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TAX ALLOWANCE AND DEDUCTIONS
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TAX ALLOWANCE AND DEDUCTIONS
INTRODUCTION
Allowances and deductions are important factors in calculating a person's or business's taxable income under the Income Tax Act. Allowances are specified sums given to workers by their employers that, if they satisfy the requirements, are not subject to taxes. These benefits include, among other things, travel allowances, special allowances, and house rent allowances (HRA). Each of them may be subject to specific restrictions or requirements and is intended to help employees with their living or working expenses. However, the Income Tax Act's deductions enable both individuals and companies to lower their taxable income by deducting costs associated with particular investments or activities .Deductions for educational expenses, insurance premiums, and provident fund payments are common. Deductions are available to firms for reasonable business-related expenses such as asset depreciation and operating costs. In addition to encouraging certain economic practices, such saving and investing in retirement plans or education, the introduction of allowances and deductions serves to lower the overall tax burden on taxpayers. By providing these tax advantages, the Income Tax Act seeks to assist people in handling their financial obligations while promoting national economic stability and prosperity.
ALLOWANCES UNDER INCOME TAX ACT , 1961
Allowances are monetary benefits businesses give their employees in addition to their base pay. Some allowances are entirely non-taxable or only partially taxable, while others are subject to head salary taxes. Individuals with salaries and those with other forms of income are subject to varied tax laws in India. Income tax e-filing is beneficial to them. They must still record their salary income, either online or offline, in order to submit their taxes, though, and it can be helpful to know about the allowances that companies pay to cover different expenses. Let’s see some of the allowances that are either taxable , partly taxable or fully exempt from tax
House rent allowance
HRA (House Rent Allowance) is a benefit available to salaried individuals who rent housing. This may not be subject to income tax in full or in part. However, if you continue to receive HRA while not living in any rental housing, it will be taxable. You can still claim the HRA exemption on your income tax return even if you were unable to provide your employer with rent receipts as evidence. Therefore, please preserve any proof of rent payments, such as rent receipts.
The HRA exemption that you can claim is the least of the following.
• The sum of your employer's HRA.
• Rent paid (-) (10% of the basic salary + Dearness allowance).
• For non-metros cities , 40% of basic salary plus DA is paid, and for metro cities , 50% of basic salary plus DA is paid.
Standard deduction
The Income Tax Act gives several methods for taxpayers to obtain deductions and refunds in addition to laws for taxing citizens' income. Depending on how the taxpayers spend their money, certain deductions are permitted.
The standard deduction is one of this. You should be aware that pensioners and salaried workers are automatically eligible to claim a specific amount under the standard deduction, even if they haven't made any purchases or investments. After being removed for several years, the clause was reinstated in the 2018 budget presentation.
Both the old tax regime and the new tax regime permit the standard deduction. Budget 2024 saw an increase in the standard deduction under the new regime. The standard deduction allowed under each system is broken down as follows:
Previous Tax System: Rs. 50,000
New Tax System: Rs.75,000.
The standard deduction can be taken as a flat deduction from the employee's entire wage for a given financial year. It is independent of how many jobs the employee has changed. As a result, the whole salary received from all employers can be deducted in one lump sum.
Leave travel allowance
Additionally, salaried personnel are excluded from LTA/LTC under the income tax rules, but only for travel expenses incurred while on leave. Please be aware that expenses for the full vacation, such as shopping, dining, entertainment, and leisure, are not covered by the exemption. In a four-year period, you are eligible to make two LTA/LTC claims. An individual may carry over this exemption to the following block if they don't use it inside that block. The limitations that apply to LTA are listed below: • The cost of overseas travel is not covered by LTA/LTC only domestic travel is. • In order to reach the location, the quickest route must be taken by train, airplane, or public transportation.
Food coupons
You might receive food coupons from your employer. When in the possession of an employee, these food tickets are taxable as perquisite. However, up to Rs 50 per meal, these meal coupons are tax-exempt.
• A monthly bonus of Rs 2,500 (22*100) is calculated using 25 working days and two meals per day.
• As a result, the annual exemption is valid up to Rs 30,000.
