FM Arun Jaitley in his Budget 2018 speech has proposed to provide a standard deduction of Rs 40,000 from salary income to employees. However, at the same time he has also proposed to take away existing annual transport allowance of Rs 19,200 and Rs 15,000 medical reimbursement. Prima facie income exempted from tax after setting off the gain and loss comes to only Rs 5800. The tax saved for each employee on this income would depend on the tax slab that income falls into. The saving in tax would be Rs 290 for those currently paying 5% tax on this income; Rs 1160 for those paying 20% as tax on this income; and Rs 1740 for those paying 30% tax on this income. However, these savings would be nullified in most cases, except in the case of income up to Rs 5 lakh, due to increase in the cess payable from current 3% to 4% on the rest of the income tax payable by the individual. As a consequence, individuals with income above Rs 5 lakh would end up shelling out more tax after taking into account the standard deduction, the removal of the allowances and the increase in cess.
1. Exemption of House Rent Allowance:
A salaried individual having a rented accommodation can get the benefit of HRA (House Rent Allowance). This could be totally or partially exempted from income tax. In case you aren’t living in any rented accommodation, however, continue to receive HRA, it would be taxable. Also, it’s important to note that if one couldn’t submit his/her rent receipts to their employer for claiming HRA, one could still claim the exemption while filing the income tax return. However, one must keep such rent receipts as an evidence and also maintain the details of such payments which is made towards rent.
The least of the following is allowed as the HRA exemption to a salaried employee:
- Total HRA received.
- Rent paid less 10 percent of salary
- 40 percent of salary (Basic+DA) for non-metros and 50 percent of salary (Basic+DA) for metros.
2. Standard Deduction:
The Indian Finance Minister during his speech while presenting the Union Budget 2018, announced a standard deduction amounting to Rs 40,000 for salaried employees. This has replaced the existing transport allowance of Rs 19,200 and medical reimbursement of Rs 15,000. In effect, the income tax exemption available to the salaried is Rs 5800 with effect financial year beginning 1 April 2018.
3. Leave Travel Allowance (LTA):
The income tax law also provides for an LTA exemption to salaried employees which are restricted to cost of travel incurred by such employee. It is important to note here that the exemption doesn’t include costs which are, incurred for entire trip which could include shopping, food expenses, entertainment and leisure and such other expense. LTA is allowable for two travels in a block of four years. In case an individual doesn’t use this exemption within a block, he/she could carry the same to the next block.
Below are the restrictions which are applicable to LTA:
- LTA only covers domestic travel and it doesn’t cover the cost of international travel
- The mode of such travel must be either railway, air travel, or public transport
4. Section 80C, 80CCC and 80CCD(1):
Section 80C is the most extensively used option for saving income. According to this section, an individual or an HUF (Hindu Undivided Families) who invests or spends on stipulated avenues then they can claim deduction up to INR 1.5 lakh. Expenditures/investment u/s 80C isn’t allowed as a deduction from income arising due to capital gains. It means that if the income of an individual comprises of capital gains alone then Section 80C cannot be used for saving tax.
Deductions under Section 80C of the Income Tax Act, 1961 are offered for the investments made in a range of instruments. Some of these instruments are more well-known than the others due to various reasons. The Indian government too supports a few as the tax saving instruments for encouraging individuals towards these investments.
The Government of India encourages investment in certain avenues which provides for a good amount of retirement corpus for the salaried while parallelly providing them with an income tax benefit too. Some of such investments are given below which are eligible for an exemption under Section 80C, 80CCC and 80CCD(1) upto a maximum of Rs 1.5 lakhs.
- Life insurance premium
- Equity Linked Savings Scheme (ELSS)
- Employee Provident Fund (EPF)
- Annuity/ Pension Schemes
- Principal payment on home loans
- Tuition fees for children
- Contribution to PPF Account
- Sukanya Samriddhi Account
- NSC (National Saving Certificate)
- Fixed Deposit (Tax Savings)
- Post office time deposits
- National Pension Scheme
5. Medical Insurance Deduction (Section 80D):
This is a deduction which is provided for medical expenses.Deduction under this Section is available over and above the deduction under 80C. One could save tax on medical insurance premiums paid for the health for self, family and dependent parents. These expenses could be deducted from overall taxable income. The limit for this deduction is Rs 25,000 for premiums paid for self/family. For premiums paid for parents who are senior citizens, one can claim a deduction upto Rs 30,000. This limit has been raised in Budget 2018 from Rs 30,000 to Rs 50,000. I.e. effective 1 April 2018, one can claim upto RS 50,000 as a deduction for premium paid for senior citizen parents. Additionally, health checkups to the extent of Rs 5,000 are also allowed.
6. Interest on home Loan (Section 80C and Section 24):
Another key tax saving tool is the interest which is paid on the home loans.Homeowners have the option to claim up to INR 2 lakhs as a deduction for interest on home loan for a self-occupied property. In case the house property is let out, the deduction is allowed for the entire interest pertaining to such home loan. However, here it becomes essential to note that from FY 2017-18, the loss from house property that can be set off against other sources of income has been restricted to Rs 2 lakhs.
In addition to the above, one can also claim the principal component of the housing loan repayment as a deduction under 80C upto a maximum limit of Rs 1.5 lakhs.
7. Deduction for Loan for Higher Studies (Section 80E):
Income Tax Act provides exemptions for interest on education loans. The significant conditions attached to claiming of such deduction are that the loan should have been taken from a bank or a financial institution for pursuing higher studies (in India or abroad) by the individual himself or spouse of his children. Further, one may begin claiming this deduction beginning from the year in which the loan starts getting repaid and upto the next seven years or before repayment of loan whichever is earlier. Even legal guardian could avail this income tax exemption.
8. Deduction for Donations (Section 80G):
The donations made which are provided u/s 80G of the Income Tax Act, 1961 offers income tax exemption to an assessee. This deduction varies based on the receiving organization, which implies that one might get exemptions from 50% to 100% of the amount donated.
9. Deduction on Saving Account Interest (Section 80TTA):
Section 80TTA of the Income Tax Act, 1961 offers a deduction of INR 10,000 on income earned in the form of bank interest. This exemption is allowed to Individuals and HUFs. The maximum limit of deduction under this section is INR 10,000. In case the income from bank interest is less than INR 10,000, the whole amount will be allowed as deduction. However, in case the income from bank interest exceeds INR 10,000, the deduction would be restricted to INR 10,000.
We at Consultaxx, file salary returns in one day. Feel free to contact us through our website or our e-mail.