Income Tax

Income Tax Exemptions for Salaried Employees

Income Tax Exemptions for Salaried Employees

Last Updated : April 15, 2021, 5:14 p.m.

In India, every individual must pay tax on their income. The Government of India has set up certain provisions for exemptions and deductions on taxable income, which are following the Income Tax Act of 1961. These provisions aim to provide some relief to taxpayers by reducing the overall tax burden on their income. Learn about the Income Tax Exemptions for Salaried Employees.

Tax Exemptions for Salaried Employees Monthly Income

As someone who earns a fixed salary, it’s important to know how your taxes calculates and what the different parts of your salary mean. This will help you better understand how you pay your taxes and how you can effectively manage your finances.

Allowances Exemptions

Below we’ve listed down some tax exemptions that help in your day-to-day life –

AllowanceExemptions
House Rent Allowance HRA exemption is the lowest of:
- Received HRA
- 40%/50% of salary (based on city), or
- Actual rent minus 10% of salary
Standard Deductions u/s 16Upto ₹50,000
Children Education Allowance₹100 per month, per child (up to 2 child)
Transport Allowance₹10,000
Medical AllowanceUp to ₹15,000

House Rent Allowance (HRA)

HRA is a component of the salary provided by large employers to assist employees in covering their rental expenses. The HRA exemption is calculated based on three conditions, and the employee is eligible for the least of these three amounts:

  1. Actual HRA Received: The first condition considers the actual amount of House Rent Allowance received by the employee. This is the amount explicitly mentioned in the salary structure.
  2. Percentage of Salary: The second condition involves calculating a percentage of the salary. If the rented property is in a non-metro city, 40% of the salary is considered. If the property is located in metro cities like Mumbai, New Delhi, Kolkata, or Chennai, the percentage is higher at 50% of the salary.
  3. 10% of Salary – Actual Rent Paid: The third condition compares the actual rent paid by the employee with a percentage of their salary. If the actual rent paid is less than 10% of the salary, this difference is considered.

The HRA exemption is granted based on the least of these three conditions, ensuring that the employee receives the most favourable tax benefit.

Standard Deduction

The Standard Deduction serves as a uniform benefit for all employees, encompassing both those receiving salary income and retired individuals drawing pension income. This deduction is straightforward, absolute, and unconditional, eliminating the need for employees to provide supporting documentation when claiming it.

The key features of the Standard Deduction are:

  • Universality: Available to all employees, the Standard Deduction applies uniformly, without differentiation based on salary levels.
  • Simplicity: With a fixed ceiling of Rs. 50,000, the deduction is easily accessible to all eligible individuals, ensuring a straightforward and consistent benefit.

This deduction provides a standardized relief to individuals in the workforce, acknowledging common expenses without the necessity for intricate documentation.

Children Education Allowance and Hostel Allowance

Organizations often provide employees with specific allowances to support the education and hostel expenses of their children. Here are the key features of these allowances:

  1. Children Education Allowance:
    • Purpose: This allowance is granted to meet the tuition fees of a maximum of two children.
    • Amount: Employees can claim up to Rs. 100 per month per child.
    • Limit: The allowance is applicable for a maximum of two children.
  2. Hostel Allowance:
    • Purpose: Hostel Allowance is provided to cover hostel expenditures for a maximum of two children.
    • Amount: Employees can claim up to Rs. 300 per month per child.
    • Limit: Similar to the Children Education Allowance, the Hostel Allowance is applicable for a maximum of two children.

These allowances aim to alleviate the financial burden associated with the education and hostel expenses of employees’ children. Employees need to be aware of the specified limits and conditions to make the most of these benefits.

Transport Allowance

It is provided to employees working in a transport system to cover their expenses incurred while performing job duties that involve travelling from one place to another. This allowance is intended to assist with the costs associated with commuting.

The exemption criteria for the Transport Allowance are as follows:

  1. Nature of Allowance: The Transport Allowance is granted specifically to employees in a transport system to support their personal expenses during work-related travel. It’s important to note that if an employee already receives a daily allowance for these expenses, they won’t be eligible for this particular exemption.
  2. Exemption Calculation: The exemption is calculated as the lower of two values:
    • 70% of Transport Allowance: This involves taking 70% of the total Transport Allowance provided to the employee.
    • Rs. 10,000 per month: The maximum exemption amount is capped at Rs. 10,000 per month.

The employee is entitled to the lesser of these two calculations, ensuring that the tax benefit is reasonable and aligned with the actual Transport Allowance received.

Medical Allowance

In addition to various components of salary, employees may also receive a Medical Allowance to cover their medical expenses. However, to qualify for tax benefits, certain conditions must be met.

  1. Conditions for Tax Benefit: To avail of the tax benefit on Medical Allowance, employees must satisfy specific conditions. The employee can take advantage of the tax benefit if the following conditions are met:
    • The Medical Allowance is used to cover medical expenses.
    • The reimbursement is based on actual expenses incurred by the employee on medical bills.
  2. Limitation of Exemption: The tax benefit is limited to a maximum of Rs 15,000. This means that if an employee’s Medical Allowance exceeds this amount, only Rs 15,000 will be eligible for tax exemption.

By adhering to these conditions, employees can optimize their tax benefits while ensuring that the Medical Allowance serves its intended purpose of easing the financial burden.

Other Type of Tax Exemptions for Salaried Employees Income

Salaried employees may be eligible for various exemptions, in addition to those previously mentioned. Some notable exemptions include:

Taxable AllowanaceExemption
Entertainment- Actual cost
- 20% of Salary
- ₹5,000
Life Insurance Premium₹1.5 Lakhs
EPFO/PF Contribution₹1.5 Lakhs
Sukanya Samriddhi Account Scheme₹1.5 Lakhs
ELSS Investments₹1.5 Lakhs
FD (with Tenure of >=5 years)₹1.5 Lakhs
Island Duty Allowance (for members of armed forces)Up to ₹3,250 per month
Special Compensatory (for members of armed forces)Up to ₹4,200 per month
High Altitude Allowance (for members of armed forces)Up to ₹1,060 - 1,600 per month
Underground Allowance (for employees working in mines)₹800 per month

Conclusion:

In navigating the complex landscape of income taxation, salaried employees are granted a range of exemptions to alleviate financial burdens and optimize their earnings. From standard deductions to specific allowances like House Rent Allowance (HRA), Leave Travel Allowance (LTA), and gratuity, these exemptions play a crucial role in enhancing the financial well-being of individuals.

The simplicity of the Standard Deduction, coupled with its universal applicability, sets the stage for a fair and streamlined tax benefit for all salary earners. Additionally, various other exemptions, such as those for medical reimbursements, meal coupons, and provident fund contributions, further contribute to a comprehensive tax-saving strategy.

As taxation laws evolve, salaried individuals must stay informed about the latest updates, seek professional advice, and make strategic use of available exemptions to optimize their financial planning. By leveraging these exemptions effectively, employees can not only reduce their taxable income but also secure a more stable and rewarding financial future.

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