Understanding income tax rules for salaried employees can be challenging, especially when it comes to retirement benefits, intellectual property income, and choosing between the old and new tax regimes. Common questions around leave encashment taxation, patent royalty income, and home loan deductions under the new tax regime often create confusion.
Income Tax on Leave Encashment After Retirement
One of the most frequently asked questions under income tax rules for salaried employees relates to the taxability of leave encashment received at retirement.
Government Employees
If the employee is from the Central Government, State Government, or a local authority, the entire leave encashment amount received at the time of retirement is fully exempt from income tax. This exemption is provided under Section 10(10AA) of the Income-tax Act, making it a significant retirement benefit for government employees.
Private Sector Employees
For non-government or private sector employees, leave encashment received on retirement is partially taxable, subject to an exemption limit. The Income Tax Rules for Salaried Employees exemption is restricted to the least of the following:
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Actual leave encashment amount received
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₹25 lakh (lifetime exemption limit)
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Ten months’ average salary (basic salary plus DA, if applicable)
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Cash equivalent of unutilised leave, calculated at a maximum of 30 days per completed year of service
Any amount exceeding the eligible exemption is taxable as salary income. This makes accurate calculation essential under income tax rules for salaried employees nearing retirement.
Income Tax on Patent Royalty Income in India
Another important area under income tax rules for salaried employees and professionals is the taxation of income earned from patents.
Concessional Tax Rate Under Section 115BBF
If a resident taxpayer receives royalty income from an eligible patent, where at least 75% of research expenditure is incurred in India, such income is taxed at a concessional rate of 10% under Section 115BBF. This tax is applied on a gross basis, meaning no deductions are allowed against this income.
Alternative Tax Option Under Normal Slab Rates
Alternatively, the taxpayer may choose to pay tax on patent royalty income under normal slab rates. In this case, a deduction of up to ₹3 lakh per year is available under Section 80RRB, subject to the actual royalty received.
However, this deduction is not available under the new tax regime introduced under Section 115BAC. Choosing the correct option requires careful tax planning.
New Tax Regime and Home Loan: What Salaried Taxpayers Should Know
Many salaried taxpayers wonder whether taking a home loan affects their ability to opt for the new tax regime.
Under Section 115BAC, a taxpayer can opt for the new tax regime even after availing a home loan. However, the tax treatment differs based on property usage. For a self-occupied property, the deduction for housing loan interest under Section 24(b) is not available under the new tax regime.
For a let-out property, housing loan interest can be claimed, but any resulting loss cannot be set off against other heads of income such as salary. Due to these restrictions, salaried employees are advised to compare tax liability under both regimes before making a final decision.
Old vs New Tax Regime: Choose Carefully
When applying income tax rules for salaried employees, selecting the right tax regime is crucial. While the new tax regime offers lower slab rates and simplicity, it removes many popular deductions. The old regime may still be beneficial for taxpayers with significant deductions like home loan interest, insurance, and investments.
Income tax rules for salaried employees vary widely based on employment type, income source, and tax regime selection. Leave encashment, patent income, and home loan deductions all follow distinct rules that can significantly impact tax liability.
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