Deductions/Allowances allowed to a salaried employee as per the Income Tax Act
‘Salary’ is the first head of income. The incometaxable under head shall be calculated on the due basis or the receipt basis, whichever occurs earlier. Taxable salary shall include taxable allowances, perquisites, retirement benefits, and profit in lieu of salary. Certain deductions are also allowed from salary income.
TaxabilityofAllowances
Allowances are additional components of salary that are regularly given to employees to meet the expenditure for particular purposes. Allowances are generally fixed irrespective of actual expenditure and are taxable. Under the Act, it is taxable under Section 15 on a due or accrual basis, irrespective of whether it is paid in addition to or instead of salary. However, some exemptions are allowed by the Income-tax Act.
TypesofAllowances
In accordance with the terms of employment or conditions of the workplace, or statutory requirements, an employer may provide various allowances to employees. An allowance is assumed to be taxable under the head ‘Salary’ unless it is specifically exempted from tax, fully or partly. The treatment of popular allowances shall be in accordance with the following provision.
FullyTaxableAllowances
| Allowance | Description |
| Dearness Allowance | Dearness Allowance is provided to an employee to compensate for the effect of rising prices and inflation. |
| OvertimeAllowance | Allowance given to employees for working overtime. |
| City Compensatory Allowance | City Compensatory Allowance is paid by employers to their employees to compensate them for the high cost of living in metro cities. |
| Transport Allowance to an employee other than a blind/deaf and dumb/ orthopedically handicapped employee | Transport allowance granted to an employee to meet his expenditure for the purpose of commuting between the place of his residence and the place of his duty is fully taxable. However, in the case of blind/deaf and dumb/ orthopedically handicapped employees, an exemption of up to Rs. 3,200 per month is provided. |
| Medical Allowance, Tiffin Allowance, and Servant Allowance are also taxable under Section 15. | |
PartiallyTaxableAllowances
| Description | Exemption |
| House Rent Allowance is paid by the employers to the employees to meet the cost of the rented house taken by them. [Section 10(13A)] (See Note) | Minimum of the following three amounts: HRA Actually Received
Actualhouserent paidminus10% ofsalary |
| 50% of salary (if the residence is in Delhi, Mumbai, Kolkata, or Chennai), otherwise 40% of salary. | |
| Transport Allowance granted to an employee working in any transport system to meet his personal expenditure during the performance of his duties for going from one place to another, provided he does not receive the daily allowance. | Lower of 70% of such transport allowance or Rs. 10,000 per month. |
| Children’s Education Allowance – Granted to meet the tuition fees of a maximum of two children. | Up to Rs. 100 per month per child for a maximum of 2 children |
| Hostel Allowance – Granted to meet the Hostel expenditure of a maximum of two children | Up to Rs. 300 per month per child for a maximum of 2 Children. |
| Office Duty AllowancesTravelling allowance, Conveyance allowance, Daily allowance, Helper allowance, Research allowance, Uniform allowance | These allowances are exempt to the extent of a minimum of actual allowance received or actual amount spent for duties of employment. |
| SpecialCompensatory Allowance(Hilly Areas)(Subjecttocertainconditionsand locations) | Varies from Rs. 300 per month to Rs. 7,000 per month. |
| BorderArea Allowance, or RemoteLocality Allowance, or DisturbedArea Allowance, or Difficult Area Allowance (Subject to certain conditions and locations) | Varies from Rs. 200 per month to Rs. 1,300 per month. |
| Tribal Area or Special Compensatory or Scheduled Area or Agency Area Allowance (Subject to certain locations) | Up to Rs 200 per month |
| Compensatory Field Area Allowance. (Subject to certain conditions and locations) | UptoRs.2,600permonth |
| Compensatory Modified Field Area Allowance.(Subject to certain conditions and locations) | UptoRs.1,000permonth |
| The members of the armed forces are operating in areas away from their permanent locations. | UptoRs.3,900permonth |
| Underground Allowance granted to employees working in uncongenial, unnatural climates in underground mines | Up to Rs 800 per month |
| High Altitude Allowance granted to the armed forces operating in high-altitude areas | a) UptoRs.1,060permonth(foran altitude of 9,000 to 15,000 feet)
b) UptoRs.1,600permonth(foran altitude above 15,000 feet) |
| SpecialCompensatoryHighlyActiveField AreaAllowancegrantedtomembersofthe the armed forces | UptoRs.4,200permonth |
| Island Duty Allowance granted to members of the armed forces in Andaman and Nicobar and the Lakshadweep group of islands | UptoRs.3,250permonth |
Note: House Rent Allowance
The exemption for House Rent Allowance (‘HRA’) shall be allowed if the residential accommodation occupied by the employee is not owned by him and he actually pays rent in respect of such residential accommodation. Thus, no exemption is allowed if the employee stays in an accommodation owned by him or where he does not pay any rent in respect of the accommodation.
