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How can salaried employees make the most of tax allowances?

To accomplish optimal tax planning optimizations, the cash budget must commence at the beginning of a new fiscal year. To lessen the tax burden on salaried persons, the government provides a variety of income tax breaks in the form of allowances, deductions, and exemptions. In India, employers provide a variety of standard allowances to salaried employees, such as House Rent Allowance (HRA), Leave Travel Allowance (LTA), Dearness Allowance, Medical Allowance, Child Education Allowance, etc. Based on a discussion with industry experts, the significant income tax allowances for salaried employees have been listed below. By using these exemptions, salaried employees can legitimately make the most of tax allowances and lessen their tax burden.

Exempt allowances for salaried employees in India

Dr. Suresh Surana, Founder, RSM India said “Salaried employees across the globe are often granted with various allowances and perquisites by their employer. So as the case is in India, where employers offer some common allowances / perks which includes, House Rent Allowance (‘HRA’), Leave Travel Allowance (‘LTA’), Conveyance Allowance, City Compensatory Allowance, Dearness Allowance, Medical Allowance, Children Education Allowance etc. Some of these are fully taxable whereas some are exempt upto a certain prescribed limit. An employee’s CTC may contain such exempt allowances, however many of them fail to make the most of it. We have discussed a few ways which may aid a salaried employee to legitimately reduce his/her tax burden by way tax planning optimisation. Below mentioned is an illustrative list of exempt allowances along with the prerequisites to avail them:

1.      House Rent Allowance (HRA)

Least of the following:

(a)    Actual HRA Received

(b)    40% of Salary (50%, if house situated in Mumbai, Calcutta, Delhi or Madras)

(c)     Rent paid in excess of 10% of salary

* Salary = Basic + DA (if part of retirement benefit) + Turnover based Commission

(i)      Rent must actually have been paid

(ii)    It is mandatory for employee to report PAN of the landlord to the employer if rent paid is more than Rs. 1,00,000

(iii)   Fully Taxable, if HRA is received by an employee who is living in his own house

2.   Children Education Allowance Up to Rs. 100 per month per child up to a maximum of 2 children (Maximum benefit of Rs. 2,400)  
3.  Children Hostel Expenditure Allowance Up to Rs. 300 per month per child up to a maximum of 2 children (Maximum benefit of Rs. 7,200)  
4.  Daily Allowance, Helper/Assistant Allowance, Uniform Allowance

Lower of the following:

(a)    Allowance received

(b)    Actual amount spent

Expenditure must be incurred for official purposes
5.   Leave Travel Allowance (LTA)

Lower of the following:

  I.     If journey is by Air:

(a)    Economy class fare by the shortest route to the place of destination

(b)    Actual amount spent

II.     If journey is by Rail:

(a)    AC first class rail fare by the shortest route to the place of destination

(b)    Actual amount spent

III.     If journey is by a recognised public transport system where rail is not connected:

(a)    1st class or deluxe class fare by the shortest route to the place of destination

(b)    Actual amount spent

(i)      Travel should be anywhere in India

(ii)    Can be claimed twice in a block of 4 calendar years (Current Block 1 January, 2022 to 31 December, 2025.)

(iii)   1 Unutilized concession can be carried forward to the next block but can be used only in the 1st year of that block.

(iv)   Exemption can be claimed for travel expenses incurred by employee on himself and on his family

* Family = spouse and children; parents, brothers and sisters who are wholly or mainly dependent on you

Dr. Suresh Surana also said “Further, the taxpayer needs to take into consideration the following:

1. Actually Incur/Spend The Allowance

It is pertinent to note that the amount of expense actually incurred by an individual is considered while determining the quantum of exemption in many of the allowances. Thus, if the actual expenditure of an employee is NIL, the whole of the allowance received by him/her will be taxable.

2. Collate And Preserve the Proof of Expenses

As it can be seen from the above illustrative list, many allowances are allowed only on actual payment and thus it is very important to keep records of the expenses actually incurred by an employee so as to substantiate the same before the Income Tax Authority at the time of scrutiny proceedings (if any). This also enables an employee to appropriately claim all the exemptions for which he is entitled.

3. Consult A Tax Advisor

A salaried employee might also consult a tax advisor to appropriately plan their expenses and investments throughout the year and encash maximum benefits out of the allowances received.

4. Negotiate the terms Of CTC with the Employer

If it is practically possible, an employee with sound understanding of the provisions of exemptions and deductions may negotiate the terms and components of CTC in his/her favour by including more tax friendly allowances.”

Tax allowance categories for salaried individuals

CA Vitesh Waikar, Sr. Tax Consultant at Fintoo said “All the applicable Allowances as part of CTC / Salary Slips to salaried person has been explained in section 10 of the Income Tax act, We divide these allowances broadly into 3 categories for better clarity and understanding.

1) Fully Exempt

2) Partly Exempt / Partly Taxable

3) Fully Taxable.

to claim full or partial exemption of allowances, it should be part of your CTC first. Knowing what are the allowances will bring benefits of full or partial exemption (subject to certain conditions and actual expenses) which are very famous and popular among employees.

1) HRA

2) LTA

3) Children’s Education Allowance

4) Uniform allowances

5) Travelling Allowances

6) Transfer allowances

Allowances that are not part of your CTC won’t bring any exemption irrespective of your actual expenses.”

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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