Income Tax in India: A Comprehensive Guide – 2024
Complete information on income tax rules, exemptions, and deductions for the financial year 2024-25
Introduction
Understanding the income tax system in India can be a complex task for many taxpayers. The rules of income tax change every financial year, making it even more challenging. In this comprehensive guide, we will explain the key aspects of the Indian income tax system for the financial year 2024-25 in simple language, enabling you to manage your tax obligations more efficiently and maximize your savings legally.
Having knowledge of income tax is not only a legal responsibility but also an essential part of your financial planning. With the right information, you can make better financial decisions and minimize your tax liability.
Key Income Details
Total Salary
The first step in calculating income tax is determining your total income. Total salary includes your basic salary, dearness allowance, transport allowance, medical allowance, and other allowances. It’s important to understand that not all allowances are taxable; some may be exempt under specific conditions.
For example, transport allowance (now considered part of salary) and medical reimbursement are treated under standard deductions. Besides salary, bonuses, commissions, and other benefits received from an employer are also included in total salary.
House Rent Allowance (HRA) Exemption
House Rent Allowance (HRA) is a significant salary component eligible for exemption under Section 10(13A). The HRA exemption is calculated as the minimum of the following three criteria:
- The actual HRA amount received
- The actual rent paid exceeding 10% of salary
- 50% of salary in metro cities (Delhi, Mumbai, Kolkata, Chennai) or 40% in other cities
For individuals living in rented accommodation, claiming HRA exemption is an effective way to save tax. However, valid rent receipts or a rental agreement must be provided.
Home Loan Interest Exemption
Interest paid on a home loan for a self-occupied or rented property is eligible for tax exemption. For self-occupied properties, a deduction of up to ₹2 lakh is allowed under Section 24(b). For rented properties, there is no upper limit on interest deduction.
Additionally, first-time homebuyers can claim an extra deduction of up to ₹50,000 under Section 80EE, provided the loan was taken before March 31, 2024, and the property value does not exceed ₹50 lakh.
Other Income (Interest, etc.)
Besides salary, income from other sources is also taxable. This may include:
- Interest on bank deposits
- Interest on fixed deposits
- Interest on debentures or bonds
- Rental income from property
- Investment income (dividends, capital gains)
Income from these sources must be declared under the head “Income from Other Sources.” For interest on savings accounts, a deduction of up to ₹10,000 is available under Section 80TTA.
Chapter VI-A Exemptions
Chapter VI-A pertains to various exemptions available to taxpayers to reduce their tax liability. These exemptions are based on specific investments, expenses, or contributions.
Section 80C (Savings up to ₹1.5 Lakh)
Section 80C is a popular provision of the Indian Income Tax Act, offering tax exemptions on investments in various savings and investment instruments. The maximum deduction under this section is ₹1.5 lakh. Eligible investments and expenses under Section 80C include:
Eligible Investments under Section 80C
- Provident Funds (EPF, PPF, VPF)
- Life Insurance Premiums
- Sukanya Samriddhi Yojana
- National Savings Certificate (NSC)
- Equity Linked Savings Scheme (ELSS)
- Tax-Saving Fixed Deposits (5-year tenure)
- Home Loan Principal Repayment
- Children’s Tuition Fees (up to 2 children)
- Women’s Welfare Fund
Since the deduction limit under Section 80C is ₹1.5 lakh, taxpayers should plan their investments to maximize this benefit.
Section 80CCF (Infrastructure Bonds)
Under Section 80CCF, taxpayers can claim an additional deduction of up to ₹20,000 for investments in infrastructure bonds. This is in addition to Section 80C, increasing overall tax savings. These bonds are typically issued by entities like the National Highway Authority of India (NHAI) and Rural Electrification Corporation (REC).
Investing in infrastructure bonds not only provides tax benefits but also contributes to the nation’s infrastructure development. These bonds usually have a lock-in period of 10-15 years and offer stable returns.
