Income Tax Allowances and Deductions Available for Salaried Individuals

The Income Tax Act of 1961 provides several exemptions and deductions for individuals to help lower their overall tax liability. Salaried individuals, especially, have a plethora of income tax allowances and deductions they can use. With the introduction of the new income tax regime alongside the existing old regime, taxpayers now have the flexibility to choose a regime that aligns with their financial situation.

However, most are unaware of these options, making financial and tax planning more challenging. In this article, we will explore the various allowable income tax deductions under both the old and new income tax regimes and understand how to use them.

Exemptions Available to Salaried Individuals Under the Old Income Tax Regime

Salaried individuals working in an organisation usually receive several allowances and perquisites in connection with their employment. The Income Tax Act of 1961 partially and totally exempts many allowances and perquisites that employers provide from the ambit of taxation.

By smartly using these allowances in income tax, employees can reduce their taxable income significantly. Here is a brief overview of some key exemptions available under the old income tax regime that salaried individuals can avail of.

• House Rent Allowance (HRA)

One of the most popular income tax allowances and deductions is the house rent allowance (HRA). It is an allowance organisations provide to employees living in rented accommodations. The primary purpose of this allowance is to help employees cover the cost of rent.

Salaried individuals living in rented accommodation and receiving HRA from their employers can claim them as an exemption from their total taxable income. However, the maximum amount of allowable deduction for income tax purposes is limited to the lowest of the following three amounts:

• The entire amount received as HRA.
• The total rent paid during a financial year after subtracting 10% of basic salary + dearness allowance (DA).
• 40% of the total salary (basic salary + dearness allowance) if residing in non-metro cities and 50% of the total salary (basic salary + dearness allowance) if residing in metro cities.

Note: Employees living in a house or accommodation they own cannot claim HRA as an exemption. Instead, the entire amount received as HRA will be fully taxable.

• Leave Travel Allowance (LTA) 

Leave travel allowance (LTA), also known as leave travel concession (LTC), is among the many allowable income tax deductions. It is provided to cover the travel expenses incurred by an employee and their family within India. LTA or LTC can be claimed twice in a block of four calendar years.

However, it is important to note that employees can only claim travel expenses and not other associated costs, such as accommodation or food. The maximum amount of leave travel allowance that can be claimed varies depending on the mode of travel:

• Air Travel (Lowest of the following) : Actual travel expenses/ Economy class fare for the shortest route to the destination

• Rail Travel (Lowest of the following) : Actual travel expenses/ 1st class AC rail fare for the shortest route to the destination

• Recognised Public Transport (Lowest of the following) : Actual travel expenses/ Deluxe class or 1st class bus fare for the shortest route to the destination

• No Recognised Public Transport (Lowest of the following) : Actual travel expenses/ 1st class AC rail fare for the same distance of travel

• Telephone or Internet Allowance

Many employers provide telephone or internet allowance to their employees, especially those involved in remote work, to cover mobile and internet expenses. This is an allowable deduction for income tax purposes. The maximum amount that can be claimed shall be the actual expenses incurred or the allowance provided, whichever is lower.

• Books and Periodicals Allowance

Salaried employees are also provided reimbursement for books, newspapers, journals and periodicals they purchase. Such allowances in income tax come under the exempt category. The maximum amount that can be claimed shall be the actual expenses incurred or the allowance provided, whichever is lower.

• Food Coupons 

Some organisations provide their employees with food or meal coupons as a perquisite. The total value of these coupons is taxable per the Income Tax Act of 1961. That said, up to ₹50 per meal is an allowable deduction for income tax purposes that salaried individuals can utilise.

• Relocation Allowance

Salaried employees may need to relocate for work purposes. Employers often reimburse the expenses in connection with work-related relocation or provide an allowance for the same. In either case, employees can claim the relocation expenses as an exemption. The maximum allowable deduction for income tax purposes is limited to the actual amount incurred or the amount provided by the employer, whichever is lower.

