Income Tax Deductions

Income Tax Deductions allow employees to reduce their taxable salary by availing deduction as per limit prescribed in each section. Runtime HRMS automatically calculates income tax on employee salary based on salary composition and deductions applicable. This article explains various deductions available to employees and related investment limits to claim deductions.

Updated for Financial Year 2022-23 (Assessment Year 2023-24)

What are Income Tax Deductions?

Income tax Deductions are pre-defined set of deductions allowed by Income Tax department which are deducted from an employee's salary before computation of taxable income. These deductions are allowed primarily due to two reasons:

  1. For expenses incurred by a person (for e.g. health insurance premium)
  2. To promote savings and investments (for e.g. qualified fixed deposits)

Impact of New Tax Regime [Section 115BC]

Before we dive into deductions, let's discuss the impact of New Tax Regime [u/s 115BC] on deductions. From Financial Year 2020-21, the Income Tax department has introduced a new Tax Regime as defined under section 115BC. This is an optional scheme and an individual may or may not opt-in for same. The objective of introducing this scheme is to simplify tax calculations by discontinuing various deductions on one hand, and decreasing the tax rates on the other hand.

Before opting-in for the new Tax Regime, one must weigh the pros and cons and opt-in if the net tax liability is reduced by doing so. In a nut-shell, the new Tax Regime disallows around 70 deductions like deductions under Chapter VI-A (80C, 80D etc.). It offers reduced rates of taxes as given below:

Existing Tax RegimeTax RateNew Tax RegimeTax Rate
Income from 2.5L to 5L5%Income from 2.5L to 5L5%
Income from 5L to 10L20%Income from 5L to 7.5L10%
Income above 10L30%Income from 7.5L to 10L15%
Income from 10L to 12.5L20%
Income from 12.5L to 15L25%
Income above 15L30%
Tax Rates under Existing and New Tax Regime

Employees can opt-in for new Tax Regime using Runtime Workman or Runtime Connect employee self-service portal. As HR Admin, you can also enable or disable new Tax Regime for any employee using Data Capture > Income Tax Declaration page.

House Rent Allowance (HRA) [Section 10(13A)]

HRA deduction is given to salaries individuals who live in rented houses. This deduction is allowed from the House Rent Allowance (HRA) component of your salary. You cannot claim HRA deduction in following cases:

  1. You do not live in a rented house
  2. You do not receive House Rent Allowance
  3. You have opted for new Tax Regime (u/s 115BC)

The deduction is calculated as the minimum of following amounts:

  1. Actual HRA received during the year
  2. If you are living in a metro city - 50% of Basic + DA
  3. If you are living in a non-metro city - 40% of Basic + DA
  4. Actual rent paid over 10% of Basic +DA

Let's understand this with an example. Suppose Mr. X receives following salary during the year:

Basic - INR 5,00,000
DA - None
HRA - INR 2,40,000
Other Allowances - INR 1,20,000

The rent paid by Mr. X during the year is INR 10,000 per month or INR 1,20,000 for the year.
Let's also assume that Mr. X is living in Delhi, which is a metro city.

Now, let's calculate the values as mentioned in the list above:

  1. Actual HRA received = INR 2,40,000
  2. 50% of Basic + DA = INR 2,50,000
  3. Actual Rent Paid over 10% of Basic + DA = 1,20,000 - 50,000 = INR 70,000

Thus, the minimum of above three values i.e., INR 70,000 will be allowed as deduction from the salary.

Note: Standard Deduction is not available when opting for new Tax Regime (u/s 115BC)

Deductions under Section 16

Runtime HRMS support a range of deductions which are allowed from income under the head "Income from Salaries" along-with some other general deductions that are available. Here, we will discuss each deduction in detail along-with the limits prescribed under the Indian Income Tax Act:

Standard Deduction [Section 16 (ia)]

Standard deduction is a flat deduction of INR 50,000/- from the income taxable under the head 'Income from Salaries'. This deduction was introduced to replace deductions for Transport Allowance and Medical Allowance. It simplifies the calculation of tax and reduced the paper work required to submit proof of expenses done on transport and medical expenses. The deduction of INR 50,000/- is given irrespective of the actual spend. This means that even if the expense of transport and medical is zero, the employee still gets the deduction of INR 50,000/- from salary income.

