Options for Saving Income tax for Salaried Person

As we all know that March 2024 is coming. This means financial year 2023-24 is about to end. The income tax department has released the income tax return forms for filing the ITR. The income tax department has made the new tax regime the default regime for the financial year 23-24. If you want to file Income tax return in the old regime then you will have to choose the old regime. As March approaches, salaried person start worrying about saving taxes and confused about the tax saving options available with them. Salaried people are also confused as to which regime will save more tax. Answers to lot of questions have been given in this article.

1. Income Tax Rates for FY 2023-24

Tax rate under new regime under section 115BAC

Tax rates under the Old Tax Regime

Cess: Health and Education cess on Income Tax @ 4% on income tax shall be levied.

Surcharge: Income-tax computed above would be increased by surcharge as per the table:

For a senior citizen, being a resident individual of the age of 60 years or more but less than 80 years at any time during the P.Y., the basic exemption limit is 3 Lakh.

For a very senior citizen, being a resident individual of the age of 80 years or more at any time during the P.Y., the basic exemption limit is 5 Lakh.

Rebate under section 87A: Available to a resident individual only

1. When resident individual paying tax under new regime: If total taxable income is up to 7 lakh, then he will be eligible for the rebate of Rs. 25,000 or the applicable tax whichever is lower.
2. When resident individual paying tax under old regime: If total taxable income is up to 5 lakh, then he will be eligible for the rebate of Rs. 12,500 or the applicable tax whichever is lower.

2. Tax Saving Options for salaried person for financial year 2023-24

Standard Deduction 16(1)

The standard deduction is allowed from gross salary. It is available to all class of employees. Standard Deduction is also available to pensioners. Amount of Standard Deduction is Rs. 50,000 or amount of salary/pension, whichever is lower.

House Rent Allowance 10(13A)

Every salaried employee who is in receipt of HRA and who resides in a rental accommodation may avail the benefit of exemption under this section provided he/she does not own any residential accommodation occupied by him.

Amount of Exemption

Exemption in respect of House Rent Allowance is regulated by rule 2A. The least of the following is exempt from tax:

The place where the residential house is situated is divided into:

• Major Cities, i.e., Mumbai, Delhi, Calcutta, Chennai
• Other Cities

For computing HRA calculation, Salary means basic salary and includes dearness allowance, if the terms of employment so provide. Salary shall not include other allowances & perquisites.

Interest on borrowed capital 24(b)

Interest paid on the capital borrowed for the purpose of purchase, construction, renovation, repair, renewal or reconstruction of the property. In case of let out property, there is no limit on the quantum of interest which can be claimed as deduction under section 24(b).

However in case of a self-occupied property, limit is Rs. 2, 00,000.

Section 80C

Following are the Investments eligible for deductions under this section:

• Life Insurance Premium: Life insurance policy should be taken on his own life, life of the spouse or any child. Child may be dependent/independent, male/female, minor/major or married/unmarried.
• Public Provident Fund: PPF account can open in his own name or in the name of minor of whom he is guardian. A HUF cannot open a PPF account.
• Unit Linked Insurance Plans: ULIP can be taken on his own life or spouse or any child. In case of HUF, ULIP can be taken on the life of any member of the family.
• National Saving Certificates: National Savings Certificate is a fixed income investment scheme that you can open with any post office.
• Fixed Deposit: Investment in fixed deposits are eligible for tax deduction under section 80C but here lock in period is 5 year.
• Sukanya Samriddhi Yojana: The Sukanya Samriddhi Yojana (SSY) is as girl child prosperity scheme. SSY account is to ensure a bright future for girl children in India.

This yojana is to facilitate them proper education and care free marriage expenses. Legal guardian or parents of a girl child can open SSY Account under this scheme anytime at the time of birth of the child till she attains an age of ten years.

• Repayment of Housing Loan: The principal portion of the EMI paid for the year is allowed as a deduction. The maximum amount that can be claimed is up to Rs 1.5 lakh.
• Tuition Fees: Any sum paid as tuition fees whether at the time of admission or otherwise to any university/college/educational institution in India for full time education of any two children of an individual.

The maximum amount deductible under section 80C is Rs. 1, 50,000.

• Section 80CCD(1B): National Pension Scheme: Section 80CCD (1B) provides additional deduction in respect of any amount paid up to Rs. 50,000 towards NPS.
• Section 80D: Medical Insurance: Individual can claim a deduction of Rs. 25,000 under section 80D for medical insurance for self, spouse and dependent children. An additional deduction for insurance of parents is available up to Rs. 25,000, if they are less than 60 years of age. If the parents are aged above 60, the deduction amount is Rs. 50,000.

Payment of medical insurance should be made by any mode other than cash.

Medical expenditure on the health of a person who is a senior citizen and medical insurance premium is not paid on the health of such person.

