Tax Exemptions & Deductions For Salaried Employees

Tax planning is essential for salaried employees to maximise their take-home pay by reducing tax liabilities. Understanding tax exemptions and deductions available under various sections of the Income Tax Act can help salaried individuals save significantly.

This guide will cover tax brackets, allowances, and deductions from which salaried employees can benefit.

New tax brackets for salaried employees

In India, income tax is levied based on income slabs, categorized into different tax brackets. Per the new regime announced for the 2024-25 financial year, the tax bracket is the following:

Note that salaried employees can choose to file taxes under the old or new regime: The old offers better avenues of exemptions and deductions, while the new regime provides lower tax rates.

Old tax brackets for salaried employees

As per the old tax regime, the tax bracket is the following:

*Rebate u/s 87 A is available for income up to 5 lakhs

Tax allowances for salaried employees

 Salaried employees can receive several allowances, which can be partially or fully exempt from tax. The major ones are:

• House Rent Allowance (HRA): HRA may be fully or partially exempt from tax if the employee pays rent and meets certain conditions. The exemption is calculated based on actual HRA received, 50% (metro) or 40% (non-metro) of basic salary, and actual rent paid, minus 10% of basic salary.

Please note: The lowest amount of the three above-mentioned deductions will be considered.

• Leave Travel Allowance (LTA): LTA is tax-exempt for travel expenses incurred by the employee within India, provided the travel is for personal leave and not for official purposes.
• Standard Deduction: All salaried employees can take a standard deduction of Rs.50,000 with the old regime and Rs.75,000 with the new regime.
• Children’s Education Allowance: Employees can claim up to Rs.100 per month per child (maximum of two children) as a tax-free allowance for their children's education
• Hostel expenditure is allowed at Rs.300 per month per child. 
  (Max 2 children)

Please note: 

• Hostel & children's education expenditure is allowed only if the expenses are incurred in India.
• Deductions are allowed only with the old tax regime.

Sections for tax deductions for salaried employees

Salaried employees can claim deductions under various sections of the Income Tax Act. Here are some key sections:

• Section 80C: This popular section allows deductions for investments in PPF, ELSS, life insurance premiums, tuition fees, etc., up to a specific limit.
• Section 80D: Deductions for medical insurance premiums paid for yourself and dependents.
• Section 24: Deduction for interest paid on a home loan.

How do I claim tax deductions from my salary?

1. Submit Investment Proofs: During the financial year, your employer will request investment proofs under sections like 80C, 80D, etc. Submit the required documents such as insurance premium receipts, PPF passbook, or home loan interest certificates.
2. Form 12BB Submission: Employees must complete Form 12BB to declare and submit their investment proofs to their employer.
3. File ITR: File your Income Tax Return (ITR) with accurate salary details, exemptions, deductions, and investments to claim the applicable deductions. The Income Tax Department will verify and process your return accordingly.

Conclusion

Whether you’re a salaried individual or a self-employed businessperson, we hope that by familiarizing yourself with these key jargon, you can better manage your tax obligations, ensure compliance, and optimize your tax savings.

FAQs

How to calculate income tax deductions from your salary?

As a salaried individual, you can calculate income tax deductions using your Form 16. It helps determine your gross income, exemptions, and deductions. Once you have the right numbers, apply the applicable tax slab to calculate your tax liability.

What is the formula for salary deduction?

The two formulae relevant for calculating salary deductions are:

1. Taxable Income = Gross Salary - (Exemptions + Deductions)
2. Income Tax = (Taxable Income x Applicable Tax Rate) - Tax Rebate

How to save tax for salaried employees?

The recommended way to save tax for salaried employees is by investing in instruments under Section 80C, claiming HRA, LTA, and other exemptions, and utilizing deductions like Section 80D for health insurance.

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This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empanelled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees, and contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.