• Children’s Education and Hostel Allowance

Among the key income tax allowances and deductions are children’s education allowance and hostel allowance. The maximum amount of exemption that salaried individuals can claim is limited to ₹100 per month per child for up to two children for education and ₹300 per month per child for up to two children for hostel.

• Gratuity Payments

Gratuity is a lump sum amount that is often provided to employees acknowledging the service they provided to the company. If a salaried individual receives gratuity during their service, the amount is fully taxable.

On the other hand, if the gratuity is received on retirement or death, it can be claimed as an exemption from the taxable income. The maximum exempt amount is limited to the lowest of the following:

• Actual amount of gratuity
• ₹20 lakh
• 15 days of the last drawn salary x completed years of service (if covered under the Payment of Gratuity Act 1972)

• Leave Encashment

Leave encashment is also one of the most important income tax allowances and deductions available for salaried employees. It refers to payments received by an employee for unutilised leave days at the time of retirement, resignation or during service.

If leave encashment is received during service, the amount is fully taxable. On the other hand, if it is received at the time of retirement or resignation, it is fully exempt for government employees and partially exempt for non-government employees.

The maximum amount of exemption for non-government employees is limited to the lowest of the following:

• Actual amount of leave encashment received
• ₹25 lakh
• 10 months x the average salary of the last 10 months
• Value of all the available leaves at the time of retirement

• Other Exemptions 

In addition to the above, employers may provide other perquisites or allowances to their employees that are either partially or fully exempt. Here is a look at some of the other allowable income tax deductions salaried individuals can avail of.

• Vouchers and gifts, whether in cash or kind, can be claimed as an exemption to the tune of ₹5,000 per financial year
• Reimbursement of medical costs incurred outside India by the employee or their family (includes travel and stay expenses of the employee or their family member and one attendant)
• The amount provided to employees for training courses (includes boarding and lodging expenses)
• Daily allowance
• Conveyance allowance to the tune of ₹1,600 per month
• Transport allowance to the tune of ₹1,600 per month (₹3,200 per month for physically challenged individuals)

Deductions Available to Salaried Individuals Under the Old Income Tax Regime

Several sections of the Income Tax Act of 1961 contain provisions that enable salaried individuals to lower their overall tax liability through the use of deductions. Some of the key allowable income tax deductions are as follows:

• Standard Deduction 

Salaried individuals can avail of a standard deduction (section 16 of the Income Tax Act of 1961) of ₹75,000 (for FY 2024 – 2025). The amount is automatically deducted against the gross salary at the time of income tax return filing.

• Professional Tax 

Professional tax is levied by state governments and is deducted from the employees’ salaries. The amount paid as professional tax is fully deductible under Section 16 of the Income Tax Act.

• Section 80C Deductions

Among the various provisions for income tax allowances and deductions available, section 80C is often the most used option. It enables salaried individuals to deduct up to ₹1.5 lakh per financial year from their total income. However, only the following investments and expenses can be claimed as a deduction under section 80C.

• Employee Provident Fund (EPF) investments
• Public Provident Fund (PPF) investments
• Equity-Linked Savings Scheme (ELSS) investments
• Life insurance premium payments
• Principal repayment on home loans
• Investments in annuity or pension schemes [section 80CCC]
• Investments in Atal Pension Yojana (APY) or other government-notified pension schemes [section 80CCD(1)]
• Children’s tuition fees
• Sukanya Samriddhi Account (SSA) investments
• National Savings Certificate (NSC) investments
• 5-year tax-saving fixed deposit investments
• Post office time deposits
• Investments in the National Pension System (NPS)

Note 1: Per section 80CCD(1B), salaried employees making investments in NPS can claim an additional ₹50,000 over and above the ₹1.5 lakh limit under section 80C. 

Note 2: Furthermore, per section 80CCD(2), they can also claim their employer’s contribution towards NPS to the tune of 10% of basic salary + DA (14% of basic salary + DA for central government employees). This allowable deduction for income tax purposes is also over and above the ₹1.5 lakh limit under section 80C.