Senior citizen is a resident individual who is at least 60 years of age at any time during the previous year.

Maximum amount of medical expenditure available for deduction under section 80D is Rs. 50,000. Overall maximum amount of deduction under section 80D is Rs. 1, 00,000.

Section 80EEA: Interest On Loan Taken For Certain House Property

Eligibility

• Assessee is an individual
• Assessee is not eligible to claim any deduction under section 80EE.
• Assessee has taken loan for the purpose of acquisition of residential house property.
• Loan is sanctioned during 01.04.2019 to 31.03.2022.
• Stamp duty value of the residential house property on the date does not exceed Rs. 45 lakh.
• Assessee does not own any residential house property on the date of sanction of loan.

Deduction: Interest payable on the loan or Rs. 1, 50,000 whichever is less.

Same Interest Is Not Deductible Twice: if any individual claims deduction of interest under section 80EEA then such amount of interest is not eligible for deduction under section 24 (b) or any other provision of the Income Tax Act for the same year or any other assessment year.

Section 80EEB: Interest On Loan Taken For Purchase Of Electric Vehicle

Conditions

• The assessee is an individual
• The assessee has taken loan for the purpose of purchase of an electric vehicle.
• Loan is sanctioned during 01.04.2019 to 31.03.2023.

Deduction: Interest payable on the loan or Rs. 1, 50,000 whichever is less.

Same Interest Is Not Deductible Twice: if any individual claims deduction of interest under section 80EEB then such amount of interest is not eligible for deduction under provision of the Income Tax Act for the same year or any other assessment year.

Section 80GGC: Contribution To Political Party

Any person can make any amount of contribution to the political party. The only condition is that the payment should be made other than cash.

Section 80G: Donations to certain funds, charitable institution etc.

Individual can make donation to any fund or institution or charitable Trust. All donations are not treated equally under Income Tax Act. Donations to certain funds and institutions qualify for 100% or 50% deduction without any qualifying limit. On the other hand, certain donations qualify for 100% or 50% deduction, subject to qualifying limit. No deduction is allowed for cash donation exceeding Rs. 2000.

Qualifying limit can be calculated as 10% of adjusted gross total income.

Adjusted Gross Total Income is equal to:

• Gross Total Income ********
• Less: Long Term Capital Gain ********
• Less: Short Term Capital Gain on sale of shares u/s 111A ********
• Less: Deduction u/s 80C to 80U (except u/s 80G) ********
• Less: Exempt Income ********
• Less: Income referred to in section 115A, 115AB, 115AC or 115AD ********
• Adjusted Gross Total Income ********

Section 80TTA: Interest on Saving Accounts

As per this section, any individual but not senior citizen can claim a deduction of Rs. 10,000 or the interest earned, whichever is lower.

Interest earned on deposits in a savings accounts with a banking company, a co-operative society engaged in carrying on the business of banking or in a post office.

First you have to show interest income in Other Income after that you can claim this deduction.

Section 80TTB: Interest On Deposits In Case Of Senior Citizens

Any senior citizen can claim a deduction of Rs. 50,000 or the interest earned, whichever is lower.

Interest on deposits with a bank/co-operative bank/post office. It may be interest on fixed deposits, interest on savings account or any other interest.

First you have to show interest income in Other Income after that you can claim this deduction.

3. Deductions not available in new tax regime for FY 2023-24

• Section 80TTA and Section 80TTB
• Deductions under Section 80C, 80D, 80E, 80CCC, 80CCD, 80DD, 80DDB, 80EE, 80EEA, 80G, etc. of Chapter VI-A of IT Act
• Professional Tax
• Entertainment Allowance on Salaries
• House Rent Allowance (HRA)
• Leave Travel Allowance (LTA)
• Helper Allowance
• Child Education Allowance
• Minor Child Income Allowance
• Interest on Housing Loan Self-Occupied/ Vacant Property
• Other Special Allowance u/ Section 10(14)
• Employee’s Contributions to NPS Account
• Donations to Political Parties/ Trusts

Note: The standard deduction of Rs 50,000 has been extended to the new tax regime from financial year 2023-24

4. How to choose between old and new tax regime?

When the employer asks for the investment declaration to deduct taxes on salary income, the individual must analyze the advantages and disadvantages of both the tax regimes before choosing one and informing the employer about it in April, otherwise, this may lead to a higher tax deduction from your salary income.

To decide between the two tax regimes, it's crucial to assess the tax exemptions and deductions available under the old tax regime. After determining the net taxable income under the old regime by accounting for all eligible deductions and exemptions, one can calculate the resulting tax liability.

Next, this tax liability under the old tax regime should be compared with the tax liability under the new tax regime. Opting for the regime with the lower tax liability is typically the preferred choice. It's important to inform the employer of this decision so that they can adjust the TDS (Tax Deducted at Source) from the salary accordingly. This ensures that the correct amount of tax is deducted each month, aligning with the chosen tax regime and minimizing the chances of any tax dues or refunds at the end of the financial year.