Relocation allowance
These days, businesses have many locations throughout the nation. For business-related reasons, you can be required to relocate to a different city. Relocating might result in costs like relocating to a new home, moving furniture, transporting a car, registering a car, enrolling your children in a new school, and more. Thankfully, the employer is responsible for covering these costs. Occasionally, the employer pays for these costs directly.
The tax burden for these expenses is summarized as follows:
• Cost of car transportation: An employee may have to pay for the car's transportation to the new location. The company may compensate the employee for their transportation costs based on the employee's real submitted bills. For instance, costs for packers and movers could be incurred. These costs are tax-exempt for the employee, regardless of whether they are paid to the transporters directly or refunded to them.
• Car registration fees: The majority of Indian states impose car registration fees on vehicles before they can be driven into their borders.
• Packaging fees: The employee is not subject to taxes on the cost of packing and transporting the furniture, regardless of whether the employer reimburses them or pays them directly.
• Accommodations: After you move, your employer might offer lodging for the first 15 days. These costs will include any meals that are included in the boarding and lodging costs. Employees will not be required to pay taxes on expenses that are repaid or covered by the employer.
• Brokerage paid on a rental property: If an employee has paid brokerage fees to locate a rental property, the costs are seen as part of the employee's personal responsibility. Any reimbursement that an employer receives is taxable as part of the employee's salary income.
• Even when your company pays for your children's school fees, this kind of expenditure is still regarded as a financial benefit to the worker.
• Brokerage paid on a rental property: If an employee has paid brokerage fees to locate a rental property, the costs are seen as part of the employee's personal responsibility. Any reimbursement that an employer receives is taxable as part of the employee’s salary income.
Child education allowances
As part of your pay, your employer might give you an allowance for your kids' education. Employees are not required to pay taxes on the allowance they receive for their children's education. The employee may, however, receive an exemption of up to Rs. 100 per month or Rs. 1,200 annually. A maximum of two children are eligible for the exemption.
Gratuity
A gratuity is a voluntary payment that an employer makes to an employee in appreciation of their services.
Exemption with regard to gratuities:
• The gratuity that was given out throughout the service.
• Gratuities received during service by government or non-government employees are fully taxable.
Gratuity given at the time of death or retirement:
• Gratuities received by government, defense, local government, civil service, etc. employees at the time of their retirement or death will be completely exempt.
• If another employee got a gratuity at the time of their retirement or death:
At least one of the following will be exempt if it falls within the Payment of Gratuity Act of 1972:
• Twenty lakh rupees.
• The actual amount of the gratuity.
• For each full year of service, 15 days of pay (based on the most recent salary) are awarded. (The number of days in a month should be 26.)
At the very least of the following will be exempt if not covered under the Payment of Gratuity Act 1972:
• Twenty lakh rupees.
• The actual amount of the gratuity.
• For each full year of service, a half-month salary *(based on the most recent salary) is awarded. (The number of days in a month should be 26.)
Salary =( Basic salary + dearness allowance in term of employment + commission ( fixed percentage of turnover))
Leave encashment
Every salaried individual is entitled to a minimum amount of paid leave annually under labor law. An individual employee does not have to use up all of his leave in a given year, though. Actually, the majority of firms permit workers to carry over unused paid time off.
When the person retires or resigns from the company, as the case may be, they will always have accumulated unutilized leave balance. This requires the business to pay workers for paid time off that they haven't used. This idea is most commonly referred to as leave encashment.
Exemption with regard to encashment of leave:
• Encashment of leave earned while serving:
Any employee, whether government or non-government, who receives leave encashment while working is subject to full taxation.
• Cash encashment for leave taken during retirement:
A government employee's leave encashment will be completely exempt if it is received at the time of retirement.
The least of the following will be exempt if non-government personnel receive leave encashment at the time of retirement:
• Twenty-five lakh rupees.
• Ten months' salary was the actual amount of leave encashment received (based on the average income of the ten months prior to retirement).
• When he retires, he will get the cash equivalent of any unused leave (based on his average pay over the previous ten months).
