applicable for up to two journeys within a block of four years. Leave Travel Allowance (LTA), also known as Leave Travel Concession (LTC), is a type of allowance provided by an employer to their employee for travelling within India either on leave, after retirement, or after the termination of service.

Eligibility and Claiming LTA Only individuals can claim LTA for travel costs incurred for themselves and their family. The term ‘family’ includes the employee’s spouse, children, and wholly or mainly dependent parents, brothers, and sisters of the employee.

Conditions for Claiming LTA To claim the LTA exemption, the following conditions must be met:

1. The actual journey is a must to claim the exemption.

2. Only domestic travel is considered for exemption, i.e., travel within India.

3. The exemption for travel is available for the employee alone or with his family.

Amount of LTA Exemption The exemption is available only on the actual travel costs i.e., the air, rail, or bus fare incurred by the employee. No expenses such as local conveyance, sightseeing, hotel accommodation, food, etc., are eligible for this exemption.

LTA Block Years LTA can be claimed for any two years in a block of four years. The current block year for claiming LTA is 2022 to 2025.

3. Children Education Allowance: Salaried individuals have the opportunity to claim special allowances for their children’s educational and hostel expenses. The Children’s Educational Allowance permits an exemption of Rs. 100 per child per month, applicable for a maximum of two children enrolled in an educational institution.

Children’s Education Allowance (CEA) is a type of allowance provided by an employer to their employee to cover the expenses related to their children’s education.

Eligibility and Claiming CEA CEA can be claimed by individuals for expenses incurred for their children’s education. The term ‘children’ includes the employee’s biological children, adopted children, and stepchildren.

Conditions for Claiming CEA To claim the CEA exemption, the following conditions must be met:

1. The actual education expense is a must to claim the exemption.

2. Only domestic education is considered for exemption, i.e., education within India.

3. The exemption for education is available for the employee’s children only.

Amount of CEA Exemption The exemption is available only on the actual education costs i.e., the tuition fee incurred by the employee. No expenses such as development fees, transport fees, etc., are eligible for this exemption.

CEA for Salaried Individuals is provided with the following exemption:

• Children’s Education Allowance: INR 100 per month per child up to a maximum of 2 children.

• Hostel Expenditure Allowance: INR 300 per month per child up to a maximum of 2 children.

Deduction on Tuition Fees under Section 80C A parent can claim a deduction on the actual amount paid as tuition fees to a university, college, school, or any other educational institution. Other components of fees, like development fees and transport fees, are not eligible for deduction under Section 80C. In a financial year, individuals can claim a maximum deduction of Rs 1.5 lakh for payments made towards tuition fees, along with deductions for items such as insurance, provident fund, pension, and others.

4. Section 80C, 80CCC and 80CCD(1): Section 80C stands as one of the most widely utilized avenues for claiming income tax deductions. This section enables individuals to seek deductions for various expenditures and investments made within the financial year, with an upper limit of Rs. 1.5 lakh. Additionally, Section 80CCC permits deductions for investments in annuity plans provided by insurance companies. Moreover, Section 80CCD(1) allows deductions for contributions made to the National Pension System (NPS) account. The combined deduction limit encompassing Sections 80C, 80CCC, and 80CCD(1) remains at Rs. 1.5 lakh.

5. Section 80CCD(1B): Section 80CCD(1B) offers an extra deduction of up to Rs. 50,000 for contributions directed towards the National Pension System (NPS). This additional deduction of Rs. 50,000, specified under Section 80CCD(1B), is accessible on top of the existing benefit of Rs. 1.5 lakh deduction allowed under Section 80CCD(1).

6. Interest on Home Loan (Section 24): Section 24 of the Income Tax Act, 1961, provides for a deduction on the interest paid on home loans. This deduction can be claimed by an individual or a Hindu Undivided Family (HUF) up to Rs. 2 lakh in a financial year. The deduction is available for self-occupied properties.

The loan must be taken for the purchase, construction, repair, renewal, or reconstruction of the property. If the loan is taken for the construction of a house, then the construction must be completed within five years from the end of the financial year in which the loan was taken.

If the property is let out, the entire interest on the home loan is allowed as a deduction. However, if the construction exceeds the stipulated time, i.e., 5 years, you can claim deductions on the interest of the home loan only up to Rs 30,000 for the financial year.

7. Deduction for Laon for Higher Studies (Section 80E): Under Section 80E, you’re entitled to a deduction for the interest paid on education loans taken for higher education, whether for yourself, your spouse, or your children. This deduction encompasses interest payments made to any bank or financial institution. Notably, there’s no ceiling on the deduction amount; however, it’s important to note that the deduction is applicable solely to interest payments, not to principal repayments. Section 80E of the Income Tax Act, 1961, provides for a deduction on the interest paid on education loans. This deduction can be claimed by an individual for a maximum of 8 years, starting from the year in which interest repayment begins. The loan must be taken for higher education of self, spouse, children, or for a student for whom the individual is a legal guardian.

The loan should be taken from any bank, financial institution, or any approved charitable institution. The deduction is available only on the interest amount paid on the loan and not on the principal amount. There is no upper limit for Section 80E exemption up to which you can claim the deduction. Whatever amount you have paid as interest in a financial year can be claimed as a deduction.

8. Donations (Section 80G): If you’ve contributed to approved charitable institutions in the preceding year, you’re eligible to claim deductions for these donations under Section 80G. The extent of tax deductions varies depending on the recipient organization, ranging from 50% to 100% of the donated amount. It’s recommended to make donations via cheque, as cash donations exceeding Rs. 2,000 are ineligible for deduction.

9. Interest on Home Loan (80EE): Section 80EE offers an additional deduction of Rs. 50,000 specifically for interest paid on home loans. This deduction is separate from the Rs. 2 lakh deduction available under Section 24. However, there are certain conditions that must be met:

• You should be a first-time homebuyer.

• You should not own any other residential property.

• The loan must be sanctioned between 1st April 2016 and 31st March 2017.

• Home loan should be upto Rs 35 lakh.

The value of residential property should be upto Rs 50 lakh.