5. FAQs on Salary Income

Q. What is considered as salary income?

​ A: Whatever is received by an employee from an employer in cash, kind or as a facility [perquisite] is considered as salary.

Q. What are allowances?

​​​​A: Allowances are fixed periodic amounts, apart from salary, which are paid by an employer for the purpose of meeting some particular requirements of the employee. E.g., Tiffin allowance, transport allowance, uniform allowance, etc.

There are generally three types of allowances for the purpose of the Income-tax Act - taxable allowances, fully exempted allowances and partially exempted allowances.​

Perquisites are benefits received by a person as a result of his/her official position and are over and above the salary or wages. These perquisites can be taxable or non-taxable depending upon their nature. Uniform allowance is exempt to the extent of expenditure incurred for official purposes u/s​10​(14).

Q. My employer reimburses to me all my expenses on grocery and children’s education. Would these be considered as my income?

​​​A: Yes, these are in the nature of perquisites and should be valued as per the rules prescribed in this behalf.​​

Q. During the year I had worked with three different employers and none of them deducted any tax from salary paid to me. If all these amounts are clubbed together, my income will exceed the basic exemption limit. Do I have to pay taxes on my own?

​​​A: Yes, you will have to pay self-assessment tax and file the return of income.​

Q. Even if no taxes have been deducted from salary, is there any need for my employer to issue Form-16 to me?

​​​A: Form-16 is a certificate of TDS. In your case it will not apply. However, your employer can issue a salary statement.​

Q. Is pension income taxed as salary income?

​​A: Yes. However, pension received from the United Nations Organization is exempt.​​

Q. Is Family pension taxed as salary income?

​​​A: No, it is taxable as income from other sources.​

Q. If I receive my pension through a bank who will issue Form-16 or pension statement to me- the bank or my former employer?

​​​​A: The bank.​

Q. Are retirement benefits like PF and Gratuity taxable?

​​A: In the hands of a Government employee Gratuity and PF receipts on retirement are exempt from tax. In the hands of non-Government employee, gratuity is exempt subject to the limits prescribed in this regard and PF receipts are exempt from tax, if the same are received from a recognized PF after rendering continuous service of not less than 5 years.​

No exemption shall be available for the interest income accrued during the previous year in the recognized and statutory provident fund to the extent it relates to the contribution made by the employees over Rs. 2, 50,000 in the previous year.

However, if an employee is contributing to the fund but there is no contribution to such fund by the employer, then the interest income accrued during the previous year shall be taxable to the extent it relates to the contribution made by the employee to that fund in excess of Rs. 5, 00,000 in a financial year.

The CBDT vide notification no 95/2021, dated 31-08-2021, has notified Rule 9D for calculation of taxable interest relating to contribution in a provident fund or recognized provided fund, exceeding above specified limit.

Q. Are arrears of salary taxable?

​​A: Yes. However, the benefit of spread over of income to the years to which it relates to can be availed for lower incidence of tax. This is called as relief ​ u/s 89​ of the Income-tax Act.​​

Q. Can my employer consider relief u/s 89 for the purposes of calculating the TDS from salary?

​​​​​A: Yes, if you are a Government employee or an employee of a PSU or company or co-operative society or local authority or university or institution or association or body. In such a case you need to furnish Form No. ​10E to your employer. ​​

Q. My income from let out house property is negative. Can I ask my employer to consider this loss against my salary income while computing the TDS on my salary?

​​​A: Yes but only to the extent of Rs. 2 lakh, however, losses other than losses under the head ‘Income from house property’ cannot be set-off while determining the TDS from salary.​​

Q. Is leave encashment taxable as salary?

​​​A: It is taxable if received while in service. Leave encashment received at the time of retirement is exempt in the hands of the Government employee. In the hands of non-Government employee leave encashment will be exempt subject to the limit prescribed in this behalf under the Income-tax Law.​

Q. Are receipts from life insurance policies on maturity along with bonus taxable?

​​​A: As per section 10(10D), any amount received under a life insurance policy, including bonus is exempt from tax. However, following receipts would be subject to tax:

1. Any sum received under sub-section (3) of section 80DD; or
2. Any sum received under Keyman insurance policy; or
3. Any sum received in respect of policies issued on or after April 1st, 2003, in respect of which the amount of premium paid on such policy in any financial year exceeds 20% (10% in respect of policy taken on or after 1st April, 2012) of the actual capital sum assured; or
4. Any sum received for insurance on life of *specified person (issued on or after April 1st 2013) in respect of which the amount of premium exceeds 15% of the actual capital sum assured. *Any person who is – i) A person with disability or severe disability specified under section 80U​; or ii) suffering from disease or ailment as specified in the rule made under section 80DDB. Following points should be noted in this regard:

• Exemption is available only in respect of amount received from life insurance policy.
• Exemption under section 10(10D)​ is unconditionally available in respect of sum received for a policy which is issued on or before March 31, 2003.
• Amount received on the death of the person will continue to be exempt without any condition.​

Q. What is the taxability of ex-gratia received from employer?

​A: If a person or his heir receives ex-gratia from Central govt/state govt/ local authority/Public Sector Undertaking due to injury to the person/death while on duty such ex-gratia payment will not be taxable.