Note: Standard Deduction is not available when opting for new Tax Regime [u/s 115BC]

Entertainment Allowance [Section 16 (ii)]

Entertainment allowance is paid to certain central and state government employees to meet certain expenses on entertainment. This allowance is deductible from employee's salary as the minimum of following amounts:

  1. Rs. 5,000 (for the year)
  2. 20% of Basic Salary
  3. Actual Entertainment allowance received

The amount actually spent on entertainment and related activities is not relevant in this case.
Non-Government employees cannot avail this deduction.

Professional Tax [Section 16 (iii)]

Professional tax is tax levied by state governments on the salary paid to employees by businesses operating in that state. The rates of professional tax are different in each state. However, the Income Tax Act has common rules to allows deduction of Professional tax paid on employee salary.

Understanding Professional Tax

Professional Tax (also known as Tax on Employment) is deducted from employee's salary and deposited with the government by the employer. The tax paid by employer is thus included in employee's salary as a perquisite when filing income tax return. It is to be noted that this amount is never paid to the employee but only included in Salary as a 'Perk' for computation purposes.

Different states have different rates of calculating professional tax but the total deduction during one financial year cannot be more than INR 2500.

Deduction for Professional Tax

Section 16 (iii) does not specify a maximum limit of deduction allowed. However, professional tax deduction cannot exceed INR 2,500 in a financial year. Therefore, the maximum deduction is also restricted to INR 2500.

Chapter VI-A Deductions

Chapter VI-A of Income Tax Act provides various sub-sections where a taxpayer can claim deduction from taxable income based on investments, expenses, donations etc. It is to be noted that deductions under Chapter VI-A cannot exceed gross total income of the taxpayer.

Deduction for Investments [Section 80C]

Section 80C of Income Tax Act allows deduction for payments made for certain savings and investment schemes. Here is the list of allowed investments:

  1. Life Insurance Premium
  2. Contribution to recognized Provident Funds (EPF, PPF)
  3. National Pension Scheme (NPS)
  4. National Savings Certificate (NSC)
  5. Equity Linked Savings Scheme (ELSS)
  6. Unit Linked Insurance Plans (ULIP)
  7. Tax-Saving Fixed Deposits (5-year)
  8. Approved Superannuation Fund
  9. Senior Citizen Saving Scheme
  10. Sukanya Samriddhi Yojna
  11. Repayment of Housing Loan (Principal amount only)
  12. Tuition Fee for school, college or university (Maximum 2 children)

The maximum deduction allowed under Section 80C is INR 1,50,000 (along-with Section 80CCC and 80CCD, discussed below).

Pension Fund Deposits [Section 80CCC]

Section 80CCC allows deduction for deposits in specified pension funds offer by life insurance providers. The deduction claimed under 80CCC cannot be claimed under section 80C (above). Income arising from annuity, pension, interest and bonus received from such fund is taxable.

The maximum deduction allowed under Section 80CCC is INR 1,50,000 (along-with Section 80CCC and 80CCD discussed here).

National Pension Scheme Deposits and Contributions [Section 80CCD]

Section 80CCD allows deductions for deposits under certain notified pension schemes. These deductions are further classified under three categories:

  1. Section 80CCD (1): Deposits in individual pension account as per National Pension Scheme or Atal Pension Yojna. The maximum deduction allowed is 10% of Basic + DA for employees and 20% Basic + DA for non-employees (self employed individuals).
  2. Section 80CCD (1A): No longer active
  3. Section 80CCD (1B): Deposits by individuals in the National Pension Scheme. The maximum deduction allowed is INR 50,000.
  4. Section 80CCD (2): Contributions made by employer to the pension account of an employee. In this case, the contributions must be included in the employee's salary to claim deduction. The maximum deduction allowed is 14% of Salary in case of Central Government employees and 10% of Salary in case of other employers.

Deduction under Section 80CCD (1B) and 80CCD (2) is in addition to the limit of INR 1,50,000 under section 80C, 80CCC and 80CCD (1).

