It is critical to have a well-structured income break-up in order to ensure that an individual uses all tax exemptions and subsequently all tax deductions in order to pay no or minimal tax. Almost every taxpayer in India looks for ways to reduce their tax burden. An individual can avoid this predicament with proper tax preparation. To pay no or little tax, it’s critical to have a well-structured wage break-up that ensures an individual take advantage of all tax exemptions and deductions. Some exemptions are based on the employee’s real expenses, while others are predetermined.
Here are seven of these must-have exemptions:
(1) House Rent Allowance (HRA): If an employee staying in rented accommodation, then usually the employer provides the compensation for the rent. The whole HRA is not exempt, however the lease of the following is exempt:
- Actual HRA received.
- 50% of salary in case of metro city or 40% in case of non-metro city.
- Rent paid – 10% of salary
(2) Education Allowance: Individuals might include an education allowance in their compensation structure because it provides Rs 100 exemption per kid, with a limit of two children. The entire amount of the exemption will be Rs 2,400 per year.
(3) Hostel Allowance: A hostel allowance of Rs 300 per month per child, up to a maximum of two children, is also available. In this situation, the total exemption will be Rs 7,200.
(4) Meal Allowance: Meal coupons issued by companies to employees are tax deductible up to Rs 50 each meal for two meals per day, according to income tax rules. As a result, if an individual work for 26 days a month, then he can save Rs 31,200 in taxes.
(5) Leave Travel Allowance: Within a four-year period, an individual can avoid tax on two trips taken by himself and his family. This exemption is only available if genuine expenses for travel within India are submitted.
(6) Gift from Employer: Employers can give their employees a monetary or in-kind present of up to Rs 5,000 that is completely tax-free under the Income Tax Act.
(7) Reimbursement: If an individual incur any expenses while doing his official duties, then he may be eligible for compensation from your employer. On the filing of actual bills, all of these reimbursements can be deducted from revenue. Mobile reimbursements, books and journals, clothes, and research allowances are just a few examples.
Less Education Allowance
Less Hostel Allowance
Less Meal Coupons
Less EPF (Employer Contribution)
Total Salary received from employer
After incorporating all the exemption, now an individual can look for the various deduction which are offered by the Income Tax Act 1961. Some of the deduction are:
(1) Standard Deduction: In lieu of transportation allowance and medical reimbursement, a standard deduction of Rs 50,000 is allowed from the financial year 19-20 onwards. This deduction is granted regardless of the amount of money spent.
(2) Section 80C: gives the advantage up to Rs 1.5 lakh.
(3) Section 80D: talks about the medical insurance.
(4) Section 80CCD: The deduction under the National Pension Scheme is in addition to the section 80C deduction. This section allows an individual to receive an additional Rs 50,000 benefit.
(5) Interest on Education Loan: This part does not have a maximum deduction limit. An individual can claim the whole amount of interest paid on a loan acquired for his or her own, spouses, or children’s higher education.
(6) Section 24 Interest Payment: Homeowners can take a standard deduction of 30% of their rent as well as a deduction for interest paid on their mortgages. This deduction is limited to Rs 2 lakh for a self-occupied house and unlimited for a let-out residence, meaning the entire amount of interest paid can be claimed as a deduction.
(7) Section 80G: Contributions to certain relief funds and charity organizations can be deducted under Section 80G.
To continue the above example:
Salary received from employer
Less Standard Deduction
Less Section 80C
Less Section 80CCD
Less Section 80D
Less Interest on Education loan
Less Interest on housing loan
Less Donation to Charitable Organization
Total Taxable Income
Tax in total Income (Rebate under Section 87A)