Income Tax Deductions for Salaried Employees

Overview of the Old Tax Regime and the New Tax Regime

• Old Tax Regime: This is the existing tax setup with higher tax slabs but allows you to claim miscellaneous deductions and exemptions under different sections of the Income Tax Act. These deductions and exemptions significantly reduce your taxable income, ultimately leading to lower tax liability.
• New Tax Regime: Introduced in Budget 2020, this regime offers lower tax rates than the old regime. However, most deductions and exemptions from the old regime aren't available to the new regime, except for the standard deduction of ₹50,000.

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Choosing Between the Old Tax Regime and the New Tax Regime

While the new tax regime is the default tax regime for FY 2023-24, most employees get confused to choose between the two tax regimes. Here are some factors to consider while choosing:

• Total deductions: If you have significant tax-saving investments and expenses that are eligible for deductions under the old regime, you might benefit more from it.
• Income level: The break-even point between the two regimes can vary depending on your income level. Generally, individuals with higher incomes might find that the old tax regime more promising than the lower tax rates offered by the new regime.
• Investment plans: If you don't have many tax-saving investments planned, the new regime's simplicity and lower tax rates might be attractive.

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Deductions and Exemptions Under Old Tax Regime

The old tax regime offers various deductions and exemptions that can significantly reduce your taxable income. Here's a breakdown of both:

Exemption of Allowances

These are reimbursements or allowances received from your employer and can be claimed for deduction if backed with valid documents, essentially reducing your taxable income. Common exempt allowances include:

• House Rent Allowance (HRA): If you pay rent, you can claim an exemption for a portion of your HRA received from your employer. The amount exempted depends on your city type and your accommodation arrangement.
  • Calculation of HRA Exemption:
    • The lowest of the following amounts can be claimed as an HRA exemption:
    • Actual HRA received.
    • 50% of (basic salary + DA) for those living in metro cities (Delhi, Kolkata, Mumbai, or Chennai).
    • 40% of (basic salary + DA) for those living in non-metro cities.
    • Actual rent paid minus 10% of (basic salary + DA).
• Standard Deduction: This is a fixed deduction offered in lieu of certain exempt allowances like transport allowance, clothing allowance, etc. It simplifies tax filing for those who don't claim these individual allowances.
• Leave Travel Allowance (LTA) or Leave Travel Concession (LTC): Exemption is available for the amount received as LTA or the cost of travel borne by your employer under the LTC scheme for your travel within India for yourself and your family for vacation purposes.
• Uniform allowance (limited amount): A fixed amount received for the purchase and maintenance of uniforms is exempt from tax up to a specific limit.
• Reimbursement of mobile expenses (limited amount): Reimbursement received for mobile phone bills for official purposes is exempt from tax, subject to a certain limit.

Deductions (Investments and Expenses)

These deductions encourage savings and specific expenses by allowing you to subtract the amount invested or spent from your taxable income. Here are some popular deductions under Chapter VI A:

• Section 80C: This is the most popular deduction with a maximum limit of Rs. 1.5 lakh per year. It allows deductions for various investments and expenses, including:
  • Life insurance premium
  • Employee Provident Fund (EPF) contributions (your contribution only)
  • Equity Linked Savings Scheme (ELSS) investments
  • Public Provident Fund (PPF) contributions
  • Tuition fees for your children's education (up to specified limits)
  • Sukanya Samriddhi Yojana account deposits (for girl child)
  • National Savings Certificate (NSC) deposits
  • Home loan principal repayment (up to a specific limit)
  • Other investments and expenses as specified under the section (like girl child education loan repayment, donation to certain schemes)
• Section 80D: This section allows deductions for medical insurance premiums paid for yourself, your spouse, your dependent parents, and your dependent children. Additionally, you can claim deductions for actual medical expenses incurred for yourself, your spouse, your dependent parents, and specified medical treatments.
• Section 24: Interest paid on a home loan taken for the purchase or construction of a residential property is deductible under this section, subject to a separate limit from Section 80C.
• Section 80CCD(1): You can claim a deduction for the employer's contribution to your National Pension System (NPS) account.
• Section 80E: Under this section, repayment of the principal amount of an education loan taken for higher education by yourself, your spouse, your children, or a student for whom you are a legal guardian is deductible.

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Deductions and Exemptions Under New Tax Regime

The new tax regime introduced in India aims for a simpler tax structure with lower tax rates. However, this simplicity comes at a cost - most deductions available under the old regime are not allowed under the new regime. Some deductions and exemptions however still available if you choose the new tax regime.

• A conveyance allowance is provided to cover transportation expenses related to employment duties.
• Exemption on Voluntary Retirement under Section 10(10C), gratuity under Section 10(10), and leave encashment under section 10 (10AA)
• Exemption on income received from a family pension plan under Section 57(iia).
• Deduction allowed for contributions made to the Agniveer Corpus Fund under Section 80CCH(2)
• Deduction under Section 24 for interest paid on a home loan taken for a property that you rent out to others.
• Deduction under Section 80CCD(1) allowed for the contribution made by your employer to your NPS (National Pension System) account.
• A fixed deduction of Rs. 50,000 offered under the new tax regime applicable from the financial year 2023-24 to simplify tax filing and account for basic expenses.

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