Introduction

Income Tax Act allows many income tax exemptions for salaried employees which are very effective in saving taxes. A salaried employee would be required to intimate his employer that he is claiming these income tax exemptions available for salaried employees and then the employer would compute the tax on the balance income as per the income tax slabs and deduct salary accordingly.There are various tax saving allowances like HRA, Leave encashment, children education, gratuity for salaried employees, income tax exemption for perquisites.

Tax Saving Allowances

The various Income Tax Exemptions for Salaried Employees have been mentioned below. These Income Tax Exemptions for Salaried Employees are highly advisable to everyone as they help in saving tax legally thereby reducing the tax burden on the Salaried Employee.

  1. HRA Exemption For Salaried Employees

Many employers give HRA to their employees for them to reside at a good place. A part of the HRA is exempted from the levy of the Income Tax and Income Tax is only levied on the remaining part.

HRA Exemption is most useful income tax exemptions for Salaried Employees as it can be easily claimed and a large amount is exempted.

House Rent Allowance (HRA): Calculation & Taxability

House Rent Allowance (HRA) is given to meet the expenses of rent of the accommodation which the employee might have to take for his residential purpose. HRA is taxable under head “Income from Salaries” to the extent it is not exempt u/s 10(13A) and paid by the employer to his employee and HRA received xxx

(Less) Exempt u/s 10(13A) (xxx)

(=) Taxable Amount xxx

The remaining amount added in the total salary of the employee and would be taxed as per the income tax slab rates.

House Rent Allowance exempt u/s 10(13A)

  • HRA received by the employee
  • 10% of the salary is given by employer as HRA and excess of Rent paid is to be by an employee.
  • Salary’s 50%, when the residential house is situated in Delhi, Mumbai, Calcutta, or Chennai and 40% of the Salary where the house is situated at any other place for the relevant period.

The HRA relief is based on the following factors

  1. Salary
  2. Place of Residence
  3. Rent Paid
  4. HRA Received

Since there is a possibility of change in any of the above factors during the previous year, exemption for HRA should not always be calculated on an annual basis. As long as there is no change in any of the above factors, it can be calculated together for that period. Whenever there is a change in any of the above factors, it should be separately calculated till the next change.

  1. Income Tax Exemption On Leave Travel Allowances

Many employers give grants to their employees to go on a vacation with their respective families. The portion given for vacation is exempted from the tax to a certain amount given was for a vacation in India only. It is an effective income tax exemption for Salaried Employees. The amount can only be claimed through vacation bills.

Income Tax relief for Leave Travel Allowance is available u/s 10(5) of an amount received by an employee from his employer for himself or his dependents. This exemption is received under following conditions:

  1. Leave to any place within India
  2. Any place in India after retirement from service or after the termination of his service

Relevant Points regarding LTA

  1. Family for this purpose means the spouse and 2 children of the employee and also the individuals who are totally the responsibility of the employee.
  2. The exemption can be availed for the journey undertaken while on leave during the duration of service or even after retirement/termination from service.
  3. Performing the journey along with the employee concerned is not necessary.
  4. LTA Exemption is only available only in respect of fare. Any other amount received by the employee will not qualify for a deduction.
  1. Exemption On Leaves For Salaried Employees

Most employers give all their employees a certain number of days which can be claimed as leaves. The employees have the option to en-cash their leaves which were allowed to be taken but were not taken.

The exemption can be claimed on the amount received as Leave Encashment.

While an employee is in service, he is allowed various types of leaves like Medical Leave, Gazetted Holidays, Casual Leaves etc.

The employee can en-cash these leaves and earns a salary for the number of the days which were allowed to be taken as leaves but were not availed as leave. The policy of the number of leaves allowed to be taken and the leave encashment depends on the employer for whom you are working and different employers have different policies for leave encashment.

 Points Regarding Tax on Leave En-Cashment

  1. The salary computation means “Basic + Dearness Allowance”. It also includes commission based income achieved by the employee. However, any other allowance received is not to be included in the computation of Salary.
  2. If the employee has received leave encashment in any one or more earlier previous year(s) also and had availed of the exemption in respect of such amount, the limit of Rs. 3,00,000 specified above shall be reduced by the amount of exemption availed earlier.
  3. After the death of an employee, leave encashment received by the family members is not chargeable to tax.
  4. The retirement of the employee may be of various kinds. It may be on superannuation or voluntary such as resignation.
  5. Leave Encashment amount received on Resignation by an employee would be treated as the amount received on Retirement.
  1. Tax Exemption from Pension Income

On the retirement of an employee, many employers pay a pension to their employees.

The Pension can be of 2 types i.e. Commuted and Uncommuted.

The whole amount of pension is received in a lump-sum amount in commuted pension, whereas in Uncommuted Pension, the amount is paid in installments at regular intervals.

The employer pays the employee a certain amount regularly in consideration of his past service at the time of retirement. This periodic payment is referred to as Pension.

Through National Pension Scheme (NPS) not the only employer can pay pension after retirement but the Pension Scheme can also pay Pension.

The amount received as pension from the employer or from the pension fund or from any other source as pension would be liable to income tax.