DEDUCTIONS UNDER INCOME TAX ACT , 1961
Understanding the importance of encouraging investments and savings, the Income Tax Department has included a wide range of income tax deductions under Chapter VI A of the Income Tax Act. Although the deduction under 80C is the most well-known provision, there are a number of additional deductions that give taxpayers the chance to strategically lower their tax obligations. The income tax department has offered a number of chapter VI A deductions from taxable income in an effort to promote investments and savings among taxpayers. In addition to the well-known 80C deduction, there are various deductions that help individuals lower their tax obligations. Let's examine these deductions in greater detail:
Section 80C , 80CCC ,80CCD(1) and 80D
The income tax department has offered a number of chapter VI A deductions from taxable income in an effort to promote investments and savings among taxpayers. In addition to the well-known 80C deduction, there are various deductions that help individuals lower their tax obligations.
When 80CCC and 80CCD(1) are combined, the maximum deduction allowed under Section 80C is Rs 1.5 lakhs. You may, however, deduct an extra Rs 50,000 for payments to the National Pension Scheme (NPS) under 80CCD(1B). Therefore, under Section 80C+80CCC+80CCD(1) + Section 80CCD(1B), the maximum deduction is Rs 2 lakhs.
| SECTION | ELIGIBLE INVESTMENT | DEDUCTION |
|---|---|---|
| 80C | Investment made in equity linked schemes , PPF , SPF , RPF , payment made towards life insurance premium , principle sum of home loan , SCSS etc | RS. 1,50,000 |
| 80CCC | Payment made towards pension fund | RS. 1,50,000 |
| 80CCD(1) | Payments made towards Atal Pension Yojna or other pension schemes | Employed: 10% of basic salary + DA Self employed: 20% of gross total income |
| 80CCE | Total deduction under section 80C, 80CCC , 80CCD(1) | RS. 1,50,000 |
| 80CCD(1B) | Investments in NPS (Outside limit Rs. 1,50,000 under section 80CCE) | RS. 50000 |
| 80CCD(2) | Employer’s contribution towards NPS (Outside limit Rs . 1,50,000 under section 80CCE) | Central government employer: 14% of basic salary + DA Others : 10% of basic salary + DA |
| 80TTA | Interest on saving account | Rs. 10,000 |
Section 80GG – Deduction on house rent paid
People who live in rental housing but do not receive HRA in their pay structure may be able to claim a deduction under Section 80GG.
Requirements for Section 80GG claims:
• The taxpayer must be an individual who are self employed or is salaried but does not get HRA.
• The taxpayer must only pay rent for residential use.
• In no other location should the taxpayer own residential property that they occupy themselves. Additionally, none of the taxpayer, their spouse, minor child, or HUF should possess any residential property in the area where they currently call residence.
• File Form 10BA.
The amount of the deduction that is available In accordance with Section 80GG:
The lowest of the following can be deduced:
• is the amount of rent paid (-) 10% of adjusted total income (-)
• 5,000 rupees a month.
• 25% of total adjusted income
Adjusted Gross Total Income:
Gross total income
- STCG under 111A.
- LTCG, if any, included in total gross income.
-Section 80C to 80U deductions, with the exception of section 80GG deductions.
-NRIs and foreign corporations pay a specific tax rate on their incomes, such as incomes under sections 115A, 115AB, 115AC, or 115AD.
Section 80E – Interest on education loan
Under Section 80E, a person may deduct interest paid on an education loan used to fund their further study.
The taxpayer, their spouse, children, or a student for whom the taxpayer serves as a legal guardian may all be eligible for the education loan.
The 80E deduction is allowed for a maximum of eight years, starting from the year interest begins to be paid and ending when all interest has been paid, whichever comes first. The total amount of interest that can be claimed has no upper limit.
Eligibility criteria for claiming section 80EEA
• The individual should not have residential house on the date of sanction of loan.
• Not eligible to claim deduction under section 80EE.
• Value of stamp duty of house should be less than or equal to Rupees 45 lakhs.
• Loan should be sanctioned between April 1, 2019, and March 31, 2022
Section 80EE –Interest on home loan for the first time home owners
Only if the loan was taken out during FY 2016–17 this deduction can be claimed starting in FY 2016–17.
Only homeowners (individuals) who owned a single home on the loan approval date are eligible for the deduction under section 80EE. The home loan must be less than Rs 35 lakh, and the property must be worth less than Rs 50 lakh. The financial institution loan must have been approved between April 1, 2016, and March 31, 2017.
