written by Khatabook | July 22, 2021

Understanding Income Tax Allowances and Allowed Deductions for Salaried Individuals

In India, salaried employees are the largest group of taxpayers. Their contribution to the overall tax collection is very significant. The salaried class is offered tax exemption and a tax deduction to save tax and reduce their tax liability. This article helps understand the income tax exemptions for salaried employees, major allowances and deductions for the salaried class. 

Income Tax Exemptions or Allowances

HRA or House Rent Allowance:

A salaried individual has the HRA or House Rent Allowance as one of the items on the income tax exemption list. This benefit is available to employees in rented accommodation and may be partially or totally exempt from income tax. If you do not live in rented accommodation, then the HRA component you receive is taxable. To claim HRA, you must submit the rent receipts as proof to your employer. However, when you cannot make these submissions, you can still claim HRA exemption when you file the Income Tax Return and retain the rental receipts or evidence of having made payments towards rent carefully for scrutiny if called for by the Assessing Officer. 

The HRA income tax exemption that you may claim is the least of the below conditions.

  1. The actual rent paid is less than 10 percent of the sum of Basic salary and DA or Dearness Allowance.
  2. The total House Rent Allowance received from your employer. 
  3. In non-metro cities, 40% of the Basic salary and DA and 50% of the Basic salary and DA in metro cities. 

Standard Deduction On Salary

When presenting the 2018 Budget, the Finance Minister announced that salaried employees could avail a standard deduction for salary of Rs 40,000. This deduction replaces the transportation allowance of Rs 19200 p.a. and the medical reimbursement to the tune of Rs 15,000. As a result, salaried people can now avail of additional income tax relief of Rs. 5,800 for the financial year or FY of 2018- 2019. The income tax exemptions for salaried employees 2020-21 for the standard deduction limit was increased in the 2019 Interim Budget to Rs 50,000. Thus when filing the ITR, the benefit of Rs 50,000 as standard deductions is available to all salaried employees to avail.

LTA or Leave Travel Allowance

The income tax laws also provide salaried employees with an exemption for Leave Travel Allowance or LTA. This amount is limited to the travel expenses incurred during a vacation within the country for the employees travelling with/without their family and when they are on leave. This exemption does not apply to the total costs incurred on the trip, the food, entertainment or shopping expenses. The LTA exemption can be claimed twice in a 4-year block announced by the IT authorities. When you do not use the LTA exemption within a particular block, you can carry over the same to the next financial year and not the next block. The applicable LTA restrictions are:

  • LTA is applicable for domestic travel and does not cover the cost of travel abroad.
  • The mode of such travel could be by air, rail, bus/public transport or any other mode of transport.
  • LTA is only available for the shortest route between the origin and destination and back again.
  • The LTA exemption is available when you travel with/without your family.
  • In case of multiple stops on your vacation, the shortest route from origin to the farthest destination and back will be considered.
  • Such reimbursement is subject to you being on leave in the travel period and producing relevant tickets or documents for travel only. This reimbursement means it does not cover all expenses like food, entry fees etc.

Also Read: How To Save Income Tax on Income From Salary For Individuals

Mobile Expenses Reimbursement

You, as a salaried taxpayer, may incur expenses towards the residence telephone or personal mobile. If so, the income tax law allows you to claim this expense as a tax-free reimbursement. To claim this, you should submit and claim reimbursement of the lower amounts between the amount provided in the salary package or the actual bill amount paid.

Periodicals And Books

Salaried employees may also incur expenses on newspapers, books, journals, periodicals, etc. You can claim a tax-free reimbursement of such expenses incurred. The amount is limited to the lower of reimbursement allowed to an employee provided in the salary package or the actual bill amount paid.

Food Vouchers

Your employer may include Sodexo food coupons or meal coupons to you. Such food vouchers are an allowance that is taxable in the employee’s hands beyond the tax-exempt limit of Rs 50/ meal. This allowance totals to Rs 2,200 every month when you calculate the amount as 2 meals a day for 22 working days at the rate of Rs 50/meal. Thus the total exemption allowed under this head is Rs 26,400 p.a.

Relocation Allowance

Since enterprises may have multiple locations and you may be asked to relocate for business reasons, these expenses are to be borne by the employer as per the income tax laws. The employer will bear your costs incurred on getting your kids admitted to a new school, renting a new house, car transportation costs, moving furniture costs incurred, car registration in new state charges and more. The employer can either reimburse you the costs incurred or make direct bill payments towards these expenses.

Under this head, here’s the summary of how these expenses are treated under the IT laws.

