Apart from investments, deductions are also given on certain allowances and expenditures, which the salaried persons should know.
As the time to submit the proof of tax-saving investments is getting closer, salaried people should know what options they have this year to make the last minute arrangement to save maximum tax. Apart from investments, deductions are also given on certain allowances and expenditures, which the salaried persons should know.
A normal employee may claim tax benefits under normal conditions on the following:
1. House rent allowance (HRA): Deductions are given to the employees staying on rented accommodation on least of – (a) actual HRA received; (b) 40% of Salary (50% for metro cities) and (c) Rent paid minus 10% of salary, where salary includes basic, DA (if part of retirement benefit) and turnover based Commission.
2. Children Education Allowance: Exemptions are given up to Rs 100 per month per child for a maximum of two children.
3. Hostel Expenditure Allowance: Exemptions are given up to Rs 300 per month per child for a maximum of two children.
4. Entertainment Allowance: Deductions are given to government employees on least of – (a) Rs 5,000; (b) 1/5th of salary (excluding any allowance, benefits or other perquisite); and (c) Actual entertainment allowance received. For other employees, it is fully taxable.
5. Employment Tax/Professional Tax: Amount actually paid during the year.
6. Standard Deduction: Lower of Rs 40,000 or the amount of salary.
7. Interest on home loan: Maximum deduction of Rs 2 lakh is allowed on interest payment on home loan.
8. Contribution to NPS: The NPS contributions may be compulsory or voluntary.
- Compulsory contribution by employee: Exempt up to Rs 1,50,000 or amount of statutory contribution, whichever is less in a financial year, u/s 80CCE which is counted along with section 80C.
- Voluntary contribution by employees or individuals: Exempt up to Rs 50,000 in a financial year u/s 80CCD, which is over and above section 80C.
9. Contribution to Provident Fund: There are three types of provident funds apart from the Public Provident Fund, which are Recognised Provident Fund, which is mostly applicable to private sector employees, Statutory Provident Funds, which is also known as GPF and Unrecognised Provident Fund.
- Employer’s contribution: For Recognised Provident Funds, it is exempt only to the extent of 12% of salary, which includes basic pay, DA (to the extent it forms part of retirement benefits) and turnover based commission. However, for Statutory Provident Funds and Unrecognised Provident Funds, the contribution is fully exempt.
- Employee’s contribution: Deductions available u/s 80C, except for contribution to Unrecognised Provident Funds.
- Interest credited to PF: For Recognised Provident Funds, it is exempt only to the extent rate of interest does not exceed 9.5%. However, for Statutory Provident Funds and Unrecognised Provident Funds, the interest is fully exempt.
9. Deductions u/s 80C: Deductions up to Rs 1,50,000 is allowed in a financial year on the following:
- Payment of life Insurance premium up to 10% of sum assured for self, spouse and children
- Investments in pension plans or deferred annuity plans or ULIPs
- Sum deducted up to 20% from salary payable to government employee for securing deferred annuity or making provision for his wife/children
- Repayment of home loan principal, provided the employee got the possession of the house within 3 years from getting the loan
- Employees’ contribution to PF as discussed above
- Tuition fees (excluding development fees, donations, etc) paid during the financial year for up to two children
- Contributions to the public provident fund (PPF) for self, spouse and child
- Purchase of National Savings Certificate (NSC)
- Investments in 5-year Post Office time deposits
- Investments in 5-year notified fixed deposits in scheduled banks
- Investments in Equity-Linked Savings Scheme (ELSS) or in any approved superannuation fund
- Investment in Sukanya Samriddhi Yojana for up to two girls
- Investments in 5-year Post Office Senior Citizens Savings Scheme (SCSS)
10. Deductions u/s 80D: Amount of health insurance premium paid (in any mode other than cash) up to Rs 25,000 or Rs 50,000 (if you or your spouse is a senior citizen) for self, spouse and dependent children. Additional deduction for premium paid on parents’ policy up to Rs 25,000 or Rs 50,000 (for senior citizen parents) may also be claimed. Payment to the Central Government health scheme (CGHS) by government employees and/or on account of preventive health check-up up to Rs 5,000 are also eligible for deductions.
11. Deductions u/s 80E: Deduction on amount of interest paid (not principal repaid) on educational loan on full-time studies for any graduate or post graduate course may be claimed under this section.
12. Deductions u/s 80G: Deductions from 50 or 100 per cent of the donated amount, depending on the charity, may be claimed on the amount donated to notified organisations. But this may not exceed 10 per cent of the gross total income in most donations.