Exemptions & Deductions Available from Salary under Income Tax Act, 1961

“Explore key exemptions and deductions from salary under the Income Tax Act, 1961. Understand benefits like standard deduction, HRA, LTA, and more. Expert insights for tax planning. Source: Indian Income Tax Rules, Tax Exemptions, Financial Year 2023-24.”

Income tax is a tax levied by the government on the income earned by individuals and entities during a financial year. The Income Tax Act, 1961 governs the taxation of income in India. Under the Income Tax Act, income is classified into five heads, namely, Salary, House Property, Business or Profession, Capital Gains, and Other Sources. In this article, we will focus on the exemptions and deductions available under the Salary head of the Income Tax Act, 1961.

1. Standard Deduction: From Financial Year 2018-19 onwards, a standard deduction of Rs. 50,000 is available to all salaried employees. This deduction is allowed irrespective of the actual amount spent on any expense.

2. Leave Travel Allowance (LTA): An exemption is available for travel expenses incurred by an employee and his/her family during a domestic holiday. The exemption is available for a maximum of two journeys in a block of four years. To claim this exemption, the employee must produce actual travel bills for the journey.

3. House Rent Allowance (HRA): HRA is a common component of the salary package offered by many employers to their employees. HRA received by an employee is exempt from tax subject to certain conditions. The exemption is available to the extent of the minimum of the following:

• Actual HRA received from the employer
• 50% of the salary for employees residing in metro cities (i.e., Mumbai, Delhi, Kolkata, Chennai, Hyderabad, and Bengaluru) or 40% of the salary for employees residing in non-metro cities
• Rent paid in excess of 10% of the salary

4. Medical Allowance: An exemption is available for medical expenses incurred by an employee, subject to a maximum of Rs. 15,000 per annum. To claim this exemption, the employee must produce actual bills for the medical expenses incurred.

5. Conveyance Allowance: An exemption is available for conveyance expenses incurred by an employee, subject to a maximum of Rs. 1,600 per month. This exemption is available irrespective of whether the employee incurs any actual expenditure on conveyance.

6. Professional Tax: Professional tax is a tax levied by the state government on salaried employees. Professional tax paid by an employee is allowed as a deduction from salary income. The maximum amount of professional tax allowed as a deduction is limited to Rs. 2,500 per annum.

7. Employee’s Provident Fund (EPF): EPF is a retirement savings scheme offered by many employers to their employees. Contributions made by an employee to the EPF are eligible for a deduction under Section 80C of the Income Tax Act. The maximum amount eligible for deduction under Section 80C is Rs. 1.5 lakh per annum.

8. National Pension System (NPS): NPS is a voluntary retirement savings scheme introduced by the government. Contributions made by an employee to the NPS are eligible for a deduction under Section 80CCD(1) of the Income Tax Act. The maximum amount eligible for deduction under Section 80CCD(1) is Rs. 1.5 lakh per annum.

9. Interest on Home Loan: An exemption is available for the interest paid on a home loan taken for the purchase or construction of a house property. The maximum amount eligible for exemption is limited to Rs. 2 lakh per annum.

In conclusion, the Salary head of the Income Tax Act, 1961 provides various exemptions and deductions that can help reduce the tax liability of salaried employees. It is important to note that the eligibility and quantum of these exemptions and deductions may vary based on several factors, such as the nature of the allowance, the amount paid, and the purpose of the expense.