Taxation for Salaried Individuals – All you need to know

Taxation in India is governed by the Income Tax Act, 1961. Under Indian Income Tax law, income is divided into five heads/group of income for taxation purpose:

1. Income from Salary
2. Income from House Property i.e. rental income.
3. Income from Capital Gain
4. Income from Business and Profession
5. Income from Other sources.

Rates of tax, exemptions, etc. vary depending upon the type of income falling under any of these categories. Salaried individuals are required to pay tax on their income based on the income slabs defined by the government. In this article, we will explore how the taxation of salaried individuals works in India, the various exemptions, deductions, and rebates available to them, and how they can optimize their tax liabilities.

All the income mentioned above are combined to arrive at ‘Gross Total Income’. Various deductions are deducted from ‘Gross Total Income’ to arrive at ‘Total Income’ and tax is levied on ‘Total Income’.

In common parlance, tax is levied on income but various exemptions and deductions are provided for social and economic purposes.

1. Income Tax Slabs for Salaried Individuals

For the financial year (FY) 2024-25 (Assessment Year 2025-26), the income tax slabs for individual taxpayers below the age of 60 under the old tax regime and the new tax regime are as follows:

Old Tax Regime (with deductions and exemptions)

• Income up to ₹2.5 lakh: Nil (no tax)
• Income from ₹2.5 lakh to ₹5 lakh: 5% above 2.5lakh
• Income from ₹5 lakh to ₹10 lakh: 12,500 + 20% above 5.0lakh
• Income above ₹10 lakh: 1,12,500 + 30% above 10.0lakh

New Tax Regime (no deductions and exemptions)

• Income up to ₹3.0 lakh: Nil (no tax)
• Income from ₹3.0 lakh to ₹7.0 lakh: 5% above 3.0lakh
• Income from ₹7.0 lakh to ₹10.0 lakh: ₹ 20,000 + 10% above ₹ 7.0lakh
• Income from ₹10.0 lakh to ₹12.0 lakh: ₹ 50,000 + 15% above ₹ 10.0lakh
• Income from ₹12.0 lakh to ₹15.0 lakh: ₹ 80,000 + 20% above ₹ 12.0lakh
• Income above ₹15 lakh: ₹ 1,40,000 + 30% above ₹ 15.0lakh

Under the new tax regime, individuals cannot claim deductions such as 80C (PPF, life insurance premiums, etc.), 80D (health insurance), and other exemptions like HRA (House Rent Allowance), among others. However, taxpayers may prefer the new regime if their overall exemptions and deductions do not amount to a significant reduction in tax liability. Only standard deduction of Rs 75,000 is allowed in new regime of tax.

2. Key Components of Salary for Taxation

The salary earned by an individual is classified into various components, and each component may be taxed differently:

• Basic Salary: This is the core salary and forms the base for calculating many allowances, deductions, and benefits.
• House Rent Allowance (HRA): HRA is given to employees to meet their rental expenses. It is exempt from tax to the extent of the least of the following three:
  1. Actual HRA received.
  2. Rent paid minus 10% of the salary.
  3. 50% of the salary (if residing in a metro city) or 40% (if residing in a non-metro city).
• Special Allowances: These are additional payments made to the employee for specific tasks or duties. These could be fully taxable or partially exempt, depending on the nature of the allowance.
• Bonus and Commission: Bonuses or commissions are fully taxable and are added to the total income of an individual.
• Provident Fund (PF): Contributions to the Provident Fund are exempt from tax up to a certain limit under Section 80C. Additionally, interest earned on the Provident Fund is also tax-free, provided the contribution is in line with the statutory rate.

3. Taxable Income of Salaried Individuals

Taxable income is the total income earned after applying exemptions, deductions, and rebates. The common deductions available to salaried individuals include:

• Section 80C: This includes deductions on investments such as Employee Provident Fund (EPF), Public Provident Fund (PPF), National Savings Certificates (NSC), tax-saving Fixed Deposits, and life insurance premiums, up to a maximum of ₹1.5 lakh.
• Section 80D: Deductions for premiums paid on health insurance policies for self, family, and parents. The maximum deduction is ₹25,000 (₹50,000 for senior citizens).
• Section 10(14): This section covers exemptions related to house rent, travel allowance, and other special allowances like children education allowance.
• Section 24(b): A deduction of ₹2 lakh per annum on home loan interest paid under the head “Income from House Property.”

4. Rebates and Reliefs for Salaried Individuals

• Rebate under Section 87A: If the total taxable income of an individual is up to ₹5 lakh, they are eligible for a rebate of up to ₹12,500 under Section 87A, for old regime. For new regime rebate is allowed upto Rs. 25,000 when total income does not exceed  ₹7 lakh.

5. Tax Filing and Compliance for Salaried Individuals

Salaried individuals are required to file their income tax returns (ITR) annually. The process involves:

1. TDS (Tax Deducted at Source): Most employers deduct tax at source from the salary of their employees as per the applicable income tax slabs. This TDS is deposited with the government on behalf of the employee.
2. Form 16: Employers issue Form 16, a certificate that provides a detailed breakdown of the salary paid and the TDS deducted. This form is summary of all information relating to income, tax, exemptions, etc. and is handy for filing income tax returns.
3. Filing ITR: Salaried individuals can file their income tax returns using the online portal of the Income Tax Department. Individuals can also claim any deductions, exemptions in their ITR, which they have not submitted to employer.

Submission of all necessary documents pertaining to exemptions, deductions, etc. helps employer in correctly determining the total income and tax payable. If any individuals has missed submitting any information to employer, they can always claim/disclose in filing of Income Tax return.

6. Tax Planning for Salaried Individuals

To minimize their tax liability, salaried individuals must engage in proactive tax planning. Some strategies include:

• Opt for the old tax regime if the total exemptions and deductions exceed the tax benefit available under the new regime.
• Maximize contributions to tax-saving instruments such as PPF, ELSS (Equity Linked Saving Schemes), and National Pension Scheme (NPS) to reduce taxable income.
• Claim HRA exemptions if applicable, especially if living in rented accommodation.
• Invest in health insurance policies and claim deductions under Section 80D.
• Take advantage of tax-free benefits like Transport Allowance, Leave Travel Allowance (LTA), and Education Allowance.

Various other deductions and exemptions are allowed to an individual taxpayer.

7. Other Important points:

• If any employee received ESOP as a part of salary income and if shares are unlisted, it is mandatory to disclose in ITR. If shares received are of a foreign Company, it is mandatory to disclose in schedule of Foreign Assets in ITR.
• Individuals are required to report all kinds of income in their ITR, apart from salary income.

Disclaimer: This article is written in Jan’2025 and it reflects tax law applicable then. Any changes in tax laws might not appear here. This article is written considering widely applicable scenarios that a salaried individual faces, and some of the specific situations might not appear here. It is always advisable to consult an expert professional before taking any decision.