Health Insurance Premium Deduction [Section 80D]

Section 80D allows deduction for expenditure on health insurance in following cases:

  1. Health insurance or Mediclaim premium
  2. Contribution to Central Government health scheme
  3. Preventive health checkup (Max. limit of INR 5,000)
  4. Medical expenditure in case of senior citizens (aged 60 years or above), not having a medical insurance

The deduction limits are as follows for individuals:

  1. Paying for self, spouse, and dependent children (all below 60 years): INR 25,000
  2. Paying for self, spouse, and dependent children (anyone above 60 years): INR 50,000
  3. Paying for parent(s) (all below 60 years): INR 25,000
  4. Paying for parent(s) (anyone above 60 years): INR 50,000

Except for preventive health checkups, cash payments are not allowed.

Medical Treatment of a Disabled Dependent [Section 80DD]

Section 80DD allows deduction for expenditure made on medical treatment, nursing care, training and rehabilitation paid for a dependent with a disability or payments made under schemes framed for this purpose. Deduction is allowed for a dependent of the taxpayer and not the taxpayer him/her self. The person with disability is not allowed to claim the deduction under Section 80U of Income Tax Act.

The maximum amount of deduction under Section 80DD is INR 75,000 where disability is more than 40% and less than 80%. In case disability if more than 80%, the limit is INR 1,25,000.

Medical Treatment of Specified Disease [Section 80DDB]

Section 80DDB allows deduction for medical expenditure incurred on treatment of specified diseases or ailments. A prescription for such treatment must be provided by a neurologist, an oncologist, a urologist, a hematologist, an immunologist or any other specialist specified under this section.

In case of senior and super-senior citizens, the maximum deduction allowed under Section 80DDB is INR 1,00,000 or amount paid, whichever is less

For others, the maximum deduction allowed under Section 80DDB is INR 40,000 or amount paid, whichever is less.

If the taxpayer receives insurance claim for such treatment or the employer of the taxpayer reimburses the expenditure, the deduction should be reduced by such amount as received by the taxpayer.

Advisory

Runtime HRMS provides 3 categories to declare the expenditure made under section 80DDB -

1. 80DDB - Medical treatment of specified disease
2. 80DDB - Medical treatment of specified disease (Senior Citizens)
3. 80DDB - Medical treatment of specified disease (Senior Citizens > 80 Yrs.)

If the declaration is made under category 1, the other two are ignored. Similarly, if the declaration is made under category 2, category 3 is ignored. Thus, it is advised to declare the expenditure in only in one of the applicable categories.

Repayment of Interest on Education Loan [Section 80E]

Section 80E allows deduction for repayment of loan taken for higher education of self, spouse, child or student to whom the taxpayer is a legal guardian. The loan should be taken from notified financial institutions or charitable organizations. The deduction is allowed for the interest portion of the repayment and not the principal.

The maximum tenure for which the deduction is allowed is 8 years or the repayment in full, whichever is earlier.

There is no maximum limit prescribed under Section 80E. Thus the entire repayment of interest is deductible.

Repayment of Interest on Housing Loan [Section 80EE]

Section 80EE section allows deduction for repayment of interest on housing loan for first-time house owners. There are certain conditions to avail this deduction as follows:

  1. The taxpayer should not own a house when the loan is approved
  2. The loan must be sanctioned in FY 2016-17 or FY 2017-18
  3. The loan amount should not be more than INR 35,00,000
  4. The house value should not be more than INR 50,00,000

The deduction claimed under this section cannot be claimed under any other section. This deduction is over and above the deduction available under Section 24 (Income from House Property).

The maximum amount allowed under Section 80EE is INR 50,000.

Repayment of Interest on Housing Loan [Section 80EEA]

Section 80EE section allows deduction for repayment of interest on housing loan for first-time house owners. There are certain conditions to avail this deduction as follows:

  1. The taxpayer should not own a house when the loan is approved
  2. The loan must be sanctioned between April 01, 2019 to March 31, 2022
  3. The house value (stamp duty value) should not be more than INR 45,00,000

The deduction claimed under this section cannot be claimed under any other section. This deduction is over and above the deduction available under Section 24 (Income from House Property).

The maximum amount allowed under Section 80EEA is INR 1,50,000.

Repayment of Interest on Electric Vehicle Loan [Section 80EEB]

Section 80EEB allows deduction for interest paid on loan taken for purchase of electric vehicles. This deduction is available to all types of tax payers like individuals, HUF, Companies etc. For individuals, the vehicle can be purchased for personal use.

The loan should be sanctioned between April 01, 2019 to March 31, 2023.

The maximum amount allowed under Section 80EEB is INR 1,50,000.