In addition to the Rs 2 lakh deduction (on the interest component of house loan EMI) permitted under section 24, you can now deduct an extra Rs 50,000 from the interest on your home loan.
Section 80D- Deduction on medical insurance premium
Under Section 80D, any individual or HUF may deduct medical insurance premiums paid throughout the financial year. Critical illness and top-up health plans are also eligible for this deduction.
The best thing about it is that it exceeds the Rs 1.5 lakh cap on deductions under Section 80C.
Only Individual and HUF can claim deduction under this section and no other entity can claim thi deduction such as company
Section 80D permits the following expenses to be deducted:
• Self-, family-, and parent-paid medical insurance premiums
• The costs of healthcare for senior citizens.
Taxpayers who are individuals or HUFs may deduct the following expenses from their insurance premiums:
• self
• spouse
• children who are dependent
• parents
The following payments are eligible for a Section 80D deduction for an individual or HUF:
• Premiums for health insurance paid in a way other than cash.
• For oneself, one's spouse, dependent children, or one's parents, up to Rs. 25,000.
• Up to Rs. 50,000 if your parents or other family members are elderly (60 years and above).
• Cash payment is accepted for preventive health examinations up to Rs. 5,000 for parents, dependent children, spouses, or self.
Residents who are 60 years of age or older and do not have health insurance may deduct up to Rs 50,000 from their medical bills.
Contributions paid to the Central Government Health Scheme (CGHS) or any other notified scheme may result in a tax deduction for individuals of up to Rs. 25,000. Nevertheless, this deduction does not apply to contributions made on behalf of parents.
Section 80DD- Deduction for medical treatment of a dependent with disability
A resident individual or a HUF may be eligible for a Section 80DD deduction.
This deduction is permitted for expenses related to the training, rehabilitation, and medical care (including nursing) of a dependant relative who is specially abled (handicapped).
• If it is normal disability with level of 40% to 79% then the amount of deduction is 75,000 rupees.
• If it is severe diability with level of 80% or more then amount of deduction is rupees 1,25,000
A certificate of incapacity from the designated medical authority is necessary in order to claim this deduction.
Note: In the case of individuals, a dependent includes their spouse, children, parents, brothers, and sisters; in the case of HUF, they are a member of the Hindu undivided family. As such, they are not eligible to claim a deduction under section 80U on their income tax return.
Section 80DDB – Deduction of medical treatment
A resident individual or a HUF may be eligible for an 80DDB deduction. Any money you spend on medical care for yourself or your family can be written off.
Deduction quantum under 80DDB:
If age is Less than 60 years then The deduction amount is actual amount paid or 40,000, whichever is less.
If age is 60 and above then the deduction amount is The amount actually paid or 1,00,000, whichever is less.
Any medical expenditure reimbursements made by an employer or insurance provider will be deducted from the amount of the deduction that the taxpayer is eligible to receive under this section. Additionally, keep in mind that in order to claim this deduction, you must obtain a prescription for the medical treatment from the relevant doctor.
Other Deductions
| SECTION | ELIGIBLE INVESTMENT | DEDUCTION |
|---|---|---|
| Section 80EEB | Interest paid on electric vehicle loan | Rs. 150,000 |
| Section 80U | Deduction for disabled Individuals | If normal disability upto 80% = Rs. 75,000 If severe disability 80% or more = Rs. 1,25,000 |
| Section 80G | Income tax benefits towards donation of social causes | Deduction up to either 100% or 50% with or without restriction |
| Section 80GGB | Donation by companies to political parties | Amount donated( not allowed if paid in cash) |
| Section 80GGC | Donation by individuals to political parties | Amount donated( not allowed if paid in cash) |
| Section 80RRB | Deductions on income by way of royalty of a Patent | Rs. 3,00,000 or income received whichever is less |
| Section 80QQB | Deduction on royalty income of authors | Rs. 3,00,000 or income received whichever is less |
- FAQ
1.What are allowances under the Income Tax Act?
Allowances are particular amounts that employers provide their workers; they are tax-exempt up to a certain amount. Among these are special allowances, travel allowances, and house rent allowances (HRA). The Income Tax Act specifies certain requirements that must be met for the exemptions to apply.