Q. Where is House Rent allowance (HRA) to be reflected while filing income-tax return (ITR)?

​​​​A: The amount of HRA is required to be disclosed in the ITR under the column allowances to the extent exempt under section 10. Section 10(3A) is the relevant section under which the amount of exempt HRA to be shown.

​Q. What is the taxability of Fixed Medical allowance?

​​​A: Medical allowance is a fixed allowance paid to the employees of a company on a monthly basis, irrespective of whether they submit the bills to substantiate the expenditure or not. It is fully taxable in the hands of employee.

Q. What is the taxability of Conveyance allowance?

A: As per section​n 10(14)​​ read with Rule 2BB Conveyance allowance is exempt to the extent of amount received or amount spent, whichever is less. For e.g., If amount received is Rs. 100 and amount spent is Rs. 80, then only Rs. 20 is taxable. However, if amount actually spent is Rs. 100; then nothing is taxable.

Q. Is standard deduction applicable to all the salaried person whether he is an employee of Central or State Government?

​​​A: The standard deduction is allowed while computing income chargeable under the head salaries. It is available to all class of employees irrespective of the nature of employer. Standard Deduction is also available to pensioners. Amount of Standard Deduction is Rs. 50,000 or amount of salary/pension, whichever is lower.

Note: The standard deduction under section 16(ia) is available only for Pension Chargeable under the head "Income under the head Salaries" and not for Pension chargeable under "Income from Other Sources".

Q. Is transport allowance can be claimed as exemption by an employee?

A: Exemption of transport allowance of Rs. 1600 p.m. granted to an employee is discontinued with effect from A.Y 2019-20.

However, exemption of transport allowance of Rs. 3200 p.m. granted to an employee who is blind or deaf and dumb or orthopedically handicapped is still available.

Q. Is standard deduction applicable to family pensioners?

​​​​​A: Section 16(ia) has been introduced by Finance Act, 2018 for class of person whose income is chargeable to tax under head salary. Family Pension is taxable under the head income from other sources. Hence standard deduction is not applicable in case of Family Pension.

Q. What is Form 12BB?

​​​​A: As per RULE - Rule 26C of the Income Tax Rules - Form No. 12BB is required to be furnished by an employ​ee to his employer for estimating his income or computing the tax deduction at source.

An assessee shall furnish evidence or particulars of the claims, such as House Rent Allowance, Leave Travel concession, Deduction of Interest under the head " Income from house property" and deductions under Chapter-VIA in Form No. 12BB​ for estimating his income or computing the tax deduction at source.

Q. Will the commission based on the sale be included in salary?

A: Yes, commission based on sales is paid in addition to fixed salary as part of the contract of employment, such commission will form part of salary. Gestetner Duplicators (P.) Ltd. v. CIT (1979).

Q. Will the commission paid with reference to profit be included in salary?

A: Yes, commission paid with reference to profit, it would partake the character of salary if it is a mode of remuneration or recompense for the services rendered by the employee. Raja Ram Kumar Bhargava v. CIT (1963).

Q. Will the bonus be included in salary for calculation of HRA?

A: No, bonus will not include in salary for calculation of house rent allowance. CIT v. B. Ghosal (1980)

Q. I am living in wife’s house can I claim HRA?

A. Yes, you can claim HRA exemption. The only condition is that the rent should be paid to wife on monthly basis. There is no legal requirement but in such case rent should be paid through bank transfer. You need to prove that it was paid. Exemption is available even if you live in your father’s or mother’s house.

As decided in the case of Bajrang Prasad Ramdharani vs ACIT for HRA exemption if the rent is paid to spouse/parent is valid if all the below conditions are fulfilled:

• The residential accommodation occupied by the assessee is not owned by him
• The assessee has actually incurred expenditure on payment of rent in respect of the residential accommodation occupied by him.

Q. I live with my mother instead of my husband and give some money to mother for her day to day expense rather than transfer to her bank account. Can I claim house rent allowance?

A: No, you can’t claim house rent allowance exemption because you give some money to your mother for day to day expense rather than rent. For claiming house rent allowance transfer of money through bank or cash must be mandatory and rent should be paid on monthly basis. You need to prove that it was paid.