• Section 80D Deductions

Section 80D of the Income Tax Act also contains certain allowable income tax deductions. According to the provisions of this section, salaried individuals can claim deductions for health insurance premiums paid for themselves, their spouse, children and parents. The maximum allowable deduction for income tax purposes per financial year is as follows:

• For self and family (below 60 years): ₹25,000
• For parents (below 60 years): ₹25,000
• For self, family, and parents (all below 60 years): ₹50,000 (₹25,000 + ₹25,000)
• For parents (above 60 years): ₹50,000
• For self and family (below 60 years) and parents (above 60 years): ₹75,000 (₹25,000 + ₹50,000)
• For self, family, and parents (all above 60 years): ₹1,00,000 (₹50,000 + ₹50,000)

Note: The term family includes spouse and dependent children.

In addition to the amounts specified above, salaried individuals can also claim up to ₹5,000 per financial year as a deduction under section 80D for preventive health checkups for themselves, their family and their parents.

• Interest on Home Loan

In addition to the principal repayments on home loans, salaried individuals can also claim the interest component of the loans under section 24b of the Income Tax Act, 1961. The maximum amount of allowable deduction for income tax purposes is limited to ₹2 lakh per financial year if the property is self-occupied. If it is let out, however, the entire interest component for the financial year can be claimed as a deduction under this section.

• Section 80E Deductions

Section 80E enables salaried individuals to deduct the interest paid on education loans. While there is no limit to the deduction amount, the loan must be taken for the higher education of the taxpayer, their spouse or children. This deduction is available for up to eight years or the end of the loan tenure, whichever is earlier.

• Section 80EE Deductions

Section 80EE of the Income Tax Act provides salaried individuals with an additional deduction of up to ₹50,000 on the interest component of a home loan. This deduction is over and above the ₹2 lakh limit provided by section 24b. However, the following conditions must be met.

• The home loan amount must be more than ₹35 lakh
• The property value must not be more than ₹50 lakh
• The taxpayer must not have any other property registered in their name at the time of taking out the loan

• Donations 

One of the most useful income tax allowances and deductions is the one pertaining to section 80G. This particular section enables salaried individuals to claim donations to certain specified charitable organisations as a deduction from their total income. Depending on the organisation, the allowable income tax deductions can range from 50% to 100% of the donated amount.

• Section 80TTA Deductions

Salaried individuals can also claim the interest earned on savings accounts up to ₹10,000 per financial year as a deduction under section 80TTA.

Exemptions and Deductions Available to Salaried Individuals Under the New Income Tax Regime

The new income tax regime which was introduced in FY 2020-21, offers reduced tax rates but significantly limits income tax allowances and deductions. However, some benefits are still available, which provide at least partial relief for salaried individuals. Here is a quick overview of the key exemptions and deductions under the new regime:

• Standard deduction of ₹75,000 (for FY 2024 – 2025)
• Employer’s contribution towards NPS to the tune of 10% of basic salary + DA (14% of basic salary + DA for central government employees) [section 80CCD(2)]
• Perquisites for official purposes
• Interest deduction on home loan for a let-out property [section 24b]
• Contributions to Agniveer Corpus Fund [section 80CCH]
• Gratuity payment exemptions
• Leave encashment exemptions
• Daily allowance, conveyance allowance and transport allowance

Also Read More AboutOld Tax Regime Vs New Tax Regime

Conclusion

Salaried individuals must be aware of and understand the available income tax allowances and deductions. It can help them minimise their tax liability and make financial planning more efficient.

However, it is important to note that the bulk of the allowable income tax deductions are only available in the old tax regime. That said, while the old regime offers a wide array of exemptions, deductions and allowances in income tax, the new regime provides simplicity and lower tax rates. Therefore, taxpayers must evaluate their income structure, eligible deductions and financial goals thoroughly before choosing the ideal tax regime.

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