Tax Exemption: Definition Significance
Tax exemption refers to specific income or transactions that are not subject to taxation. This means certain earnings, like agricultural income or allowances such as House Rent Allowance (HRA), are excluded from your taxable income. These exemptions help reduce the overall tax liability , allowing individuals to retain more of their earnings. Understanding and utilising available tax exemptions is essential for effective financial planning and maximising take-home income.
Common Tax Exemptions in India
Taxpayers in India can reduce their taxable income through various exemptions and deductions, thereby lowering their tax liability. These provisions are designed to encourage savings, investments, and essential expenditures. Below are some common tax exemptions available:
Standard Deduction:
Salaried employees were eligible for a standard deduction of ₹50,000 from their gross salary, reducing taxable income under the new tax regime. As per Budget 2025,* this has been increased to ₹75,000 in the New Tax Regime.
Section 24 – Home Loan Interest:
Individuals can claim a deduction on home loan interest. Deduction up to ₹2 lakh can be availed on interest paid for housing loan for self-occupied property .
Section 80CCD(2) - National Pension System (NPS):
It allows employees to claim a deduction on their employer's NPS contributions for up to 14% of the salary.
Agricultural Income:
Earnings from farming activities are exempt under the Income Tax Act 1961. However, if agricultural income that is the income after deduction of expense exceeds ₹5,000 and non- agricultural income surpasses the basic exemption limit, it will be considered for tax rate purposes.
Gratuity:
A lump-sum payment is given to employees upon retirement or resignation which is fully exempted from tax. For non-government employees, gratuity up to the minimum of ₹20 lakh, actual gratuity received or (last drawn salary * number of years of employment*15)/26, is tax-exempt provided the company falls under the Gratuity Act 1972. If not, then the gratuity amount is upto a minimum of ₹10 lakhs, amount of gratuity actually received or the average salary for the last 10 months * total number of years of employment * 0.5.
Leave Encashment:
Leave encashment refers to the amount received by employees for unused leaves. The Indian government has maintained the tax exemption limit for leave encashment of the least of ₹25 lakh, actual leave encashment and 10 months salary or its cash equivalent of leaves not taken for non-government employees on salaries upon their retirement.
Section 80D – Medical Insurance Premiums:
Premiums paid for medical insurance qualify for deductions. Individuals can claim up to ₹25,000 for premiums covering self or family . If the insured parents are senior citizens, the deduction limit increases to ₹50,000.
Section 80TTA – Savings Account Interest:
Interest earned up to ₹10,000 from savings accounts deductible from gross total income for Individuals and HUFs .
House Rent Allowance (HRA):
HRA exemption under Section 10(13A) is the lowest of: actual HRA received, 50% of [basic salary + DA] for metro residents, 40% of [basic salary + DA] for non-metro residents, or actual rent paid minus 10% of [basic salary + DA].
Leave Travel Allowance (LTA):
Employees can claim an exemption for travel expenses incurred on leave, covering travel within India for themselves and family. This exemption is available for two journeys in a block of four years.
Section 80C Deductions:
Individuals and Hindu Undivided Families (HUFs) can claim deductions up to ₹1.5 lakh annually for investments in specified instruments. The premiums paid for life insurance plans are also allowed as a deduction under this section, which helps you lower your tax liability.
These exemptions and deductions are subject to specific conditions and limits. Section 80C, 80D, and 80TTA are available under the old tax regime only. The same applies to HRA and LTA. Taxpayers should assess their eligibility and maintain the necessary documentation to avail of these benefits.
Key Tax Exemptions and Updates in Budget 2025
The Union Budget 2025* introduced several key tax exemptions and updates. These measures aim to boost household savings and consumption, thereby stimulating economic growth
Increased Income Tax Exemption Limit:
All individuals earning up to ₹12 lakh annually are now exempted from any payment of income tax under the new tax regime.
Standard Deduction for Salaried Employees:
All salaried individuals can avail of a standard deduction of up to ₹75,000 under the New Tax Regime. This effectively raises the tax-free income limit to ₹12.75 lakh per anum.
Revised Tax Slabs:
The basic exemption limit has been increased to ₹4 lakh under the new tax regime, providing relief to taxpayers by reducing their taxable income.
Introduction of a Simplified Direct Tax Code:
A new, concise Income Tax Bill is set to be introduced, aiming to provide greater clarity and ease of understanding .
How to Claim Tax Exemptions?
To claim tax exemptions in India, follow these simple steps:
Identify Eligible Exemptions:
Determine which tax exemptions apply to your income and investments.
Gather Necessary Documents:
Collect proof such as rent receipts for House Rent Allowance (HRA) or interest certificates for home loan deductions etc.
Submit Declarations to Employer:
Salaried individuals provide Form 12BB to their employer, detailing their tax-saving investments and expenses.
File Income Tax Return (ITR):
Accurately report your income and claim eligible exemptions when filing your ITR.
Retain Supporting Documents:
Keep all related documents for future reference, as they may be required during assessments.
Conclusion
Understanding tax exemptions helps individuals avoid overpaying and maximise savings. Many income sources qualify for exemptions, with the most common ones offering significant tax relief. Staying informed about tax laws ensures proper filing and compliance while making the most of available benefits. Always report exempt income correctly in tax returns to claim the rightful exemption.
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