8 Useful Income Tax Exemptions for Salaried Employees

Income tax in India is an essential part of the financial system. Tax is imposed on the income earned by individuals. The tax system is structured progressively, with higher incomes subject to higher tax rates. However, to help salaried employees lower their taxable income and thus their tax liability, the government offers various exemptions and deductions under different sections of the Income Tax Act, 1961. In this article, we look at the 8 income tax exemptions that salaried people can benefit from to reduce their tax obligations. 

Income Tax Exemptions Available to Salaried People  

HRA or House Rent Allowance

HRA, or House Rent Allowance, is provided by employers to their employees to help cover accommodation costs. Employees residing in tier-1 or metropolitan cities receive HRA equivalent to 50% of their basic salary, while those living in tier-2 cities receive 40% of their basic salary as HRA. Taxpayers can claim tax exemption on a certain percentage of one's house rent allowance. The house rent allowance exempt from tax liability depends on four factors, namely the taxpayer's salary, their place of residence, rent paid by them, and the HRA received. 

Also Read: How to Claim Home Loan Tax Exemptions and HRA Together 

Exemption on Leaves Encashed

Leave encashment refers to the process wherein an employee recieves payments in lieu of paid leaves they have accrued but not taken. Typically this payment is provided when an employee retires, resigns, or in some cases, is still employed. Leave encashment is considered a part of employees income and is taxable. However, employees can be eligible for tax relief under Section 89 of the Income Tax Act, 1961.

Tax Exemption Available on Leave Travel Allowance

Leave Travel Allowance (LTA) or Leave Travel Concession (LTC) is an allowance provided by an employer to an employee for travel to any location within India, either during leave, after retirement, or following the termination of employment. To claim the exemption, the travel must be domestic, as international travel is not covered under LTA/LTC. The exemption applies to the employee's travel alone or with their family, where 'family' includes the employee's spouse, children, and wholly or primarily dependent parents, brothers, and sisters.

Tax Exemption Available on Gratuity

Gratuity refers to a gift made by an employer to an employee. A part of the gratuity that the borrower receives is exempt from tax mandates. However, the amount of tax exemption that one can claim depends on whether the employee falls under the government employee and employees of local authorities category or employees covered under the Payment of Gratuity Act, 1972. The maximum limit for tax-exempt gratuity has been increased to Rs.20 Lakh, up from the previous limit of Rs.10 Lakh, as per Section 10(10) of the Income Tax Act, 1961.

Tax Exemptions Available on Pension 

Pensions are subject to Tax Deduction at Source (TDS), with the deduction based on the income tax slab that applies to the pensioner's overall income. For salaried employees, pensions can be either commuted or uncommuted. Commuted pensions mean receiving the entire pension amount as a lump sum, while uncommuted pensions are paid out in monthly instalments. In both scenarios, a portion of the total pension can be exempt from tax, providing relief on the overall tax liability.

Income Tax Benefit on Home Loan

This tax exemption is available to both salaried as well as self-employed individuals. Under Section 80C of the Income Tax Act, 1961, borrowers can claim up to a maximum of Rs.1.5 Lakh on payments made towards interest repayment and up to a maximum of Rs.2 Lakh on payments made towards interest repayment. If one avails of a Home Loan with a co-borrower, all co-borrowers who are also co-owners can claim income tax benefits on the Home Loan separately. Thus, a husband and wife can claim up to a maximum of Rs.7 Lakh under various sections of the Income Tax Act, 1961. Home Loans allow borrowers to save a considerable amount of funds over an extended period. You can use an Income Tax Calculator to estimate your tax savings both before and after taking a Home Loan.

However, if you are planning to avail of a Home Loan, opt for a lender offering you a lower housing loan interest rate. This way you will reduce the cost of borrowing effectively and find it easier to repay your loan.  

Income Tax Exemption Available in the Case of Voluntary Retirement 

Employees may decide to retire before the designated age of retirement. In this case, some employers choose to give funds to borrowers as pensions. In the case of VRS (Voluntary Retirement Scheme), a certain section of the pension is exempt from tax deductions under Section 10(10C) of the Income Tax Act, 1961. 

Income Tax Exemption on Other Allowances

Over and above the tax exemptions mentioned above, borrowers can also claim tax exemption on various other allowances, such as transport allowance and children's education allowance. 

Read Also: Income Tax Slabs in the New Regime 

Final Words

Salaried employees in India can significantly reduce their tax liability through various exemptions under the Income Tax Act, 1961. From House Rent Allowance and Leave Travel Allowance to benefits on pensions and Home Loans, these provisions allow individuals to manage their taxes effectively while securing long-term financial benefits. One can also avail of a housing loan as it comes with several tax benefits. In fact, in the case of joint Home Loans, all co-borrowers who are also co-owners of the property can claim up to a maximum of Rs.7 Lakh as tax exemption under various sections of the Income Tax Act, 1961. 

People Also Read: Joint Home Loan Tax Benefits