Income Tax in India

Every individual who earns an income in India is supposed to pay Tax on the Income earned by him during that financial year to the government of India. Calculation of the Income Tax to be paid by an individual is a cumbersome process. The government of India provides certain benefits to its citizens who earn an income in the country by means of deductions, exemptions etc. Before going into the details below are the items that would be covered in this article.


1. Heads of Income
a. What exactly qualifies to be an income, for which you need to pay Tax.
b. Salary Perquisites that are taxable
2. Deductions
a. House Rent Allowance – HRA
b. Leave Travel Allowance – LTA
c. Medical Allowance
d. Transportation Allowance
e. Interest paid on Housing Loan
3. Exemptions
a. Under Section 80C
b. Under Section 80D
c. Under Section 80DD
d. Under Section 80DDB
e. Under Section 80E
f. Under Section 80U

4. Clubbing of Minor Income

Heads of Income:
The Heads of Income includes the types of income earned by an individual that would qualify as Income for which he/she needs to pay tax. These include the components that would be earned by an individual through employment with an organization/company. They are:
1. Salaries & Wages
2. Bonus & Commissions
3. Other Perquisite benefits

According to the IT laws Perquisites include the following:
a. Rent free accommodation or concessional rate accommodation received from the employer
b. Any other benefit given by the employer either in cash or material (Apart from monthly Salary)
c. Any Fringe benefits provided by the employer (This would include Mobile bill reimbursement, Petrol expenses etc)

Deductions on Income:

As per the IT regulations, there are certain deductions that are allowed on the income earned by an individual. These amounts can be subtracted while arriving upon the net taxable salary of an individual.

They include:
1. Housing Rent Allowance (HRA)
The HRA is usually a part of the salary/wages paid out to an employee by the employer. The deduction on HRA is eligible to any individual who is residing in a rented house and is paying rent to the house owner. There are some rules that govern the limit till which HRA can be deducted from your taxable income. Out of the below mentioned 3 items whichever is LEAST will be considered for the purpose of deduction under the HRA component.
a. Actual amount of the HRA paid by the employer (As part of Salary) Or
b. 50% of Basic salary in case of Metros (Delhi, Bombay, Calcutta & Chennai) or 40% of Basic salary in case of non Metros. Or
c. Actual rent paid by the individual – 10% of Basic salary
For e.g., your monthly Basic salary is Rs. 12,000/- and the HRA component as per your salary is Rs. 6000/- and the actual rent you are paying is Rs. 6000/- in Chennai then the amount you would be eligible for HRA exemption is Rs. 4800/- (Actual rent – 10% of Basic salary) per month.

2. Leave Travel Allowance (LTA)
LTA also is usually a part of the salary paid out to an employee as part of his employment. As per the Indian tax laws you are eligible to claim an amount that less than or equal to the total LTA paid out to him by his employer. This would cover the expenses incurred in travel of self with/without dependents. (Dependents would include spouse, children and dependent parents) There are some conditions which need to be satisfied for an individual to claim exemption under LTA. They are:
a. LTA can be claimed only twice in a block of 4 financial years. You cannot claim LTA every year.
b. Only Transportation expenses would be considered for LTA. Accommodation & food expenses are not considered.
c. For an employee to be eligible for claiming LTA, he/she should have taken at least 3 days of earned leave from the employer

3. Medical Allowance
Medical allowance is also a part of the salary paid out to an employee. The maximum amount eligible for this component is either Rs. 15,000/- or the actual amount paid out to you as part of Salary. To claim exemption under this you need to provide medical bills to substantiate your claim of having incurred medical expenditure. The medical bills can be in the name of the individual or his spouse or children or dependent parents.

4. Transportation Allowance
The IT laws permit a deduction of Rs. 9,800/- as a standard transportation allowance to all resident individuals who pay income Tax. This amount is standard irrespective of the job/industry the individual is employed. Also this amount does not change irrespective of the means of transport you use to commute to your office.