2.What is House Rent Allowance (HRA) and how is it taxed?
HRA is an allowance given to employees to cover their rent expenses. It is partially exempt from tax, and the exemption depends on factors like the amount of rent paid, the salary, and the city of residence. A formula is used to calculate the exempt portion, which may vary based on the employee’s location and rent.
3. What deductions can I claim under the Income Tax Act?
The following are examples of deductions that lower your taxable income:
• Section 80C: Provident fund (PF) investments, life insurance premiums, and National Savings Certificates (NSC).
• Section 80D: Health insurance policy premiums paid.
• Certain benefits, including as uniform and travel allowances, are covered under Section 10(14).
• Section 24(b): Home loan interest.
4.Can I claim deductions for my children's education expenses?
Yes, under Section 80C, tuition fees for children’s education are eligible for a deduction, provided the total amount does not exceed the prescribed limit. However, this is only available for tuition fees, not other educational expenses.
5. Are there any deductions for senior citizens?
Yes, seniors are eligible to deduct more from their health insurance premiums under Section 80D. Furthermore, the Income Tax Act grants people over age of 60 a larger exemption level, which includes the exemption from interest income.
6. Can I claim a deduction for donations?
Yes, Section 80G of the Income Tax Act allows for a deduction for contributions made to specific charitable organizations. The type of charity and the amount donated determine the deduction percentage.
7. Is there any deduction for rent paid if I don’t receive HRA?
Yes, you can deduct rent paid under Section 80GG if you do not receive HRA. However, there are some restrictions, such as not having any residential property of your own.
8. How do I claim allowances and deductions while filing my income tax return?
You must fill out the appropriate areas of the income tax return form with information about your income, deductions, and allowances. Make sure you have legitimate records to back up your claims, such as proof of investments, insurance premiums, or rent receipts.
9.What are the conditions for claiming the HRA exemption?
Rent for a residential property must exceed 10% of your wage in order for you to be eligible for the HRA exemption. Furthermore, the exemption is contingent on a number of variables, including your city of residence, salary, and rent amount. You cannot receive an HRA exemption if you own real estate.
10. Is there a deduction for interest paid on education loans?
Yes, you can deduct interest paid on loans carried out for higher education under Section 80E. For a maximum of eight years or until the interest is paid in full, whichever comes first, this deduction is permitted.
11. Can I claim both HRA and a deduction for rent under Section 80GG?
No, you are unable to claim a Section 80GG deduction and an HRA exemption in the same year. Depending on whether your employer is paying you HRA or not, you can claim either one.
12.What is the deduction for medical expenses under the Income Tax Act?
You can deduct the premiums you pay for health insurance coverage under Section 80D. Additionally, you or your family may be eligible for deductions under Section 80DDB for medical treatment of specific diseases.
13. How are transportation and travel allowances taxed?
If a travel allowance or transportation is given for work-related travel, it is usually tax-exempt. However, the excess sum is taxable if the allowances beyond the specified limits.
14. Are there deductions available for contributions to pension schemes?
Yes, you can deduct your payments to pension plans under Section 80CCC. Section 80CCD(1B) allows for further deductions for contributions to the National Pension Scheme (NPS).
15. Can I claim a deduction for the cost of books and other study material for education?
No, the cost of books or study materials is not specifically deductible under the Income Tax Act. The interest paid on student loans taken out for higher study, however, is deductible under Section 80E.
16. Are there any tax exemptions for allowances received by government employees?
Subject to the same restrictions as other employees, government workers are qualified to receive a number of exemptions, including the exemption for travel expenses, housing rent, and specific compensatory allowances.
17. Can I claim deductions for my children’s school fees under Section 80C?
Indeed, you can deduct up to two children's tuition costs under Section 80C, up to a total of ₹1.5 lakh for qualified investments under the same section.
18. Are there any deductions available for individuals with disabilities?
Yes, people with disabilities can lower their taxable income by claiming a deduction of ₹75,000 (₹1.25 lakh for severe disabilities) under Section 80U. In addition, dependent family members with disabilities are eligible for medical expense deductions under Section 80DD.