Income Tax under the head Salary

CA. Arpan Jain , Last updated: 26 June 2021
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Understanding your Pay slip

Basic Salary	Fixed Component of your pay
House Rent Allowance	Salaried individuals, who live in a rented house/apartment, can claim house rent allowance or HRA to lower tax payment. This can be partially or completely exempt from taxes.
Leave Travel Allowance	Salaried employees can avail exemption for a trip within India under LTA. The exemption is only for the shortest distance on a trip.
Bonus	The bonus is usually paid once or twice a year. Bonus, performance incentive, whatever may be its name, is 100% taxable
Employee Contribution to Provident Fund	Provident Fund or PF is a social security initiative by the Government of India. Both employer and employee contribute a 12% equivalent of the employee's basic salary every month toward employee's pension and provident fund. It is completely exempt. Further, interest earned on PF is also exempt.
Allowances	Apart from above, employees gets various allowances as a part of salary. Few of them are taxable and few are exempt to a particular extent.

Slab rates for Financial Year 2020-21 and onwards

Taxable income	Tax Rate (Old Scheme)	Tax Rate (New Scheme)
Up to Rs. 2,50,000	Nil	Nil
Rs. 2,50,001 to Rs. 5,00,000	5%	5%
Rs. 5,00,001 to Rs. 7,50,000	20%	10%
Rs. 7,50,001 to Rs. 10,00,000	20%	15%
Rs. 10,00,001 to Rs. 12,50,000	30%	20%
Rs. 12,50,001 to Rs. 15,00,000	30%	25%
Above Rs. 15,00,000	30%	30%

Surcharge Rate on the amount of income tax

10% - Net income exceeds Rs.50 Lakhs but doesn't exceed Rs.1 Crore
15% - Net income exceeds Rs.1 Crore but doesn't exceed Rs 2 crore
25% - Net income exceeds Rs.2 Crore but doesn't exceed Rs 5 crore
37% - Net income exceeds Rs.5 Crore

Individuals who opt for the income tax slab under the new tax regime will not be able to avail some of the popular deductions and exemptions under the Income Tax Act, 1961. Following are some of the deductions and exemptions out of 70 deductions that you will need to forgo under the new tax regime:

Section 80C – Rs. 1,50,000/- (Eg. Insurance, PPF, National Saving Certificate etc.)
Section 80D - Rs. 25,000-50,000/- (Mediclaim)
Standard Deduction – Rs. 50,000/-
Leave Tax Allowance (LTA)
House Rent Allowance (HRA)
Interest on Housing Loan u/s 24

Various Tax Savings Methods

1. House rent allowance (HRA)

Salaried individuals, who live in a rented house/apartment, can claim house rent allowance or HRA to lower tax payment. This can be partially or completely exempt from taxes. The deduction available is the least of the following amounts:

Actual HRA received;
50% of Basic Salary for those living in metro cities (40% for non-metros); or
Actual rent paid less 10% of Basic Salary

You can claim deduction for Interest on Home loan and HRA simultaneously.

Taxceller Fact: You can claim HRA while living your parents as well.

Example: Rahul is working in a MNC in Gurgaon and receives a salary of Rs. 12,00,000 per annum and lives in an owned home with his parents in Delhi. Though he is living in a owned home but he can still get income tax benefit for House rent allowance received from the company. All he needs to do is to pay rent to his parents monthly and send the rent receipts to the HR. His parents will have to show the rent he paid on their income tax returns. However, they can save a lot as a family.

Illustration

Basic Salary	8,00,000	HRA exemption will be least of following
HRA	4,40,000	50% of Basic Salary	Rs. 4,00,000/-
Other Allowance	2,60,000	Actual HRA Received	Rs. 4,40,000/-
Total Income	15,00,000	Rent Paid – 10% of Basic Salary =3,60,000 – (10% of 8,00,000)	Rs. 2,80,000/-
Rent Paid	Rs. 3,60,000/-	HRA Exemption – Lowest of three	Rs. 2,80,000/-

Tax Liability without HRA exemption		Tax Liability with HRA exemption
Total Salary	12,00,000	Total Salary	12,00,000
Standard Deduction	-50,000	Standard Deduction	-50,000
		HRA exemption	-2,80,000
Net Taxable Income	11,50,000/-	Net Taxable Income	8,70,000/-
Tax Liability	Rs. 1,63,800/-	Tax Liability	Rs. 89,960/-

2. Home Loan Tax Benefit

Every borrower pays interest as well as principal component on a loan taken. Income tax law provides benefit for both components.

Interest Component: You can claim a maximum of Rs. 2,00,000/- of deduction(expense) for interest on home loan paid in case the house is self occupied or vacant. But, if the house is rented out then you can claim deduction to the extent to interest paid with no upper limit. This deduction can be adjusted against your salary income, thereby reducing your overall tax liability.

Principal Component: You can claim maximum of Rs. 1,50,000/- as deduction under Section 80C for the principal component. It is adjusted from overall income and thereby reduces overall tax liability.

Taxceller Fact: If the loan is taken jointly, then each of the loan holders can claim a deduction of interest component up to Rs. 2,00,000/- each as well as principal component up to Rs. 1,50,000/- each in their individual tax returns.

3. Deduction Under Section Section 80C, 80CCC, 80CCD & 80D

Deductions on Investments-80C

Maximum Limit Rs. 1,50,000/-: 80C allows deduction for investment made in PPF , EPF, LIC premium, principal amount payment towards home loan, stamp duty and registration charges for purchase of property, Sukanya Samriddhi yojana (SSY) , National saving certificate (NSC) , Senior citizen savings scheme (SCSS), ULIP, tax saving FD for 5 years, Infrastructure bonds etc.

Deduction for NPS : 80CCD (2)

Additional Limit Rs. 50,000/-: 80CCD(2) allows additional deduction of Rs 50,000 for amount deposited to NPS account by employee.

Deduction for Mediclaim: 80D

You can claim deduction of Rs. 25,000 for a mediclaim policy of self, spouse and dependent children. Deduction limit is increased to Rs. 50,000 if any member is senior citizen (60+).

An additional deduction for mediclaim of parents is available up to Rs 25,000, if they are less than 60 years of age. Deduction limit is increased to Rs. 50,000 if parents are senior citizen (60+).

Taxceller Fact: In case, both taxpayer and parent(s) are 60 years or above, the maximum deduction available under this section is up to Rs.1 lakh.