Taxation benefits for Salaried Employees in India

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Tax planning is an essential aspect of financial management for salaried employees in India. The government provides various deductions, exemptions, and rebates under the Income Tax Act, 1961, to reduce the tax burden on individuals. This article explores the key taxation benefits available to salaried employees in the financial year 2024-25.

  1. Tax Regimes: Old vs. New

Salaried employees can choose between two tax regimes:

  • Old Tax Regime: Allows various deductions and exemptions.
  • New Tax Regime (Default): Offers lower tax rates but fewer exemptions.

For optimal tax savings, employees should compare both regimes before filing their tax returns.

  1. Standard Deduction
  • Under Old tax regime Rs.50,000 can be deducted as Standard deduction and in New tax regime it is increased to Rs.75,000
  1. House Rent Allowance (HRA) (Old Regime Only)

Employees living in rented accommodation can claim HRA exemption under Section 10(13A).

The exemption is the minimum of:

  • Actual HRA received
  • 50% of salary (metro cities) / 40% of salary (non-metro)
  • Rent paid – 10% of salary
  1. Leave Travel Allowance (LTA) (Old Regime Only)

Tax-free reimbursement of travel expenses for self and family within India.

Allowed for two journeys in a block of four years.

  1. Deductions Under Section 80C (Old Regime Only)
  • Maximum deduction: ₹1.5 lakh per year
  • Eligible investments include:
  • Employee Provident Fund (EPF)
  • Public Provident Fund (PPF)
  • Life Insurance Premium
  • National Savings Certificate (NSC)
  • Equity Linked Savings Scheme (ELSS)
  • Home Loan Principal Repayment
  • Sukanya samriddi yojana
  • National Pension Scheme
  • Unit linked insurance policy
  1. National Pension System (NPS) – Section 80CCD
  • Employee Contribution (80CCD(1)): Part of the ₹1.5 lakh limit under 80C.
  • Employer Contribution (80CCD(2)): Up to 10% of basic salary is tax-free.
  • Additional Deduction (80CCD(1B)): ₹50,000 for self-contribution.
  1. Medical Insurance & Healthcare Benefits (Section 80D)
  • Deduction on health insurance premiums:
  • Self, spouse, children: ₹25,000
  • Parents (below 60 years): ₹25,000
  • Parents (above 60 years): ₹50,000
  1. Tax-Free Perquisites & Benefits
  • Employer contributions to EPF and NPS.
  • Food coupons (up to ₹50 per meal).
  • Mobile and internet reimbursements.
  1. Rebate Under Section 87A
  • Available to taxpayers with income up to ₹7 lakh under the new regime.
  • Provides a full tax rebate of ₹25,000, effectively making income up to ₹7 lakh tax-free

 

  1. Gratuity
  • If an employee receives gratuity during the service, it is fully taxable.
  • If the gratuity is received at the time of retirement or death by an employee of the government, defence services, local authority, members of civil services etc will be fully exempted.
  • If covered under the Payment of Gratuity Act 1972, the least of the following will be exempted:
  • 20 lakhs
  • Actual gratuity received
  • 15 days salary (based on last drawn salary) for every completed year of service. (No. of days in a month to be taken as 26)
  • If not covered under the Payment of Gratuity Act 1972, the least of the following will be exempted:
  • 20 lakhs
  • Actual gratuity received
  • Half-month salary (based on last drawn salary) for every completed year of service. (No. of days in a month to be taken as 26)
  • *Salary = (Basic salary + DA if provided in terms of employment + commission as a fixed percentage of turnover
  1. Leave Encashment

As per labour law, every salaried person is entitled to a minimum number of paid leave every year. However, it is not necessary for an individual employee to utilise all the leave he is entitled to in a year. In fact, most employers allow employees to carry forward such unutilised paid leaves.

This would invariably leave the employee with an accumulated unutilised leave balance at the time of retirement or resignation from the company, as the case may be. This compels the employer to compensate the employees for unutilised paid leave. This concept is better known as leave encashment.

Exemption in respect of leave encashment : 

Leave encashment received during the service :

If leave encashment is received during the service by any employee ( either government or non-government), it is fully taxable.

Leave encashment received during the time of retirement :

  • If leave encashment is received at the time of retirement by a government employee, it will be fully exempted.
  • If leave encashment is received at the time of retirement by non-government employees, the least of the following will be exempted:
  • 25 lakhs
  • Actual leave encashment received
  • 10 months  salary (on the basis of average salary of last 10 months preceding retirement)
  • Cash equivalent of unavailed leave (Based on last 10 months average salary) to his credit at the time of retirement.

*Salary = (Basic salary + DA if provided in terms of employment + commission as a fixed percentage of turnover)

  1. Pension
  • Uncommuted Pension : Fully taxable (both in the hands of government and other employees)
  • Commuted Pension :

-Government Employees : exempt from tax

-Other Employees :

1.If the employee is not receiving gratuity: exemption of ½ of commuted value of full pension

2.If the employee is receiving gratuity: exemption of 1/3 rd of commuted value of full pension

 Conclusion

Salaried employees can significantly reduce their tax liability by strategically using available exemptions, deductions, and rebates. While the new tax regime offers simplicity and lower rates, the old regime provides extensive deductions. Choosing the right tax regime based on individual income and expenses can maximize tax savings.

For personalized tax planning, consulting a financial advisor is recommended.

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