Understanding inflows and outflows better helps taxpayers plan their taxes more effectively. Tax planning is a crucial aspect for every taxpayer in India, enabling them to file income tax properly and reduce tax liability. Understanding the suitable tax regime along with its pros and cons allows taxpayers to make better savings decisions. Being aware of the exemptions and deductions available under the Income Tax Act helps taxpayers achieve substantial savings and ultimately reduce tax liability.
Understanding the Tax Slabs and Regimes
First and foremost, understanding the tax slab rates based on income and age is crucial for everyone. Additionally, choosing the appropriate tax regime is an essential requirement for taxpayers.
The government has introduced various incentives to attract more taxpayers to the new tax regime and eventually phase out the old one. Both regimes offer different exemptions, tax rebates, and deductions, and the income tax slab rates also vary. Therefore, careful selection of the appropriate regime is crucial for taxpayers.
Important Exemptions for Salaried Employees
House Rent Allowance (HRA)
HRA reduces taxable income for salaried individuals paying rent for a valid residential property. HRA exemption is determined by the lowest of the following:
HRA received (as per salary slip).
50% (metro) or 40% (non-metro) of basic salary + DA.
Actual rent paid minus 10% of basic salary + DA.
Leave Travel Allowance (LTA)
Taxpayers can claim an exemption on travel expenses through LTA only if they travel within India. It is applicable for two trips in a block of four calendar years, and the current block year is 2022 to 2025. The exemption covers travel by rail, air, or public transport. However, LTA is only available under the old regime.
Gratuity
Gratuity is a lump sum payment made by an employer to employees in recognition of their service to the organisation. It is tax-exempt up to Rs 20 lakh, an increase from the previous limit of Rs 10 lakh, under Section 10(10) of the Income Tax Act.
Important Deductions for Salaried Employees
Standard Deductions
Salaried individuals can claim a standard deduction without the need for any investment or expenditure. A standard deduction of Rs 50,000 or the salary amount, whichever is lower, is available under both the old and new tax regimes from AY 2024-25 onwards.
Deduction Under Section 80C
Section 80C is one of the most widely claimed tax deductions by individuals, allowing them to reduce taxable income through tax-saving investments or eligible expenses. A deduction of up to Rs 1,50,000 can be claimed annually from the gross total income.
Eligible investments under this section include Equity Linked Savings Schemes (ELSS), PPF, SPF, RPF, life insurance premiums, the principal repayment of a home loan, Sukanya Samriddhi Yojana (SSY), National Savings Certificate (NSC), Senior Citizen Savings Scheme (SCSS), and more.
Read More About- Smart Ways to Save Income Tax under Section 80C
Deduction Under Section 80D
Individuals can claim a deduction under Section 80D for medical insurance premiums paid during the financial year. This deduction also applies to top-up health plans and critical illness plans. Health insurance premiums paid through any mode other than cash are eligible for deduction as follows:
Up to Rs 25,000 for self, spouse, dependent children, or parents.
Up to Rs 50,000 if the insured individual, family, or parents are senior citizens.
Deduction Under Section 80CCD (1B)
The National Pension System (NPS) is a government-backed pension scheme available to both salaried and self-employed individuals. Under Section 80CCD(1B), an individual can claim an additional deduction of up to Rs 50,000 for contributions made to NPS.
This is in addition to the Rs 1.50 lakh deduction available under Section 80CCD(1). Therefore, the total maximum deduction limit under Section 80CCD(1) and Section 80CCD(1B) is Rs 2 lakh.
Employer Contribution to EPF/NPS
Employees can claim a tax deduction under Section 80CCD(2) for their employer’s contribution to NPS. The deduction is available up to 10% of salary (Basic + DA) or 14% if the contribution is made by the Central Government. This benefit is over and above the Rs 1.50 lakh deduction limit provided under Section 80CCE.
On the other hand, for a Recognised Provident Fund, the employer’s contribution is tax-exempt up to 12% of Basic Salary + DA. In the case of a Statutory Provident Fund (SPF), the employer’s contribution is fully tax-exempt.
Deduction Under Section 24
Under this section, individuals can claim the interest component of a home loan EMI as a deduction from total income, up to a maximum of Rs 2 lakh per year. For a let-out property, there is no upper limit on the interest deduction, and the entire interest paid on the home loan can be claimed as a deduction.
However, in the case of a self-occupied property, if the construction period exceeds the stipulated five years, the maximum deductible interest is limited to Rs 30,000 for the financial year.
Deduction Under Section 80EEB
Individuals can claim a tax deduction of up to Rs 1.5 lakh on interest paid on a loan taken specifically for purchasing an electric vehicle under Section 80EEB of the Income Tax Act. This deduction is available only to those opting for the old tax regime.
Wrapping Up
Understanding exemptions and deductions allows taxpayers to minimise taxable income and ultimately reduce tax liability. Opting for the correct regime is also a crucial decision for taxpayers. Many individuals start considering tax-saving options near the end of the financial year, leading to rushed decisions and often missed opportunities. It is always better to stay informed and create the right mix of deductions and exemptions to reduce overall tax liability.
*This article is for informational purposes only. This is not investment advice.
*Disclaimer: Teji Mandi Disclaimer