Donations [Section 80G]

Section 80G allows deduction for donations made to specified funds and authorities. The approved funds fall into two categories with different deduction allowances:

Category 1: Eligible for 100% deduction:

  1. Prime Minister's National Relief Fund
  2. The National Children's fund
  3. & more...

Category 2: Eligible for 50% deduction:

  1. Jawaharlal Nehru Memorial Fund
  2. Prime Minister's Drought Relief Fund
  3. Indira Gandhi Memorial Trust
  4. Rajiv Gandhi Foundation

Category 3: Eligible for 100% deduction, subject to qualifying limit:

  1. Donations to Government or approved local authorities for promotion of family planning

Category 4: Eligible for 50% deduction, subject to qualifying limit:

  1. Donations to charitable institutions who provide a certificate

Qualifying Limit: The donations under Category 3 and 4 should not exceed 10% of Adjusted Gross Total Income of the taxpayer.

Donations made in kind are not eligible for deduction.

Payment of Rent [Section 80GG]

Section 80GG allows deduction for rent paid by the taxpayer who does not own any residential property. The following conditions must be met while claiming deduction under this section:

  1. The taxpayer, his/her spouse, minor children or HUF of which he/she is a member, should not own any residential accommodation at place of residence or place or work.
  2. Any residential property owned at another location should not be claimed as self-occupied property under "Income from House Property".
  3. Rent payments must be made by taxpayer.
  4. The taxpayer should not be in receipt of HRA from employer.

The deduction allowed under section 80GG is the lowest of:

  1. INR 5,000 per month or INR 60,000 per year
  2. 25% of Adjusted Total Income
  3. Rent paid as reduced by 10% of Adjusted Total Income

The taxpayer needs to file Form 10BA that requires details of payments of rent.

Contributions made to Political Parties [Section 80GGC]

Section 80GGC allows deduction of contributions made to political parties in full. The contributions should not be made in cash to be eligible for deduction under Section 80GGC. The Political Party is defined as any Political Party registered under Section 29A of the Representation of the People Act.

Interest on Savings Accounts [Section 80TTA]

Section 80TTA allows deduction for interest earned on a savings bank account held with a Bank, Co-operative Bank or Post office.

Interest earned on Fixed Deposits, Bonds, TD interest is not eligible for deduction.

The maximum deduction allowed under Section 80TTA is INR 10,000 or interest earned, whichever is less.

Interest on Deposits & Savings Accounts [Section 80TTB]

Section 80TTB allows deduction of interest earned on deposits (including fixed deposits) and savings accounts held with Banks, Co-operative banks, Post office, Banking company, Co-operative society engaged in banking business.

Section 80TTB is applicable only for taxpayers who are senior citizens (age 60 years or more).

The maximum deduction allowed under Section 80TTB is INR 50,000 or interest earned, whichever is less.

Advisory

An individual can either claim deduction under Section 80TTA (if he or she is not a senior citizen) or Section 80TTB (if he or she is a senior citizen). In Runtime HRMS, it is advised to declare the interest income only in one of the two sections based on your eligibility. If a declaration is made under both sections, Section 80TTA declaration will be considered and Section 80TTB declaration will be ignored.

Person suffering from Physical Disability [Section 80U]

Section 80U allows a flat deduction to taxpayers suffering from a physical disability. The taxpayer needs to attach a certificate issued by appropriate medical authority to claim deduction.

The allowed deduction under Section 80U is as follows:

  1. Person suffering from at least 40% Physical Disability: INR 75,000
  2. Person suffering from at least 80% Physical Disability: INR 1,25,000

Advisory
Runtime HRMS has two heads for Section 80U for both the categories defined above. It is advised to declare the eligibility in only one of the heads. In case declaration is made under both heads, the 40% category will be considered and 80% category declaration will be ignored.

The deduction is a flat amount, irrespective of any expenditure on treatment etc.

For more information on physical disabilities and definitions, please refer to:

Conclusion

This article covers all eligible deductions eligible that can be claimed by an individual taxpayer while filing his/her Income Tax Return. We have omitted deductions allowable to body corporates like Companies, HUF, Trust, Societies etc.

We hope this will help the users of Runtime HRMS to plan their taxes properly and make the best use of deductions allowed by Income Tax Act to reduce the tax liability.

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