Salary in India: Taxation, HRA & ITR Explanation

Salary income is one of the most common sources of earnings for individuals in India. Understanding the taxation system, House Rent Allowance (HRA) benefits and Income Tax Return (ITR) filing process is crucial for salaried employees to ensure compliance and optimize tax savings. 

Understanding Salary Income Taxation

The Indian Income Tax Act, of 1961, classifies incomes into five categories, and salary income falls in the "Income from Salary" category. Tax is deducted at source (TDS) by employers as per applicable tax slabs, and employees are paid their salaries. The taxability of income from salary is determined only under the various allowances, exemptions, and deductions under the law.

Components of Salary

A salary package generally comprises the following components:

1. Basic Salary – The core salary component, forming the basis for other allowances.
2. Dearness Allowance (DA) – Provided to adjust against inflation.
3. House Rent Allowance (HRA) – Given to employees to meet rental expenses.
4. Conveyance Allowance – Granted for commuting expenses.
5. Medical Allowance – Reimbursement of medical expenses.
6. Leave Travel Allowance (LTA) – For travel within India, subject to conditions.
7. Bonus and Incentives – Performance-based earnings.
8. Provident Fund (PF) Contributions – Employer contributions to EPF account.

Income Tax Slabs for Salaried Individuals (FY 2025-26)

1. Old Tax Regime (With exemptions and deductions)
2. New Tax Regime (Lower tax rates but no exemptions)

A rebate under Section 87A is now available for income up to ₹12 lakh, making it tax-free under new tax regimes.

House Rent Allowance (HRA) Exemption

For salaried individuals staying in rented accommodation, HRA forms a significant tax saving piece. This is under the exemption provided under Section 10(13A), the exemption is the least of the following:

1. Actual HRA received.
2. 50% Salary (for metro cities) or 40% salary (for non-metro cities).
3. Paid minus 10% of the salary

Conditions for HRA Exemption

• The employee must be living in rented accommodation.
• Rent receipts must be provided for claiming exemptions.
• If rent exceeds ₹1 lakh per annum, the landlord’s PAN must be furnished.

Tax Deductions for Salaried Employees

Various deductions under the Income Tax Act help to lower taxable income:

Section 80C – Maximum of ₹1.5 lakh: EPF, PPF, ELSS, NSC, etc.

Section 80D – Health insurance premium deduction (₹25,000 for self & family, ₹50,000 for senior citizens)

Section 80E – Deduction for interest on education loan

Section 24(b) – Deduction of up to ₹2 lakh for interest on home loan.

Standard Deduction – A standard deduction of ₹75,000 on salary income (Modified from ₹50,000).

Section 80G — Deductions for Contributions to Charitable Bodies

Income Tax Return (ITR) Reporting for Salaried Individuals

Who Should File an ITR?

A salaried individual needs to file an ITR in case:

• Their total income is above ₹4 lakh (₹5 lakh for senior citizens, ₹7.5 lakh for super senior citizens).
• They own foreign income or assets.
• They apply for refunds for the excess TDS deducted.
• They have realized capital gains or business income.

Types of ITR Forms for Salaried Employees

ITR-1 (Sahaj)- Income up to ₹50 lakh, salary, single house property and interest income.

ITR-2 - For income above ₹50 lakh and having more than one house property and income earned outside India.

Steps to File ITR for Salaried Individuals

1. Gather Documents – Form 16, Form 26AS, rent receipts, investment proofs, etc.
2. Choose the Correct ITR Form – ITR-1 or ITR-2 based on income sources.
3. Log in to the Income Tax Portal – incometax.gov.in
4. Fill in Salary Details – Enter income, deductions, and TDS details.
5. Claim Deductions and Verify Tax Liability – Ensure applicable deductions are included.
6. Submit and Verify – E-verify through Aadhaar OTP, Net Banking, or by sending a signed physical copy to CPC Bangalore.

Tax Tips for Salaried Employees

• Choose your tax regime based on eligibility for deductions and exemptions.
• TAX: For 80C benefit, invest in PPF, ELSS, NPS, etc.
• Keep rent receipts and proofs handy if claiming for HRA.
• Make the most out of your LTA and medical reimbursements.
• File ITR before the due date (typically 31st July for individuals).

Tax Planning Strategies for Salaried Employees

Effective tax planning can help salaried individuals maximize savings while ensuring compliance. Here are some strategies:

1. Choosing the Right Tax Regime:
   • The old regime allows multiple deductions and exemptions, making it beneficial for those with high investments.
   • The new regime offers lower tax rates but removes deductions. If an individual does not claim many deductions, the new regime might be preferable.
2. Investing in Tax-Saving Instruments:
   • Public Provident Fund (PPF): A long-term investment with tax-free returns.
   • Equity Linked Savings Scheme (ELSS): Mutual funds with a lock-in period of three years offering tax benefits under Section 80C.
   • National Pension Scheme (NPS): Provides an extra ₹50,000 deduction under Section 80CCD(1B) in addition to the ₹1.5 lakh limit under 80C.
3. Optimizing HRA and Home Loan Benefits:
   • If renting, individuals should ensure they provide valid rent receipts to claim HRA.
   • Those with home loans can claim deductions on both principal (under 80C) and interest (under Section 24(b)).
4. Utilizing Health Insurance and Medical Benefits:
   • Salaried individuals can claim up to ₹25,000 for medical insurance premiums under Section 80D (₹50,000 for senior citizens).
   • Medical reimbursement by employers (if provided) is also an effective tax-saving tool.
5. Maximizing Standard Deduction and Other Benefits:
   • The revised standard deduction of ₹75,000 directly reduces taxable income.
   • Expenses like phone bills, internet reimbursement, and professional development courses (if reimbursed by employers) can be used to optimize take-home salary.

Common Mistakes to Avoid While Filing ITR

1. Selecting the Wrong ITR Form:Filing ITR-1 instead of ITR-2 when having multiple income sources can lead to rejection.
2. Not Reporting All Income Sources:Apart from salary, interest from fixed deposits, capital gains from investments, and freelancing income should be disclosed.
3. Mismatching TDS Details:Employees must cross-check TDS deductions with Form 16 and Form 26AS to avoid discrepancies.
4. Missing the ITR Deadline:Late filing results in penalties of up to ₹5,000 and loss of refund opportunities.

ITR Verification and Refund Process

Once the ITR is filed, it must be verified within 30 days. The verification methods include:

• Aadhaar OTP verification (quickest method)
• Net banking e-verification
• Sending a signed physical copy to the CPC Bengaluru office

After verification, the tax department processes the return, and if excess tax has been deducted, the refund is credited to the taxpayer's bank account.

Frequently Asked Questions (FAQ)