‘Salary’ for this purpose shall be the aggregate of basic salary, dearness allowance(if it forms part of salary for retirement benefits), and commission paid to the employee.
The exemption is allowed only for the period during which the rented house is occupied by the employee and not for the period afterorbeforethat that. Ifrentalexpenditure is less than 10% of the salary, no exemption shall be allowed to the employee for the HRA.
Deductions fromSalary[Section16]
Income-tax Act allows three deductions from the salary income, i.e., Standard Deduction, Deduction for Entertainment Allowance, and Deduction for Professional Tax. Standard Deduction is allowed to every employee whose income is taxable under the head of salary. In contrast, the other two deductions are allowed subject to certain conditions.
StandardDeduction
This deduction is available to all employees drawing salary income, including retired employees drawing pension income. The Standard Deduction is absolute and unconditional, and the employee does not need to furnish any supporting evidence to claim this deduction. The deduction is the same for all employees with a ceiling of Rs. 50,000, irrespective of the salary drawn. However, with effect from 01-04-2025, the Finance (No. 2) Act, 2024, increased the amount of standard deduction from the existing 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). Accordingly, this will apply to the assessment year 2025-26.
EntertainmentAllowance
The entertainment allowance received by an employee is taxable. If such an entertainment allowance is received by a Government employee, a deduction is allowed to him while computing the taxable income under the head salary. However, no deduction is allowed under this provision to a taxpayer who is not an employee of any Central or State Government.
The amount of deduction allowable to the Government employee for the Entertainment Allowance shall be the lower of the following:
Actual amount of entertainment allowance received during the previous year is 20% of salary, exclusive of any allowance, benefit, or other perquisites
Rs.5,000
Professionaltax
Professional tax paid by the employee, by way of deduction from his salary, is allowed as a deduction from the taxable salary income. Even if paid in advance, the professional tax paid during the year is deductible from the salary income.
If the employer pays the professional tax out of his pocket, without deducting it from the employee’s salary,then it shall first be included in the employee’s allowance. After that, a deduction on such professional tax is allowed from gross salary.
Deductionallowedtosalariedemployee[ChapterVI-A]
| Section80C Common investments or expenditures for which thedeductionunderSection80C isallowedareas under: 1. Payment for life insurance premiums 2. Sumpaidunderacontractforadeferred annuity 3. ContributionstotheEmployees’orRecognised 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. Contributiontonotifiedunit-linkedinsurance plan 9. Tuitionfeesforthefull-timeeducationofany 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-IINPS account by central government’s employees. |
Upto1,50,000(Subjecttooveralllimit of Rs. 1,50,000 under Section 80C, 80CCC and 80CCD(1)) |
| Section80CCC Contribution to certain specified Pension Funds of LIC/other insurers (Subject to certain conditions). |
Upto1,50,000(Subjecttooveralllimit of Rs. 1,50,000 under Section 80C, 80CCC and 80CCD) |
| Section80CCD Contribution to New Pension Scheme (NPS) notified by the Central Government (Subject to certain conditions). |
Amount contributed to a pension scheme or 10% or 14%, as the case may be, of salary/gross total income*, whichever is less (subject to ceiling limit of Rs. 1,50,000 as provided under Section 80CCE) shall be allowed as deduction under section 80CCD(1). |
| Additional deduction to the extent of Rs. 50,000 shall also be available to the assessee under section 80CCD(1B). The additional deduction is not subject to a ceiling limit of Rs. 1,50,000 as provided under Section 80CCE. | |
| Contribution made by the employer shall also be allowed as a deduction under section 80CCD(2) while computing the total income of the employee. However, the amount of deduction could not exceed 14% of the salary in case of central/state Govt.employeesand10%or14%,as the case may be, in any other employees. | |
| *10% salary in case of employees, otherwise 20% of gross total income. | |
|
Note: The benefit of additional deduction of up to Rs. 50,000 under section 80CCD(1B) is also available to a sum deposited to the account of a minor by a parent or guardian (effective from AY 2026-27) |
|
| Section80CCH Amount paid/deposited in Agniveer Corpus Fund by the assessee and the contribution made by the Central Government to such fund |
Whole of the amount paid/deposited |
| Section80D Amount paid (in any mode other than cash) to LIC or other insurers to effect or keep in force an insurance on the health of a specified person (self, spouse, dependent children or parents). An |