5. Interest Paid on housing loan
The IT laws permit an individual who has taken a home loan from a recognized bank for the purpose of construction or purchase of a residential property to claim exemption on tax on the interest part of the loan taken by the individual. There is a limit to this exemption which is as follows.
a. If the property is occupied by the individual then the maximum eligible amount under this is Rs. 1,00,000/-
b. If the property is rented out and the rental income is included in the total income earned by the individual then there is no maximum amount. The actual interest paid on the home loan can be used for deduction from total salary considered for the purpose of income tax.
Note: Exemption is available on home loans taken to purchase residential property only. Home loans taken to purchase land do not qualify for income tax exemption.


Income Tax Exemption:

The Income Tax laws allow all individuals who are assessed for income tax to claim exemption from income tax under the following heads.
1. Section 80C

The section 80C of the IT laws provide exemption from income tax on amounts that are invested by the individual. This usually includes the amount the individual invests in certified instruments that are exempt from tax. They are:
a. PF – Provident Fund (A portion of your salary is deducted by your employer as PF and would be remitted to the PF house that is maintained by the government of India. A maximum of 12% of your basic Salary is eligible for exemption from income tax)
b. PPF – Public Provident Fund – A maximum of Rs. 70,000/- per financial year.
c. ELSS – Equity Linked Savings Scheme (Mutual funds)
d. NSC – National Savings Certificate
e. KVP – Kisan Vikas Patra
f. Life Insurance (Insurance provided by LIC & Other registered Insurance companies)
g. Tax Saving ULIP’s – Unit Linked Insurance Plans
h. Principal amount repaid as part of the Home loan
i. 5 year bank fixed deposits
A point to be noted here is that the sum total of all these components can be a maximum of Rs. 1,00,000/- per financial year.

2. Section 80D

This section of the IT laws provide exemption on the premium paid towards Medical insurance of the individual, spouse & children and also dependent parents. The maximum eligible amount under this section is Rs. 15,000/- per financial year.

3. Section 80DD

Exemption under sec 80DD is available to any individual who:
a. Incurs any expenditure for the medical treatment, training and rehabilitation of a disabled dependent Or
b. Deposits any amount in schemes of the LIC of India for the maintenance of the disabled dependent.
A deduction of Rs. 50,000/- is available to all individuals who incur any of the above two said expenditures. Where the dependent has a Severe disability a deduction of Rs. 1,00,000/- is allowed. An individual should furnish a copy of the issued certificate by the medical board constituted either by the Central government or a state government in the prescribed form, along with the return of income of the year for which the deduction is claimed.

4. Section 80DDB
An individual, resident in India spending any amount for the medical treatment of specified diseases affecting him or his spouse, children, parents, brothers and sisters and who are dependent on him, will be eligible for a deduction of the amount actually spent or Rs 40,000, whichever is less.

For any amount spent on the treatment of a dependent senior citizen an individual is eligible for a deduction of the amount spent or Rs 60,000, whichever is less is available. The individual should furnish a certificate in Form 10-I with the return of income issued by a specialist working in a government hospital.


5. Section 80E
Under this section, deduction is available for payment of interest on a loan taken for higher education from any financial institution or an approved charitable institution. The loan should be taken for either pursuing a full-time graduate or post-graduate course in engineering, medicine or management, or a post-graduate course in applied science or pure science. There is no upper limit and the entire interest amount repaid each year to the bank for a period of 8 years is exempt from income tax

6. Section 80U - It is deduction in the case of a person with a disability. An individual who is suffering from a permanent disability or mental retardation as specified in the persons with disabilities (Equal Opportunities, Protection of Rights and Full Participation) Act, 1995 or the National Trust for Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities Act, 1999, shall be allowed a deduction of Rs 50,000. In case of severe disability it is Rs. 75,000.

The Income tax assessee should furnish a certificate from a medical board constituted by either the Central or the State Government, along with the return of income for the year for which the deduction is claimed.
Note: Section 80U is available only for individuals who are disabled but still earn an income that qualifies for income tax.


Clubbing of Minor Income:
There might be cases where the minor child in the family earns an income that could be through interest earned on deposits in the name of the minor or through dividends on shares held in the name of the minor etc. Under such a situation,
• The minor's income is clubbed with that of the parent with the higher income.
• Only income earned till the year the minor attains age 18 is clubbed.
In excess of Rs. 1,500 earned by a minor, the income is added to the parent with higher income, irrespective of the residential status of either the child or the parent. The clubbing provision is applicable even if the parents are NRI and the minor stays in India or vice-versa.

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