Section 80G (Donations) / 80D (Health Insurance)
Section 80G (Donations)
Section 80G provides tax exemptions for donations to registered charities and religious institutions. Depending on the nature of the donation and the recipient organization, deductions range from 50% to 100%. Some key examples include:
- Prime Minister’s National Relief Fund (100% deduction)
- Swachh Bharat Kosh (100% deduction)
- National Defence Fund (100% deduction)
- Registered Charitable Organizations (50% deduction, with limits in some cases)
When claiming deductions for donations, it’s crucial to have a valid receipt from the organization, including PAN and 80G registration details.
Section 80D (Health Insurance)
Section 80D offers tax exemptions on health insurance premiums. Current provisions allow:
- For self, spouse, and children: Up to ₹25,000 (below 60 years)
- For parents: Up to ₹25,000 (below 60 years)
- For senior citizens (60+ years): Up to ₹50,000
This means a family can claim up to ₹1,00,000 in deductions if both the taxpayer and parents are over 60 years old. Additionally, expenses on preventive health checkups are also eligible within this limit.
Section 80U (Disability Exemption)
Section 80U provides a significant tax exemption for individuals with disabilities. Under this section, a disabled person can claim a flat deduction:
- For 40% to 80% disability: ₹75,000
- For over 80% disability: ₹1,25,000
To claim this deduction, the taxpayer must have a valid disability certificate issued by a government hospital or medical authority. This exemption accounts for the additional medical and other expenses faced by disabled individuals.
Savings Details under Section 80C
Various investment and savings options are available under Section 80C, through which taxpayers can claim deductions up to ₹1.5 lakh.
Deductions in GPF and GIS
General Provident Fund (GPF)
GPF is a mandatory savings scheme for government employees. Employees contribute a fixed percentage of their basic salary and dearness allowance to GPF. This contribution is eligible for tax exemption under Section 80C. The interest earned on GPF deposits is also tax-free.
Government Insurance Scheme (GIS)
GIS is another welfare scheme available to government employees. Contributions are typically deducted from salary and are eligible for tax exemption under Section 80C. This scheme provides both insurance cover and savings.
Deposits in LIC and PPF
Life Insurance Premium (LIC)
Premiums paid on life insurance policies are eligible for deduction under Section 80C. However, the deduction is limited to 10% of the sum assured (for policies issued after April 1, 2012). LIC policies not only offer tax savings but also ensure financial security.
Public Provident Fund (PPF)
PPF is one of the most popular tax-saving investment options in India. It is a government-backed savings scheme with a 15-year lock-in period. A maximum of ₹1.5 lakh can be deposited annually in PPF, which is eligible for deduction under Section 80C. Both the interest and maturity amount from PPF are tax-free.
Purchase of NSC
National Savings Certificate (NSC) is a fixed-income investment scheme available through post offices. Investments in NSC are eligible for tax exemption under Section 80C and come with a 5-year lock-in period. The interest earned on NSC is considered reinvested in the next financial year and qualifies for deduction under Section 80C, except in the maturity year.
Tuition Fees, Home Loan, and Others
Tuition Fees
Payments made for children’s tuition fees are eligible for deduction under Section 80C. This exemption applies to full-time education expenses and is limited to a maximum of two children. Only tuition fees qualify; hostel or transportation expenses do not.
Home Loan Principal Repayment
The principal portion of a home loan repayment is eligible for deduction under Section 80C. This deduction falls within the overall ₹1.5 lakh limit. Interest on a home loan is separately deductible under Section 24(b), as discussed earlier.
Other Eligible Investments
Other investments eligible under Section 80C include:
- ELSS (Equity Linked Savings Scheme): A category of mutual funds with a 3-year lock-in period
- Senior Citizens Savings Scheme (SCSS): For individuals above 60 years
- Tax-Saving Fixed Deposits: With a 5-year lock-in period
Income Tax Calculation
Calculating income tax accurately is crucial to understand your tax liability and plan your finances effectively.