For self, spouse, and dependent children: Up to Rs. 25,000 (Rs. 50,000ifspecifiedpersonisasenior citizen) For parents: an additional deduction of |
An
| individual can also make a payment to the Central Government health scheme and/or on account of a preventive health check-up. Note: Deduction for preventive health check-up shall not exceed in aggregate Rs. 5,000. Paymentonaccountofpreventivehealth check-up may be made in cash. Within the overall limit, deduction shall also be allowed up to Rs. 50,000 towards medical expenditure incurred on the health of a specified person, provided such person is a resident senior citizen and no amount has been paid to effect or to keep in force an insurance on the health of such person. |
Rs.25,000shallbeallowed(Rs. 50,000 if the parent is a senior citizen) |
| Section80DD (a) Any expenditure incurred for the medical treatment (including nursing), training, and rehabilitation of a dependent, being a person with disability (b) Any amount paid or deposited under an approvedschemeframedinthisbehalfbythe the LIC or any other insurer or the Administrator or the specified company for the maintenance dependent, being a person with disability (Subject to certain conditions). |
Rs.75,000(Rs.1,25,000incaseof severe disability)
Note: Dependant of an individual means the spouse, children, parents, brothers and the individual or any of them. |
| Section80DDB
Expenses actually paid for medical treatment of specified diseases and ailments for the assessee himself or wholly dependent spouse, children, parents, brothers and sisters (Subject to certain conditions). |
UptoRs.40,000(Rs.100,000incaseof senior citizen) |
| Section80E Amount paid out of income chargeable to tax by way of payment of interest on a loan taken from a financial institution/approved charitable institution for pursuing higher education (Subject to certain conditions). |
The amount of interest paid during the initialyearand7immediatelysucceeding assessment years (or until the above interest is paid in full). |
| Section80EE
Interest payable on a loan taken up to Rs 35 lakhs by the taxpayer from any financial institution, sanctioned during the FY2016-17, for the purpose of acquisition of a residential house property |
Deduction of up to Rs. 50,000towards interest on loan. |
| whosevaluedoesnotexceedRs.50lakhs.
Note: On the date of sanction of the loan, the taxpayer should not own any other residential house property. |
|
| Section80EEA Interest payable on a loan taken by an individual, who is not eligible to claim deduction under section 80EE, from any financial institution during the period beginning from 01-04-2019 ending on 31-03-2022 for acquisition of a residential house property whose stamp duty value does not exceed Rs. 45 lakhs. |
Deduction of up to Rs. 1,50,000towards interest on loan |
| Section80EEB
Interest payable on a loan taken by an individual from any financial institution during the period beginning from 01-04-2019 and ending on 31/03/2023 to purchase an electric vehicle. |
Deduction of up to Rs. 1,50,000towards interest on loan |
| Section80G Donationtospecifiedinstitutionsorfunds Note: No deduction shall be allowed in respect of donation in cash over Rs. 2,000. |
50%to100%ofdonationmade |
| Section80GG Rentpaidforfurnished/unfurnishedresidential accommodation(Subjecttocertainconditions) |
A minimum of the following shall be allowed as a deduction:
(a) Rentpaidinexcessof10%oftotal income; (b) 25% Income; or (c) Rs 5,000 per month. TotalIncome=Grosstotalincome minus long-term capital gains, short-termcapital gains under section 111A, deductions under sections 80C to 80U (other than 80GG) and income under Section 115A |
| Section80GGA
Donations for scientific research or rural development Note: Nodeduction shall be allowed in respect of cash contribution over Rs. 2,000. |
100%ofthedonationmade |
| Section80GGC
Donation to a political party’s electoral trust |
100%ofthedonationmade |
| Note: The amount contributed in cash shall not be eligible for deduction. | |
| Section80TTA
Interest on deposits in a savings account with a banking company, a post office, a co-operative society engaged in banking business, etc.(Subject to certain conditions) |
100%oftheamountofsuchincome subject to a maximum of Rs. 10,000 |
| Section80TTB Interest on deposits with a banking company,a post office, a co-operative society engaged in banking business, etc. (Subject to certain conditions) |
100% of the amount of such income subjecttothemaximumamountofRs. 50,000 |
| Section80U
A resident individual who, at any time during the previous year, is certified by the medical authority to be a person with disability |
Rs.75,000(Rs.1,25,000incaseof severe disability) |
MCQsonDeductions/Allowances allowed to salaried employees
Q1.Transport allowance granted to an employee(except whois blindordeafand dumb or orthopedically handicapped with disability of lower extremities) to meet his expenditure for the purpose of commuting between the place of his residence and the place of his duty is.