Before understating the computation of tax on pension, it is important to understand that there are 2 types of Pension:-

  1. Uncommuted Pension: Uncommuted Pension refers to Pension received periodically. Any amount received as Uncommuted Pension is fully taxable in the hands of both government and non-government employees.
  2. Commuted Pension: Commuted means Interchange. Employers allow the employee to forgo the amount of the pension and receive a lump-sum amount by paying portion of the Pension. Such amount received is known as Commuted Pension. The pension may be fully or partly commuted.
  1. Income Tax Exemption On Gratuity

Gratuity is a gift made by the employer to his employee in appreciation of the past services rendered by the employee. Gratuity can either be received by:-

  1. The employee himself at the time of his retirement
  2. The legal heir at the time of the death of the employee

The employees are divided into 3 parts and then the exemption is allowed depending on the category they are into:-

  1. Govt. Employees and employees of Local Authorities
  2. Employees covered under the Payment of Gratuity Act, 1972
  3. Employees not covered in any of the 2 above.

Income Tax Exemption on Gratuity payment to an employee as per Income Tax Act

In case Government Employee gives gratuity

Gratuity is fully exempt from tax if it is received by an employee of the Central Government, State Government or local authority, on death or retirement.

In case where Employer is covered by the Payment of Gratuity Act and receives gratuity

The least of the following is exempt from Tax:

  • 15 days salary based on the salary last drawn for every completed year of service or part thereof in excess of 6 months. Hence, the amount exempted from total Gratuity paid is calculated as

Last drawn salary X number of years in employment X 15/26.

Last drawn salary is Basic salary and DA. A number of years in service are rounded off to the nearest full year. For example – if you have worked in an organization for 12 years and 2 months, the number of years of employment shall be considered to be 12 years. And in case you have worked for 12 years and 7 months, the number of years in employment shall be considered to be 13 years.

  • Rs 10,00,000
  • Gratuity actually received

 An example –

Ram worked for a company for 17 years and 7 months. His company is covered by the Payment of Gratuity Act. At the time of his retirement, his salary was Rs 30,000. He received Rs 8,00,000 as Gratuity from his employer.

Calculation of amount which is exempt from Rs 8,00,000 – lower of the following:

  • 30000 x 18 x 15/26 = Rs 3,11,538
  • Rs 10,00,000
  • Rs 8,00,00

The amount that is exempt from Gratuity payment for Ram is Rs 3,11,538 and remaining amount of Rs 8,00,000 – Rs 3,11,538 = 4,88,462 is taxable for Ram.

  1. Income Tax Exemption for Perquisites

Employers provide various facilities like Car, Mobile phones, Rent Free accommodation.

Such perquisites are not fully tax-free.

Gains that are incidentally made from employment in addition to regular salary or wages are known as Perquisites. Following are few perquisites which shall be taxable.

  1. Rent Free Accommodation
  2. Concessional Rent House
  3. The obligation of employee met by Employer. Amount paid by Employer regarding:
    1. Supply of Gas, Electricity & Water
    2. Free or Concessional Education Facilities of Children
    3. Income Tax of employee
    4. Professional Tax on employee
    5. Salary of servant employed by employee
    6. Motor Car or any other Conveyance for personal use of Employee
    7. Reimbursement of Medical Expenditure
  4. Any other Fringe benefits are given by the employer to an employee:
    1. Free meals provided during working hours and value exceeds Rs.50 per day. Excess is taxable.
    2. Gifts exceeding Rs.5,000
    3. Club facilities actual expenditure is taxable.
    4. Credit Card and add on card-actual fee is taxable
    5. Interest-free loans or loan at a concessional rate of interest if more than Rs.20,000 and if not for medical treatment difference between prescribed rate and the rate charged is taxable.
    6. Use of movable assets except for computers and laptops.
    7. Transfer of movable assets.
    8. Expense on tours and travels.
  5. Exemption on Various Allowances

Allowances are exempt under Section 10 (14)(i) for the performance of the duties of an office to the extent of the real amount received or the amount spent for the achievements of the duties of an office (whichever is less).

The following allowances are covered under this category:-

  1. Travelling Allowance: Any allowance granted to meet the cost of travel on tour or on the transfer of duty. Amount paid to meet the expenses of transfer, packing, and transportation.
  2. Daily Allowances: Allowance given on tour or for the period of journey in connection with the transfer, to meet the ordinary daily charges incurred by an employee on account of absence from his normal place of duty.
  3. Conveyance Allowances: Amount provided to meet the expenses incurred on the carriage in a performance of duties of an office or employment of profit, provided that free conveyance is not provided by the employer.
  4. Helper Allowances: Allowance given to meet the expenditure incurred on a helper where such helper is engaged for the performance of duties of an office or employment of profit.
  5. Academic Allowances: Funds provided for encouraging academic, research and training pursuits in educational and research institutions.
  6. Uniform Allowance: Allowance given to meet the expenditure incurred on the purchase or maintenance of uniform for wear during the performance of duties of an office or employment of profit.

For any help on ITR Filing feel free to consult the tax experts at LegalRaasta. You can file ITR yourself via our ITR software or get CA’s help on filing income tax return. You can also use the option of Business Return, Bulk Return or Revised Return Filing.