Deduction for employees from salary income

It is a well known fact that for the salaried employees tax is deducted at source every month on the estimated salary income of the employee for whole of the financial year. As the Financial Year comes to a close, the salaried employees in particular have to be very careful specially in making their investments before the close of the Financial Year so as to enjoy correct deduction of tax at source on their salary income keeping in view the investments actually made during the year.

The first most important point which every salary employee should keep in mind is to submit declaration to the employer about the proposed investments which will be made by the employee before the close of the accounting year so as to get deduction from salary income. This declaration should be submitted to the employer as soon as possible so that the employer can take into consideration the expected investments by an employee before deducting income-tax on his salary income.

However, the investments for availing tax deduction from the total salary income can be made by an employee any time before 31st March i.e. before the close of the Financial Year. In case the declaration is not submitted to the employer about the expected investments to be made by the employee, in that situation there would be a great problem because the employer would have deducted tax on the salary income without considering the investments proposed to be made by the employee and then the employee will have big problem in filing Return and getting back the Refund from the Income-tax Department.

In the Declaration which is to be submitted to the employer, the employee should jot down the different instruments in which he or she proposes to make the investments. The first most important deduction which is available to every salaried employee is the deduction under section 80C of the Income-tax Act, 1961 whereby on a sum total of maximum Rs.1 lakh the investments can be made in terms of section 80C of the Income-tax Act, 1961. The following are the important items for which the employee can make the investment and then enjoy the deduction within the overall limit of Rs. 1 lakh.

(a)Life Insurance Premium for self, wife & children & also contribution to Unit Linked Insurance Plan (ULIP).

(b) Contributions to Provident Fund.

(c) Contributions to Public Public Provident Fund.

(d) Contribution to Equity Linked Savings Scheme (ELSS) - may be combination of more than one plan.

(e) Payment for Purchase or Construction of residential house so arrived at by looking at the breakup of your EMI Payments – but no deduction for repayment of loans to all but only for loans from employer, banks, LIC, National Housing Bank, etc. If would also include stamp duty & payment of registration fee of the house.

(f) Term Deposit/Fixed Deposit with a bank for 5 years or more

(g) Deposit in Senior Citizens Savings Scheme – may be in one lot or different lots.

(h) Investments in National Savings Certificates (NSC) & Post Office Time Deposit Scheme.

(i) Payment of tution fees for full time education of any two children excluding donation, etc to school.

In addition to the above items which entitle an assessee to claim deduction under section 80C, it is also possible for the employee to enjoy deduction for contribution to certain Pension Funds as per section 80CCC or deduction in respect of contribution to Pension Scheme of the Central Government as per section 80CCD. However, the deduction in respect of these items inclusive of the deduction under section 80C is limited to a maximum of Rs. 1 lakh. Hence, the employee should submit in the first place declaration to the employer about the proposed investments for the above purpose so that the employer can take the same into consideration and deduct tax at source accordingly.

The second important point which will entitle deduction at source from the salary income of the employee would be in respect of deduction for interest on housing loan. As per section 24 deduction available on housing loan for residential house upto Rs. 1,50,000 p.a. if loan taken after 1-4-1999 but it would be only Rs. 30,000 p.a., if loan taken prior to 1-4-1999. Do remember the following salient features:-

(1) Deduction only to the assessee who is owner of the property.

(2) Deduction available to each co-owner.

(3) If loan after 1-4-1999 the acquisition or construction must be completed within three years after taking loan.

(4) The employer can grant deduction only on furnishing simple statement to be verified by the taxpayer.

(5) Certificate from person to whom interest is to be paid to be submitted to the employer.

(6) Deduction permissible for loan from any one at any rate of interest.

(7) Deduction of interest for more than one house cannot be claimed within the limit of Rs. 1,50,000.

(8) Deduction for interest also permissible for other properties if rented out.

(9) Interest deduction for house loan available even if actual interest not paid during the year.

(10) Interest on House Building Advance taken by Govt. employees also allowed deduction even if firstly the loan is repaid & the interest is paid later on.

While claiming the benefit of deduction in respect of residential housing, care should be taken to note that the deduction cannot be available in respect of interest on housing loan in case the property is not ready.

The employer can also grant deduction in respect of other items also to the employee. Some of these important items for which deduction can be granted are as under :-

(a) Deduction as per section 80D on Medical Insurance Policies for self, spouse and children deduction upto Rs. 15,000 and further for Insurance of parents upto Rs. 15,000. However, if senior citizen the deduction is Rs. 20,000.

(b) Deduction as per section 80DD for maintenance of dependant with disability Rs. 50,000 and Rs. 75,000 for severe disability.

(c) Deduction as per section 80DDB for medical treatment of specified diseases for self and dependants Rs. 40,000 and Rs. 60,000 for senior citizens.

(d) Deduction as per section 80E for interest on loan for higher education without any upper limit.

(e) Deduction for donation under section 80G at the rate of 50% and 100% in case of Donations to P.M. Drought Relief Fund, Rajiv Gandhi Foundation National Defence Fund, etc. Employer generally not to give the deduction, employee to claim in Income-tax return.

(f) Donation to a recognised Political Party as per section 80GGC.

(g) Deduction in case of person with Disability as per section 80U of Rs. 50,000 and Rs. 1 lakh for persons with severe disability.

(h) Deduction for exemption from the amount of House Rent Allowance would be granted as per section 10 of the I.T. Act only if actually rent paid. The maximum deduction is minimum of (i) HRA amount (ii) Excess of Rent paid over 10% of salary (iii) 50% of salary for metros and 40% of salary in other towns.

(i) Deduction for Rent paid as per section 80GG upto 25% of income subject to maximum of Rs. 2,000 p.m.

To avail the above deductions from salary income it is utmost necessary to submit papers and details to the employer so that the employer can give necessary credit for the same while deducting tax at source.

(Articles by Subhash Lakhotia, Tax Expert)

The author is tax & investment consultant at New Delhi for last over 40 years. He is also Director of M/s R N Lakhotia & Associates LLP & The Strategy Group. E-mail: [email protected] M 9810001665 )