Understanding the Key Deductions for Salaried Employees

The Income Tax Act allows three types of deductions from salary income, i.e., Standard Deduction, Deduction for Entertainment Allowance, and Deduction for Professional Tax. The Standard Deduction is available to all employees with taxable salary income. However, the other two deductions are only allowed in specific conditions.

1. Standard Deduction

The deduction is available to all employees with taxable salary income, involving retired employees drawing pension income. The standard deduction is fixed and unconditional and employees don’t need to provide any proof or documents to claim this deduction. The deduction is the same for all employees, up to a maximum of Rs. 50,000, no matter how much salary they earn. Starting from 1-04-2025, the Finance (No. 2) Act, 2024, has increased the standard deduction from Rs. 50,000 to Rs. 75,000 in a case where the assessee-employee computes the income tax under the new (default) tax regime prescribed under Section 115BAC(1A)(ii). This change will apply to the assessment year 2025-26 and beyond.

2. Entertainment Allowance

Entertainment allowance is a taxable benefit for employees. This allowance is received by government employees who can claim a deduction for this allowance when calculating their taxable income under the “salary” head. This deduction is not available to non-government employees.

The deduction allowed for Entertainment Allowance to a government employee is the least of the following:

• Actual amount of entertainment allowance received during the previous year
• 20% of salary exclusive of any allowance, benefit, or other perquisites
• Rs. 5,000

3. Professional Tax

The tax paid by the employee, which is deducted from their salary, can be claimed as a deduction from taxable salary income. This applies even if the professional tax is paid in advance during the year. If the employer pays the professional tax on behalf of the employee without deducting it from their salary, it will first be added to the employee’s income as a perquisite. Then in this case the employee can claim a deduction for the professional tax from their gross salary.

Deduction Allowed to Salaried Employee:

Section 80C

Common investments and expenses for deduction under Section 80C include:

1. Payment for life insurance premium
2. Sum paid under a contract for a deferred annuity
3. Contributions to the Employees’ or Recognised Provident Fund
4. Contribution to Public Provident Fund Account
5. Contribution to an approved superannuation fund
6. Subscription to any notified security or notified deposit scheme (Sukanya Samriddhi Account Scheme)
7. Subscription to notified savings certificates
8. Contribution to notified unit-linked insurance plan
9. Tuition fees for the full-time education of any 2 children
10. Certain payments for the purchase/construction of residential house property
11. Notified annuity plan of LIC or other insurers
12. Investment in Equity Linked Saving Scheme
13. Term deposits for a fixed period of not less than 5 years with a scheduled bank
14. Deposit in Senior Citizen Savings Scheme
15. Contribution to Tier-II NPS account by central government’s employees.

Deduction: Up to 1,50,000 per year for investments in the above-mentioned financial instruments. (Subject to overall limit of Rs. 1,50,000 under Section 80C, 80CCC and 80CCD(1))

Section 80CCC

Contribution to certain specified Pension Funds of LIC/other insurers.

Deduction: Up to 1,50,000(Subject to an overall limit of Rs. 1,50,000 under Section 80C, 80CCC and 80CCD).

Section 80CCD

Contribution to New Pension Scheme (NPS) notified by the Central Government.

Deduction: Deduction under Section 80CCD(1):

You can claim a deduction for contributions made to a pension scheme, limited to:

• 10% of salary (for salaried employees) or
• 20% of gross total income (for self-employed individuals), whichever is lower.
• The maximum deduction allowed is Rs. 1,50,000, as per the overall limit under Section 80CCE.

Additional Deduction under Section 80CCD(1B):

• You can claim an extra deduction of up to Rs. 50,000 under this section.
• This additional deduction is not part of the Rs. 1,50,000 limit under Section 80CCE.

Employer Contribution under Section 80CCD(2):

If your employer contributes to your pension scheme, you can also claim it as a deduction. The deduction is limited to:

• 14% of salary for central/state government employees.
• 10% or 14% of the salary for other employees, depending on the case.

Section 80CCH

The amount deposited in Agniveer Corpus Fund by the assessee and contribution made by Central Government to such fund

Deduction: Whole of the amount paid or deposited.

Section 80D

You can claim a deduction for the amount paid (other than in cash) for health insurance premiums to LIC or any other insurer for yourself, your spouse, dependent children, or parents. This includes payments made to the Central Government health scheme. Additionally, payments for preventive health check-ups also qualify for this deduction.

You can also claim a deduction of up to Rs. 50,000 for medical expenses incurred for the health of a resident senior citizen, as long as no amount has been paid for health insurance for that person. The deduction is part of the overall limit for deductions.

Deduction: For self, spouse, and dependent children: Up to Rs. 25,000 (Rs. 50,000 if the specified person is a senior citizen) and For parents: additional deduction of Rs. 25,000 will be allowed (Rs. 50,000 if the parent is a senior citizen)

Section 80DD

(a) Any expense incurred for the medical treatment training, and rehabilitation of a dependent, or a person with disability.

(b) You can claim a deduction for any amount paid or deposited under an approved scheme by LIC or any other insurer, or a specified company to support the maintenance of a dependent person with a disability.

Deduction: Up to Rs. 75, 000 (Rs. 1,25,000 in case of severe disability)

Section 80DDB

You can claim a deduction for medical treatment expenses of specified diseases for yourself or your dependent family members (spouse, children, parents, brothers, and sisters), subject to certain conditions.

Deduction: Up to Rs. 40,000 (Rs. 100,000 in case of senior citizen)

Section 80E

You can claim a deduction for interest paid on a loan taken from a financial institution or approved charity for higher education. This is allowed under certain conditions.

Deduction: You can claim a deduction for the interest paid during the first year and the next 7 years, or until the full interest is paid.

Section 80EE

You can claim a deduction on the interest paid for a loan up to Rs. 35 lakhs, taken from any financial institution during FY 2016-17, to buy a residential property worth up to Rs. 50 lakhs.

Deduction: Up to Rs. 50,000 towards interest on loan.

Section 80EEA

If an individual takes a loan from a financial institution to buy a residential property (with a stamp duty value of up to Rs. 45 lakhs) between 01-04-2019, and March 31, 2022, and is not eligible for the deduction under Section 80EE, they can still claim a deduction on the interest paid on the loan.

Deduction: Up to Rs. 1,50,000 towards interest on loan.

Section 80G

Section 80G allows taxpayers to claim deductions for donations made to eligible charities and organizations.

Deduction: 50% to 100% of donation made

Section 80GG

Section 80GG helpful provision for individuals who pay rent but do not receive house rent allowance (HRA).

Deduction: You can claim a deduction for rent paid based on the following, whichever is the least:

• Rent paid over 10% of your total income.
• 25% of your total income.
• Rs. 5,000 per month.

Section GGA

Donations for scientific research or rural development

Deduction: 100% of the donation made

Section 80GGC

Donation to a political party or an electoral trust

Deduction: 100% of the donation made

Section 80TTA

You can claim a deduction on the interest earned from savings account deposits in banks, post offices, or cooperative societies (subject to certain conditions).

Deduction: 100% of the amount

Section 80TTB

Interest on deposits with a banking company, a post office, a cooperative society engaged in banking business, etc.

Deduction: 100% of the amount of such income subject to the maximum amount of Rs. 50,000

Section 80U

A resident individual who is certified by a medical authority as a person with a disability at any time during the previous year.

Deduction: Rs. 75,000 (Rs. 1,25,000 in case of severe disability)