- FullyTaxable
- 3,200permonth
- 1,600permonth
- None of the above
Correctanswer:(a)
Explanation: Transport allowance granted to an employee to meet the purpose of commuting between the place of his residence and the place of his duty is fully taxable. However, in the case of blind/deaf and dumb/ orthopedically handicapped employees, an exemption of up to Rs. 3,200 per month is provided.
Q2.Medical allowance granted by an employer to the employee is fully taxable.
- True
- False
Correctanswer:(a)
Explanation: Medical Allowance, Tiffin Allowance, and Servant Allowance granted by an employer to the employee are fully taxable.
Q3.HouseRentAllowancepaidbytheemployerstotheemployeesisexemptupto
.
- HRA Actually Received
- Actualhouserent paidminus10% ofsalary
- 50% of the salary (if the residence is in Delhi, Mumbai, Kolkata, or Chennai), otherwise 40% of the salary
- Lowerof(a),(b)and(c)
Correctanswer:(d)
Explanation: House Rent Allowance paid bytheemployerstotheemployees is exempt up to the minimum of the following amounts:
HRA Actually Received
Actualhouserentpaidminus10%of salary
50%of salary (if the residence is in Delhi, Mumbai, Kolkata, or Chennai), otherwise 40% of salary.
Q4. Transport Allowance granted to an employee working in any transport system to meet this personal expenditure during the performance of his duties, forgoing from one place to another, is exempt up to .
- 70% transport allowance
- 10,000permonth
- Lower of (a)or (b)
- Higherof(a)or(b)
Correctanswer:(c)
Explanation: Transport Allowance granted to an employee working in any transport system to meet his personal expenditure during the performance of his duties for going from one place to another, provided he does not receive the daily allowance and is exempt up to the Lower of 70%of such transport allowance or Rs. 10,000 per month.
Q5.Which of the following allowances areexempttotheextentofa a minimum of actual allowance received or actual amount spent for duties of employment?
Correctanswer:(d)
Explanation: Office Duty Allowances are exempt to the extent of a minimum of actual allowance received or actual amount spent for duties of employment. This includes Travelling allowance, Conveyance allowance, Daily allowance, Helper allowance, Research allowance and Uniform allowance.
Q6.The entertainment allowance received by an employee (other than a government employee) is exempt up to .
- Actual amount of entertainment allowance received
- 20%ofsalaryexclusiveofanyallowance, benefit, or other perquisite
- 5,000
- None of the above
Correctanswer:(d)
Explanation: The entertainment allowance received by an employee is taxable.If such an entertainment allowance is received by a Government employee, a deduction is allowed to him while computing the taxable income under the head salary. The amount of deduction allowable to the Government employee for the Entertainment Allowance shall be the lower of the following:
Actual amount of entertainment allowance is 20%of salary, exclusive of any allowance, benefit, or other perquisite
Rs.5,000
Q7.WhichofthefollowingpaymentsarecoveredforthedeductionunderSection80C?
- Lifeinsurancepremium
- Contribution to Public Provident Fund Account
- Tuition fees
- Allofthe above
Correctanswer:(d)
Explanation: Deduction under Section 80C can be claimed for all of the above-mentioned payments, including Life insurance premium, Contributionto Public Provident Fund Account, and Tuition fees (excluding development fees, donations, etc.) paid by an individual to any university, college, school, or other educational institution situated in India, for the full-time education of any 2 of his/her children.
Q8.What is the maximum amount allowed under Section 80D for the payment made by an individual for the health insurance premium of the parents (senior citizens)?
- 25,000
- 50,000
- 1,00,000
- 5,000
Correctanswer:(b)
Explanation: An individual can claim a maximum deduction of Rs.. 50,000 under section 80D where payment is made in respect of medical insurance premium on the health of his parents (if the parent is a senior citizen,) otherwise Rs. 25,000 shall be allowed as a deduction.
