A Guide to Salary Tax Exemptions and Deductions

By greytHR
3 minute read ● April 27, 2023
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A Guide to Salary Tax Exemptions and Deductions

The intricacies of income tax can be overwhelming, particularly for salaried individuals. However, employers can assist their employees in saving money and attaining financial stability.

During our Parichay‒Ask the Expert session, CA Ruchika Bhagat, Managing Director of Brooks Consulting Pvt Ltd, shared her expertise on tax exemptions and deductions.

In this blog, we've summarised our takeaways from the session and our own research. Read on to discover how you can help employees control their finances better.

What are the different salary components?

  • Two types of components
  • Fixed components (e.g., HRA)
  • Variable components (bonus, commission, etc.)
  • Basic salary (to be 50% of CTC)
  • Allowances (monetary benefits for housing, dearness allowance, etc.)
  • Perquisites (e.g., car for GM or CFO)
  • Bonus, commission & leave travel concessions
  • Social security benefits (ESI, PF, etc.)
  • Gratuity
  • Retrenchment compensation
  • Other components with different names (all are taxable)

How is income tax calculated for salaried employees?

  • Income tax for salaried employees is calculated based on five different heads of income.
  • The five heads of income include salary, income from house property, profit and gains from business and profession, capital gains (which includes stocks) and income from other sources.
  • If one sells stocks for a profit, the gains will be taxable as either short-term or long-term capital gains.
  • Short-term capital gains (holding period of less than one year) will be taxed at 15%.
  • Long-term capital gains (holding period of more than one year) will be taxed at 10% with an exemption of up to INR 1 lakh.
  • Gross total income is the sum of five heads of income.
  • Deductions are made under Section 80 to arrive at the net income (which is taxable).
  • The tax is payable along with the surcharge and education cess.

What are the tax exemptionsfor salaried employees?

Old regime:

  • Three categories: general, senior citizen and super senior citizen
  • Tax slabs vary based on age and income
  • Exemption limit for general category: INR 2.5 lakh
  • Education cess and surcharge are applicable as per income

New regime:

  • Different tax categories (as above)
  • Exemption limit: INR 2.5 lakh
  • No deductions are allowed

New budget changes:

  • Exemption limit is increased to INR 7 lakh
  • Standard deduction of INR 52,500 is available for a salary above INR 15.5 lakh

What are the different income tax deductions for salaried employees?

Salaried employees can avail of various deductions under different sections such as Section 80, Section 24 and Section 10. Section 80C is the most important section that covers a wide range of investments for deductions up to INR 1.5 lakh.

Other sections include 80CCD1B, 80D, 80DD, 80DDB, 80E, 80EEA, 80EEB, 80G, 80TTA, 80TTB and 80U. Deductions for interest paid on loans for a self-occupied property are limited to INR 2 lakh under Section 24. A physically challenged person can get a deduction of INR 75,000 to 1.5 lakh.

What is Sukanya Samriddhi Yojana, and what are its benefits?

Sukanya Samriddhi Yojana is a government scheme started in 2015 under the "Beti Bachao Beti Padhao" campaign. It allows investment in the name of a girl child under 10 years, with a minimum amount of INR 250 and a maximum of INR 1.5 lakh per annum. The scheme offers around 7-8% interest rates and tax benefits under Section 80C. The maturity amount and interest earned are fully tax-exempt.

What are the eligibility criteria for tax benefits under Section 80E?

Under Section 80E, individuals can claim a deduction on interest paid on higher education loans, taken for themselves, their spouse, children or legal guardians, from banks, financial institutions or charitable organisations. There is no limit on the deduction, and it is available for eight years starting from the year of loan repayment. It is different from the deduction available under Section 80C for tuition fees.

What is Section 10 of Income Tax, and what are its exemptions?

Section 10 of the income tax covers various allowances and exemptions, including:

  • Fully exempt allowances for High Court judges, UN employees and government employees working outside India.
  • Fully-taxable allowances such as compensatory and caffeine house allowances.
  • Partly taxable and exempt allowances, with some exemptions limited to actual amounts spent or specified limits set by the government.
  • Allowances include the ones for Sodexo coupons, hilly areas, borders, tribal areas and children's education allowances, as well as transport and underground allowances for mines.

What is Section 80D, and how can a salaried person benefit from it?

Section 80D allows individuals to claim a deduction on health insurance premiums paid for themselves, their spouse, children, and parents. The deduction cap is INR 25,000 for non-senior citizens and INR 50,000 for senior citizens. If the individual and their parents are both senior citizens, they can claim a deduction of up to INR 1 lakh. Additionally, individuals can claim a deduction of up to INR 50,000 on medical expenses incurred for themselves or their family members if they cannot get health insurance for some reason.

Note: Talk to your auditor or visit the official government portals before making any financial decision

Listen to the recording of the entire webinar

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