Introduction
Understanding your tax deductions is a smart way to optimize your financial planning. Under the Indian Income Tax Act, income is classified under five heads, and among them, ‘Salaries’ and ‘Income from House Property’ are two common sources for many individuals. The Act allows a number of deductions under these heads that help reduce the taxable income, thereby easing the overall tax burden.
This article explains the key deductions available under both heads, the legal framework that supports them, and includes practical insights and a mnemonic to remember them easily.
1. Deductions Allowed Under the Head “Salaries”
Income under the head ‘Salaries’ is governed by Sections 15 to 17 of the Income Tax Act, 1961. It includes wages, pensions, gratuities, perquisites, and more. While gross salary is fully taxable, there are some specific deductions and exemptions that can be claimed to reduce the net taxable amount.
A. Standard Deduction – Section 16(ia)
- Introduced in the 2018 Budget, this is a flat deduction of ₹50,000 available to all salaried individuals and pensioners.
- No bills or proof required.
B. Entertainment Allowance – Section 16(ii)
- Only available to government employees.
- Maximum deduction allowed:
- ₹5,000, or
- 20% of basic salary, or
- Actual allowance received,
- Whichever is least.
C. Professional Tax – Section 16(iii)
- Deduction allowed for professional tax paid to state governments (e.g., Maharashtra, Karnataka).
- Usually, ₹2,500 per annum is paid by employers and allowed as deduction.
D. Exemptions under Section 10 (impact taxable salary)
Though not deductions, the following exemptions reduce gross salary:
- HRA Exemption – Section 10(13A) (if paying rent and receiving HRA)
- Leave Travel Allowance – Section 10(5)
- Gratuity – Section 10(10)
- Leave Encashment – Section 10(10AA)
- Pension – Section 10(10A)
Note: Exemptions apply only if you opt for the old tax regime. Under the new regime (Section 115BAC), most of these are not available except standard deduction.
2. Deductions Under the Head “Income from House Property”
This head includes income earned from letting out property (residential or commercial). If you have one self-occupied property, the net annual value is treated as NIL. However, deductions are still available.
Key provisions are governed by Sections 22 to 27 of the Income Tax Act.
A. Standard Deduction – Section 24(a)
- A flat deduction of 30% of the Net Annual Value (NAV) is allowed.
- Applies only to let-out or deemed let-out properties.
- NAV = Gross Rent – Municipal Taxes paid.
B. Interest on Home Loan – Section 24(b)
- Maximum deduction up to ₹2,00,000 per annum (for self-occupied property).
- For let-out properties, entire interest paid is deductible (no limit).
- Conditions:
- Loan must be taken for purchase/construction.
- Construction must be completed within 5 years.
- Certificate from lender is required.
For pre-construction interest, you can claim it in 5 equal installments from the year of completion.
Additional Related Deductions (Not Part of the Heads but Commonly Claimed)
These deductions fall under Chapter VI-A, but are directly related to salary or home loan:
A. Section 80C – Principal Repayment on Home Loan
- Up to ₹1.5 lakh deduction allowed.
- Also includes EPF, PPF, LIC premiums, tuition fees, etc.
B. Section 80EE/80EEA – Additional Interest on Home Loan
- Section 80EE: ₹50,000 extra deduction for first-time buyers (conditions apply).
- Section 80EEA: ₹1.5 lakh extra deduction (on loans sanctioned between 2019–2022).
C. Section 80GG – Rent Paid without HRA
- If you don’t receive HRA but pay rent, you can claim deduction under this section.
Old vs New Regime (Important Tax Planning Note)
| Deduction | Available in Old Regime | Available in New Regime |
|---|---|---|
| Standard Deduction (Salary) | ✅ Yes | ✅ Yes |
| HRA Exemption | ✅ Yes | ❌ No |
| 80C/80D/80EE | ✅ Yes | ❌ No |
| Interest on Home Loan (Self-Occupied) | ✅ Yes | ❌ No |
To avail all deductions mentioned here, you must opt for the old tax regime. The new tax regime offers lower slab rates, but most deductions are disallowed.
Illustration: Tax Planning Example
Suppose Mr. Sharma earns ₹10,00,000 annually. He pays ₹20,000 professional tax and gets ₹1,50,000 HRA, but pays rent. He also pays ₹2,00,000 interest on his home loan and claims 80C deductions for LIC and PPF.
His taxable income under old regime would be:
- Gross Salary: ₹10,00,000
- Less Standard Deduction: ₹50,000
- Less Professional Tax: ₹2,500
- Less HRA Exemption (as per rules): say ₹1,20,000
- Net Salary Income = ₹8,27,500
- Less Interest under 24(b): ₹2,00,000
- Less 80C: ₹1,50,000
- Taxable Income: ₹4,77,500
This highlights how smart deductions help reduce the tax burden significantly.
Mnemonic :
Mnemonic to Remember – “SIP HOP 30-2”
To easily remember the key deductions, think:
SIP HOP 30-2
- S – Standard Deduction (Salary)
- I – Interest on Home Loan (Section 24b)
- P – Professional Tax
- H – HRA Exemption
- O – Other Allowances (LTA, Gratuity, etc.)
- P – Principal Repayment (Section 80C)
- 30 – 30% Standard Deduction on NAV (House Property)
- 2 – ₹2,00,000 limit on Interest (Self-occupied)
