Income Tax Allowances & Deductions Allowed to Salaried Individuals

Though the calculation of income tax for salaried individuals is not a daunting task, it involves the computation based on various slabs. It is crucial to comprehend that filing at the end of the financial year may involve chances of error. Hence, tax planning is important and must be initiated at the beginning of the new fiscal year.

What Are the Taxable Heads under Salaried Income? 

There are several components in an individual’s salary that are taxable – some fully taxable, and some partly taxable. Here’s a list of all the taxable heads in your salaried income.

 Examples of fully taxable allowances are: 

  1. Dearness allowance
  2. Deputation allowance
  3. Servant allowance
  4. City compensatory allowance
  5. Overtime allowances

Examples of partly taxable allowances are: 

  1. House rent allowances
  2. Entertainment allowances
  3. Children education allowances
  4. Travel or research allowances

How to Calculate Income Tax? 

Along with the basic salary, income from salary includes transport allowance, house rent allowance and other different allowances. Let’s understand the process of calculating income tax for a salaried individual with the help of the following steps. 

Step 1: Calculate the Gross Salary 

Gross Salary is the amalgamation of basic salary, house rent allowance, special allowance, transport allowance and other special allowances. At this step, if the standard deduction is available, then it will be deducted as well. 

Step 2: Deduct the Tax Exemptions  

Deduct the various exemptions and standard deductions, whichever is applicable. This will be the taxable income. 

Step 3: Choose a Tax Regime (Old/New)

On this taxable income, calculate the income tax to be payable as per the various slabs available. Here are the tax slabs mentioned below: 

Old Tax Regime 

Income Tax Slab Tax Rate 
Up to ₹2,50,000Nil
₹2,50,001 – Rs. 5,00,0005% above ₹2,50,000
₹5,00,001 – ₹10,00,000₹12,500 + 20% above ₹5,00,000
Above ₹10,00,000₹1,12,500 + 30% above ₹10,00,000

New Tax Regime u/s 115BAC

Income Tax SlabTax Rate
Up to ₹2,50,000Nil
₹2,50,001 – ₹ 5,00,0005% above ₹2,50,000
₹5,00,001 – ₹7,50,000₹12,500 + 10% above ₹5,00,000
₹7,50,001 – ₹10,00,000₹37,500 + 15% above₹7,50,000
₹10,00,001 – ₹12,50,000₹75,000 + 20% above ₹10,00,000
₹12,50,001 – ₹15,00,000₹1,25,000 + 25% above ₹12,50,000
Above ₹15,00,000₹1,87,500 + 30% above ₹15,00,000

Step 4: Derive the Net Salary

In this step, the income tax derived along with the provident fund will be excluded from the taxable income to derive the net salary. 

What Are the Exemptions Allowed While Computing Income Tax from Salary? 

Salaried individuals are eligible for exemptions on the income tax which helps them legally save tax which in turn assists in reducing tax burden. Here are various crucial income tax exemptions for salaried individual listed below: 

  1. House rent allowance 

House Rent Allowance (HRA) exemption is a pivotal income tax exemption as it is easy to claim while computing the income tax on salary. Many companies and firms offer a large amount of HRA to their employees to meet all expenses related to accommodation rent. 

As per section 10(13A), a portion of the house rent allowance is exempted from tax. The amount of house rent allowance granted to an employee depends on factors like salary, amount of rent paid, place of accommodation, and the amount of HRA received. 

How Is HRA calculated? 

The calculation of HRA is understood with the help of an example, following the steps below. 

Step 1: Consider the total salary 

For example, let the total salary of an individual be ₹50,000 including HRA of ₹ 24,000. For easy understanding, let’s assume he pays ₹ 2,000 per month or ₹24,000 per year as rent in a Metro City.  The calculation of the tax exemption applicable in this case is elaborated in the next step. 

Step 2: Calculate the exemption amount

The least of any of the following three amounts will be considered for exemption. 

Actual HRA received for a year (For example, ₹ 2000 X 12)₹24,000
Rent paid – 10% of salary (₹24,000 – ₹5,000)₹19,000
50% of the salary₹25,000

Step 3: Calculate the HRA

An amount of ₹19,000 will be exempted as House Rent Allowance (HRA), and the amount of ₹5,000 will be included in the gross salary of the employee. 

  1. Leave travel allowance

When employees go on a vacation, accompanying their family, many companies offer Leave Travel Allowance (LTA) for expenses incurred on vacation. The employee claims this Leave Travel Allowance by submitting all actual bills of the staycation. 

An employer grants the amount of leave travel concession based on which designation that employee is in. The computation of this allowance is made at the time of filing an income tax return, and exemption is available under section 10(5). 

  1. Encashment of leaves for salaried employees

In all organisations, a certain number of leaves are allotted to employees. If an employee does not apply for these leaves in a financial year, some companies allow these employees to encash these leaves in terms of cash. This amount received as leave encashment is eligible for exemptions if received at the time of retirement/resignation for Central or State Government employees However, it is taxable for a non-government employee.

  1. Pension income 

A pension scheme is available to employees in a majority of services once they retire. Pension in an organisation can be of two types which are commuted and uncommuted. An employee is said to receive a commuted pension when the whole pension amount is received as a lump sum. 