  • Car transportation costs: This can be claimed towards expenses borne on the car's transportation to the new location when you produce the actual bills to your employer.
  • Charges for the Movers & Packers: These expenses can be reimbursed for the moving and packaging of the furniture or the bill directly paid to the transporters and is tax-exempt.
  • Car registration costs: Registration as per the State laws may be required in the new state. Such car registration expenses are tax-exempt when the vehicle is registered in your name and is used to travel in as part of the transportation costs when travelling to the new location.
  • Accommodation Costs: On relocation, your employer may reimburse your accommodation facilities for 15 days or provide you with such facilities. These expenses are tax-exempt and cover lodging, boarding and expenses on any meals during this period. All such expenses incurred after the 15-day period are fully taxable.
  • Air/Train Tickets: The travel expense of tickets by air or rail also forms part of the tax-exempt expenses. You must, of course, provide such tickets to your employer, or the employer can pay these expenses directly.
  • Rented house real-estate brokerage: This expense, when incurred, is fully taxable in the employee’s hands and considered a personal obligation. When your employer reimburses this amount, it forms a taxable part of your salary and is not tax-exempt.
  • Children’s school admission fees: Your employer may reimburse the costs incurred on your children’s school admission fees. However, the amount is a monetary benefit and is fully taxable as part of your salary income.
  • Children education allowances: The Children Education Allowance provide to you as part of your salary package is tax-free. The limits on this benefit are that you can claim an exemption of Rs 100/month or Rs 1200/year. This allowance is only allowed for a maximum of 2 children.

Allowable Income Tax Deductions

Deductions U/S 80C, 80CCD(1), 80CCC: Several deductions can help you save taxes, and the important ones are detailed below. 

Savings Instruments: Section 80C is used extensively by taxpayers to save on income tax liabilities. Under this head, a HUF or Hindu Undivided Family/ individual can save in specific tax-saving instruments towards long-term pension savings and claim a total deduction of Rs 1.5 lakh per FY as tax deductions. Some of these are NPS or National Pension Scheme, premiums for Life insurance, EPF or Employee Provident Fund Pension or Annuity Schemes, the ELSS or Equity Linked Savings Scheme, the Home Loan Principal payments, the Sukanya Samriddhi Account, Children tuition fees, the NSC or National Saving Certificate, Post office time-deposits, etc. Income solely taxable as capital gains from property selling is not eligible for deductions U/S 80C. 

Medical insurance premiums: Sec 80D covers medical expenses and medical insurance Premiums up to the limits below. 

  • Rs 25,000 paid for self or family medical insurance premiums. 
  • Rs. 50,000 on medical premiums of the senior citizen parents. 
  • Rs 5,000 for health checkups under the overall limit.

Senior citizens can claim a Rs 50,000 p.a. maximum deduction for medical expenses and premium sums. Employees can also claim an additional Rs 50,000/- towards their parent's medical expenses when the parents are not covered under a Mediclaim policy. Such medical premiums may be paid and deducted by the employer on your behalf from your salary. If so, they are eligible for a tax deduction.

Housing loan: Sections 24 covers the interest paid on a home loan up to an amount of Rs 2 Lakh p.a. on a self-occupied property. If the property is rented out, the interest amounts on loan can be claimed fully as tax-free. U/S 80C, one can claim the housing loan repayment principal component up to Rs 1.5 lakh. However, from FY 2017-2018, the total losses from the property have been pegged at Rs 2 lakh. 

Under 80EEE, an additional of Rs 50,000 is allowed for home loan interest, where the property is registered under the taxpayer’s name. This is also accounted for under Section 24 of Income Tax Act, where loan interest does not exceed Rs 35 lakh as per property value which has not exceeded Rs 50 lakh. 

Higher studies loans: Sec 80E covers interest on loan deductions for higher studies abroad and in India. The exemption for loans from banks/financial institutions is available once the loan is disbursed and lasts for 8 assessment years in total. It can be used for the study loans for self, spouse and children.

Charitable donations: U/S 80G donations made to approved NGOs and charitable organizations are tax-exempt from 50 to 100% with or without restrictions.

Savings Account and FD Interest: U/S 80TTA a deduction of Rs 10,000 on interest income earned from the savings account is available to HUFs and individuals. Amounts earned in interest more than the limit are fully taxable.

Also Read: Special Allowances in India- Taxation and Calculation 

The Bottom Line:

The Income Tax Act of 1961 allows you to make certain tax claims tax-free. The most important among them are the allowances or deductions discussed above. You must plan your investments and savings carefully to save the maximum under the IT laws. We hope that through this article we have been able to clear your doubts regarding income tax exemptions for salaried employees 2020-21. Happy ITR filing!

FAQs

How is joining bonus and notice pay treated under the IT laws?

Some companies ask for a specific period of service under an agreement or bond. If you leave before this period, you may have to return the initial joining bonus and/ or notice pay. 

For example, if you have signed an agreement to serve a company X for 2 years and receive a joining bonus of Rs 50,000/-. After six months, you want to join company Y immediately. In that case, you will have to reimburse the joining bonus of Rs 50,000 and/or serve your notice period or pay back the notice period pay of 1 or 3 months as laid out in your contract.

Is the free cab facility provided by the employer taxable? 

The employer’s cab facility for travelling from your home to office and back is not a perquisite taxed under the IT laws even when it is free or provided at concessional rates.

Is the free health club facility taxable?

If your employer provides a health club facility to all its employees, then it is not taxable in your hands.

Do the vouchers and gifts from the employer get taxed? 

Such vouchers and gifts are tax-free up to Rs 5,000 pa. 

When relocating, can I claim tax exemption for longer than 15 days?

The IT Act allows relocation expenses specifically for a period of 15 days and not more than it. Beyond this period, the expenses, even if reimbursed by your employer, are taxable in your hands from the 16th day onwards.

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