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Income tax exemption for salaried employees


  • If you are a salaried employee, it is likely that you cringe every time a part of your salary goes into tax payment. While this may not be a happy thought, there are certain tax exemptions on your salary that you can claim.
     A salaried employee would be required to inform the employer that he/she is claiming these income tax exemptions, the employer would calculate tax on the balance income and as per the Income tax slab and deduct TDS on salary accordingly.
     
    Here are some tax exemptions for salaried employees: -


    House Rent Allowance

    If you are staying at a rented house, you can claim a tax exemption in lieu of Section 10 (13A) of the Income Tax Act. Many employers give House Rent Allowance (HRA) to their employees for them to reside at good place. However, there are certain conditions –
    1. An employee must pay rent for the house which he occupies.
    2. The rented house must not be owned by him and.
    3. He must submit a proof of rent being paid through rent receipt.
    House Rent allowance will be available up to the minimum of following three options –
    1. Actual House Rent Allowance received from your employer.
    2. Actual house rent paid by you, minus the 10% your basic salary.
    3. 50% of your basic salary if you live in metro and 40% of basic your salary If you live in any other place.

    Is HRA accounted for self-employed professional also?
    Self-employed professionals cannot be considered for HRA, but they can claim benefit for house rent expenses incurred under Section 80GG, which is similar to Section 10 (13A) but with certain conditions.

    Can I pay rent to my parents of spouse to avail the benefit of HRA?
    You can pay rent to your parents or spouse to avail the benefit of HRA. However, they need to pay tax on same or account the same in calculating their taxable income.


    Leave Travel Allowance

    Many company also give allowances to their employees to go on a holiday with their respective families. Government employees can avail the benefit of leave travel concession (LTC), which can be used for travelling anywhere in India.
    Income tax exemption on Leave Travel Allowance is given under Section 10 (5) from an amount received by employee from his employer. However, this exemption is only available if the amount is received in relation to –
    1. Leave to any place within India.
    2. Any place in India after retirement from service or after the termination of the service.
    Some important considerations for Leave Travel Allowance –
    1. No LTA is cashed without performing the journey.
    2. Employee can claim exemption in respect of any 2 journey in a block of 4 years.
    3. Family for this purpose mean spouse and 2 children. It also includes parents, brothers and sisters of the employee or are wholly or mainly dependent upon him.
    4. LTA is only available in respect of fare.


    Encashment of Leaves

    Most employees give all their employee a certain number of leaves which can be claimed as leaves. In case the employee does not wish to claim these leaves, they have the option of encashing these leaves. This amount received as leave encashment is allowed an exemption up to a certain limit.


    Pension Income

    Pensions are paid on the retirement of the Employee. Pension is of two types. Commuted pension, in which whole amount of pension is received in lump sum and Uncommuted pension, the amount Is paid in instalments at regular interval of time.
    The pension received shall be taxable under Head Salary. However, as per Section 57 (ii)(a), if uncommuted pension is being paid after the death of the employee, it shall be taxable under income from other sources. In such case, 1/3rd of the pension or Rs 15,000, whichever is less shall be exempt.
    If any commuted pension is being paid to the family members, no tax would be levied on commuted pension.
     

    Gratuity

    Gratuity is a gift by the employer to his employee for the past services rendered by him. For the purpose of tax exemption on gratuity under Section 10 (10), employees are divided into three categories –
    Any death cum retirement gratuity received by Central and State Govt employees, Defence employees and employees in Local authority shall be exempt.
    Gratuity received by person covered under the Payment of Gratuity Act, 1972shall be exempt subject to following limits: -
    1. For every completed year of service, gratuity shall be paid at the rate of fifteen days’ wages based on the rate of wages last drawn by the concerned employee.
    2. The amount of gratuity as calculated above shall not exceed Rs. 10,00,000/-
    For other employees, gratuity received hall be exempted, subject to following conditions:
    1. It will be limited to half month salary for each completed year of service or Rs. 10 Lakhs whichever is less.
    2. Where the gratuity was received in any one or more earlier previous years also, then the exemption to be allowed during the year gets reduced to the extent of exemption already allowed, the overall limit being Rs. 10 Lakhs.


    Voluntary retirement from the service

    Many employees opt for Voluntary retirement from the services i.e. retiring before the actual age of retirement (60 years). In such case employers give some money to the employee on his voluntary retirement. Section 10 (10) allows exemption to the extent of Rupees 5 lakhs.
     

    Perquisites

    Many employees are entitled to perquisites or perks. Such as car, rent free accommodation, medical facilities etc. there are tax exemptions on such facilities up to a certain limit. Such as:
    Medical facility and reimbursement - Medical facility and reimbursement of medical expenses to the extent of Rs. 15000 per year as per the Act.
    Loans - Interest free / concessional loan of an amount not exceeding Rs. 20,000 provided by the employer to his employees is not a taxable.
    Transportation - If an employer is a business of transport, provides transport facilities to its employees and his family members either free of cost or at concessional rate then it would not be a taxable perquisite.
     

    Various other exemptions

    There are other allowances such as transport allowance, Children Education Allowance, Helper allowance etc., allowed to salaried employees but up to certain limit.

     

    These guides are not legal advice, nor a substitute for a lawyer

    These articles are provided freely as general guides. While we do our best to make sure these guides are helpful, we do not give any guarantee that they are accurate or appropriate to your situation, or take any responsibility for any loss their use might cause you. Do not rely on information provided here without seeking experienced legal advice first. If in doubt, please always consult a lawyer.

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