In the case of an uncommuted pension, an employer pays the pension in instalments for a consecutive period of time. 

  1. Gratuity for salaried employees

Income tax exemptions are also available on an employer’s gratuity as a token of appreciation for the services rendered by the employee in that organisation. Generally, gratuity is received in two different ways – 

  1. Directly to an employee during their retirement.
  2. To the family of an employee at the time of his death. 

To make a computation of exemptions on Income tax on salary easy, allowance of exemptions is available in three different parts: 

  • 1. Employees who fall under the Payment of Gratuity Act of 1972.
  • 2. Applicable to Government employees and Local Authorities.
  • 3. Applicable to employees who are not covered in any of the above two factors. 
  1. VRS amount received 

There are employees in every organisation that opts for Voluntary Retirement before attaining 60 years. In these cases, the employer offers a lump-sum amount of money on the occasion of his voluntary retirement. As per Section 10(10C), the amount receivable by the employee during his/her voluntary retirement under the golden handshake scheme is exempted.  

In addition to all the above exemptions, employers offer different perquisites like mobile phones, cars, etc., to employees. Furthermore, other exemptions, like children’s education allowances, transport allowances, etc., act as an allowance while computing income tax for salaried individuals. 

What Are the Deductions on Income Tax Available to Salaried Individuals? 

The income tax for salaried individuals has been prescribed in a certain way that allows relaxation from bearing excessive tax burden. Apart from the standard deductions of ₹50,000, which is available to all taxpayers, there are several other deductions that are available to salaried employees. 

Here are some of the pivotal deductions that are available to salaried individuals: 

  1. Section 80C  

The deductions under Section 80C, 80CCC and 80CCD are one of the pivotal ways that help reduce the tax burden of salaried individuals. Deduction of up to ₹1.5 lakh is available in one financial year on the following heads: 

  1. Public Provident Fund (PPF).
  2. Employees’ Provident Fund (EPF).
  3. Life Insurance Premiums.
  4. National Savings Certificates.
  5. Term deposits which are not less than 5 years.
  6. Equity Linked Saving Scheme and a few others. 
  1. Section 80D

Under Section 80D, a deduction on income tax on salaried employees is available in medical insurance. A taxpayer is eligible for a deduction of a maximum of ₹25,000, which he is paying as a health insurance premium for himself or any of his family members or dependents. In addition, as per the provisions in the section, if a taxpayer is paying premiums for a policy of his/her parents (senior citizen), then the amount of ₹50,000 will be available for deduction. 

  1. Section 80E

Any loan taken as an educational loan for himself or his spouse from a banking institution will be eligible for deductions under section 80E under the Income Tax Act. 

  1. Section 80G

The deduction in Section 80G is related to the donations that are made to registered charitable organisations. This also includes trusts and other approved funds, etc. and deduction is available for up to 50% to 100%. Being one of popular deductions, the provisions under this section offer maximum tax relief. 

  1. Section 80TTA

Deduction under Section 80TTA, an assessee can claim deductions on the income generated from the savings account. The claim on the deduction is available up to a maximum amount of ₹10,000. 

  1. Section 24B

Section 24B of the Income Tax Act, 1961 states that interest on a home loan for purchasing a home or for construction and repair purposes is eligible for deduction. Moreover, this deduction is available on an accrual basis which means the interest that is payable for a year is eligible for deductions. This relaxation is available in two or more housing loans or houses. 

It is quintessential to keep all the details while filing for Income Tax Returns after the computation of taxable income from salary. Moreover, adjusting all deductions and exemptions correctly during calculation will allow maximum tax relief. 

Final Word

The calculation of income tax for salaried individuals requires various aspects to consider. This includes consideration of fully and partly taxable allowances and a plethora of deductions. Hence, being aware about the deduction limits and current updates becomes essential for correct calculation. 

Frequently Asked Questions

Are retirement benefits like Provident Funds and Gratuity taxable?

Employees of non-government organisations are eligible for exemption on gratuity to a prescribed limit which is ₹20 lakh, as per the new tax regime. Whereas, in the case of provident fund (PF), the exemption on the receipt is available if the employee was under the employment for not less than 5 years. 

However, in the case of a Government employee, full exemption is available on the PF and gratuity receipt.

What is the importance of Form 12BB?

According to Rule 26C of the Income Tax Rules, Form No. 12BB is essential to be provided by an employee for the calculation of tax deduction at source (TDS). In this form, an assessee presents all the actual claims like House Rent Allowance, Leave Travel Concession, etc. which is pivotal during computing TDS.

What is the available relief U/S89?

Under section 89, relief is available to individuals if he or she has received any of the following: 

Compensation received for termination of employment as per Rule 21A(4).
Commuted pension received in excess of exemption under Section 10(10A)(i) as per Rule 21A(5).
Salary or family pension received in arrears or in advance as per Rule 21A (2).
Gratuity received in excess of exemption under Section 10(10)(ii)(iii) as per Rule 21A(3).

Animesh Gupta is a Chartered Accountant by profession and a NISM certified Mutual Fund Expert. He has over 4+ years of experience working in the Financial Services Industry. In his role at Wintwealth, he is part of the Credit and Risk team and evaluates the risk of the bonds available on Wintwealth's platform.

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