Up to ₹2.5 Lakh: 0%
For the financial year 2024-25, under the Old Tax Regime, no tax is levied on income up to ₹2.5 lakh. This is the basic exemption limit. For senior citizens above 60 years, the exemption limit is ₹3 lakh, and for super senior citizens above 80 years, it is ₹5 lakh.
The basic exemption limit provides relief to low-income taxpayers, ensuring that individuals with minimal income are not burdened by taxes.
₹2.5 Lakh to ₹5 Lakh: 5%
Income between ₹2.5 lakh and ₹5 lakh is taxed at 5%. However, under Section 87A, if the total income does not exceed ₹5 lakh, taxpayers can claim a tax rebate of up to ₹12,500. This means if your total income is ₹5 lakh or less, you pay no tax.
Example:
If your total income is ₹4.8 lakh, the tax calculation would be:
- Up to ₹2.5 lakh: No tax
- ₹2.5 lakh to ₹4.8 lakh (₹2.3 lakh): ₹11,500 (at 5% rate)
- Rebate under Section 87A: ₹11,500
- Tax payable: Zero
₹5 Lakh to ₹10 Lakh: 20%
Income between ₹5 lakh and ₹10 lakh is taxed at 20%. This is a significant tax slab as the tax rate increases considerably at this level.
Example:
If your total income is ₹8 lakh, the tax calculation would be:
- Up to ₹2.5 lakh: No tax
- ₹2.5 lakh to ₹5 lakh (₹2.5 lakh): ₹12,500 (at 5% rate)
- ₹5 lakh to ₹8 lakh (₹3 lakh): ₹60,000 (at 20% rate)
- Total tax: ₹72,500
Above ₹10 Lakh: 30%
Income above ₹10 lakh is taxed at the highest rate of 30%. This applies to the high-income group.
Example:
If your total income is ₹15 lakh, the tax calculation would be:
- Up to ₹2.5 lakh: No tax
- ₹2.5 lakh to ₹5 lakh (₹2.5 lakh): ₹12,500 (at 5% rate)
- ₹5 lakh to ₹10 lakh (₹5 lakh): ₹1,00,000 (at 20% rate)
- ₹10 lakh to ₹15 lakh (₹5 lakh): ₹1,50,000 (at 30% rate)
- Total tax: ₹2,62,500
Exemption under Section 87A
Section 87A provides a tax rebate for low-income taxpayers. For FY 2024-25, if your total income does not exceed ₹5 lakh, you are eligible for a rebate of up to ₹12,500.
This provision offers relief to the middle-income group and ensures zero tax liability for taxpayers with income up to ₹5 lakh.
Education and Health Cess (4%)
A 4% Education and Health Cess is levied on the base income tax amount. This additional tax is collected to fund education and healthcare services.
Example:
If your total income tax is ₹1,00,000, the Education and Health Cess would be ₹4,000 (4% of ₹1,00,000), making the total tax liability ₹1,04,000.
Final Tax Liability
To calculate your final tax liability, you need to consider various factors, including advance tax payments and Tax Deducted at Source (TDS).
Advance Tax Deduction
Advance tax is paid in installments during the financial year, typically following this schedule:
- First Installment (by June 15): 15% of estimated tax liability
- Second Installment (by September 15): 45% of estimated tax liability (including first installment)
- Third Installment (by December 15): 75% of estimated tax liability (including first and second installments)
- Fourth Installment (by March 15): 100% of estimated tax liability (including all previous installments)
Failure to pay advance tax may attract interest under Sections 234B and 234C.
TDS (Tax Deducted at Source) is also a form of advance tax, where the payer deducts tax at the time of payment. TDS is commonly applied to salaries, interest income, rental income, and professional fees.
Your final tax liability = Total tax liability – (Advance tax paid + TDS)
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