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What Does It Mean to Be Tax Exempt?

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February 23, 2021
Want to reduce your tax burden? Here's the ultimate guide to tax exemption that will help you save your hard earned money

We live in a world where inflation rates are constantly on the rise, and that leaves people with hardly any income in hand. The struggle is real and that's why taxpayers are always on the lookout to reduce their taxable income, whether it's by way of deductions, allowances and exemptions.

But before we dive deep into what the various kinds of exemptions are, let's first understand what tax exemption means. By definition, being tax-exempt refers to income or transactions that are free from tax. The government of India offers a range of tax exemptions to either get complete relief from tax, or reduced tax rates. What's important to note is that these exemptions do not discourage taxpayers from paying taxes, but only reduce their tax burden.

Let's take a look at various kinds of tax exemptions & Deductions that are applicable today:

House rent allowance

As the name suggests, house rent allowance can be claimed by salaried employees who live in rented houses. This exemption available under Section 10 (13A) of the Income Tax Act can be claimed by the individual, if he has submitted a proof that shows he pays rent to the owner. If the individual does not live in rented accommodation, then this allowance is fully taxable.

The amount of HRA exemption is the lowest of the following:

  1. HRA received from an employer
  2. Actual rent paid less 10% of basic monthly salary
  3. 50% of the basic salary, in case the individual lives in a metropolitan city
  4. 40% of the basic salary, in case the individual lives in a non-metro city

Leave travel allowance

In this case, salaried individuals can claim exemption on any expenditure done during a financial year on domestic travel for self and family. This does not mean that the exemption is valid for the entire trip such as food, shopping and entertainment expenses, but can be claimed in case of travel tickets under Section 10 (5).

It is only available for two journeys in a span of four years. During train travel, the exemption is permitted for AC first-class tickets; for air travel, it is valid for a national airline's economy class, and in case of other modes of transport, it can be an amount equivalent to first-class or deluxe, whichever is lower. Last but not the least, it can be claimed only for the shortest route to the destination.

Children education allowance

If a salaried individual receives a children education allowance from his employer, then he can claim tax exemption under Section 10 of the Income Tax Act. But here's what you need to know, the maximum amount exempted is Rs 1200 per annum for maximum up to two children.

Subsidy on Hostel Facility

This is again a type of exemption that is related to children's education policy. This subsidy can be claimed up to Rs 300 on a monthly basis, only for two children.

Income tax deduction on housing loan

Taxpayers can get the benefit of this income tax exemption if they move to a new city due to a change in job, and decide to buy a house, instead of living in a rented accommodation. If they get a home loan, the payment of interest is exempted from tax. The maximum income tax exemption is up to Rs 2 lakh on interest levied on housing loan.

There are some conditions that need to be fulfilled to claim this exemption. First of all, the house must be under construction, but the construction must be completed within three years.

Section 80C

There are several investments that are exempt from tax under Section 80C, 80CCC and 80CCD. The maximum exemption is up to Rs 1.5 lakh for the following:

  • Employee Provident Fund
  • Life Insurance Premium
  • Home loan principal payment
  • Pension/annuity schemes
  • National Saving Certificate
  • Public Provident Fund
  • SukanyaSamriddhi Account
  • Tuition fees for children

These tax exemptions can help taxpayers save some big bucks. Now that's good news for sure!


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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal Vishal Subharwal

Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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