Tax Exemptions In India

The Indian government offers a wide range of tax exemptions to boost investments and promote specific economic activities – for example, it offers an exemption on insurance premiums to encourage more people to purchase life cover.

For taxpayers, exemptions are a practical way to reduce their taxable income and save tax, and make some good long-term investments. By claiming tax exemptions, a taxpayer can save all or part of his tax amount.

Tax Exemptions After Union Budgets Of 2019 And 2020

• The government has proposed a new tax regime under Section 115BAC. Taxpayers can either opt for the new regime or continue to pay taxes according to the existing regime.

• Individuals earning up to Rs 5 lakh per year will be eligible for a rebate (under Section 87A) of up to Rs 12,500 on tax payable.

• Deductions on transport allowance and medical allowance are no longer available. They have been replaced by standard deduction of Rs 50,000.

• Deductions on health insurance premiums and medical expenses remain at Rs 50,000 under Section 80D.

• Health and education cess is to be levied at 4% on the sum of income tax and surcharge wherever applicable.

• Corporate tax has been minimised to 25% for companies with turnover of up to Rs 250 crore and 30% for turnover above Rs 250 crore.

Tax Exemptions

Tax exemptions in India are offered under various categories. Some are fully exempt; others are partially exempt.

Fully Exempt Incomes

Partially Exempt Incomes

TDS Exemption

TDS stands for tax deducted at source. It is the tax deducted by a payer for payments made to you – whether as salary or professional fee. Banks, too, deduct tax at source when they pay out interest. The payer then deposits the tax with the government and the amount is credited to your tax account. You can adjust it against the tax amount you are liable to pay or claim a refund if the TDS exceeds your tax. (Read more about How to Calculate TDS)

Due to the COVID- 19 lockdowns, TDS rates have been reduced by 25% for up to 23 non-salaried payments to Indian residents who hold valid PAN cards. This includes TDS applicable on contracts, professional fees, interest, rent, dividend, commission, and brokerage, among others. The relief will be available from 14 May 2020 until 31 March 2021.

TAX Exemption - HRA

Employers offer a house rent allowance (HRA) to employees as part of their salary to pay for accommodation. The Income Tax Act allows an exemption on the amount. However, employees cannot claim the exemption if they live in a home they own. The HRA exemption is the minimum of:

• The actual HRA paid to the employee
• Actual rent paid minus 10% of (Basic Salary+ Dearness Allowance)
• 50% of (Basic Salary+ Dearness Allowance) if rented accommodation is in a metro city OR
• 40% of (Basic Salary+ Dearness Allowance) if rented accommodation is in a non-metro city

Tax Exemption On Education Loan

If you are an individual taxpayer, you can claim a deduction on interest paid on an education loan. However, you must fulfil the following conditions:

• The loan should be from a financial institution or an approved charitable institution
• The loan should be taken towards higher education for yourself or your spouse or children or a student to whom you are a legal guardian
• The interest on the loan is to be paid from income that is subject to tax

The deduction is valid until the loan is paid or for 8 years, whichever is sooner.

Tax Exemption On Car Loan

Tax benefits on interest paid on car loan can be availed only by businessmen or self-employed individuals, provided you declare the profit earned and show that the vehicle is used for business purposes. A salaried individual cannot claim this tax benefit.

Tax Exemption - LTA

Leave Travel Allowance (LTA) is paid to employees for travel within India with their families. The amount is tax-free, if proof of travel is given as evidence. The exemption is valid only on travel cost. The exemption applies for two journeys in 4 years.

For air journeys, the LTA cannot be more than the amount for economy airfare (of employer and family) on the national carrier. For rail journey, it is the AC first class ticket fare. The cost is calculated on the shortest route between two destinations.

Income Tax Exemption Limit

The Indian tax laws exempt income up to a certain limit from income tax based on your age. This does not include standard deduction and other tax exemptions you can claim by showing investments and expenses. The table below outlines tax slabs for different groups of individuals. Read more about Income Tax Slabs

• If your annual income does not exceed Rs 5 lakh, you are eligible for a tax rebate of up to Rs 12,500.

• Surcharge is applicable on annual incomes of Rs 50 lakh and above. The rates are:

• 10% on income between Rs 50 lakh and Rs 1 crore

• 15% on income between Rs 1 crore and Rs 2 crore

• 25% on income between Rs 2 crore and Rs 5 crore

• 37% on income above Rs 5 crore

• 4% health and education cess is levied on the sum of income tax and surcharge

While the above rates are applicable to FY 2020–21 as well, taxpayers can also opt for a new taxation regime that offers lower rates. The income tax slabs under the optional regime is the same for all individual taxpayers regardless of age.

Have a look at the income tax slabs under the special new regime:

The rebate on earnings under Rs 5 lakh will still apply. So will surcharge rates as well as the health and education cess.

However, if you choose the new rates, you would be waiving several exemptions and deductions, such as (among others):

• Exemptions on various allowances (e.g. LTA, HRA, conveyance allowance, relocation allowance, etc.), children’s tuition fees, and other special allowances under Section 10(14)

• Standard deduction

• Deduction on housing loan interest payment under Section 24

• Deductions available under Chapter VI-A (Sections 80C,80D, 80E, etc.)

In case you are unsure about which regime to choose for FY2020–21, compute your tax liability using both systems. You could even use an income tax calculator to make it simpler. Then compare the results to figure out which regime helps you reduce your tax burden.