How to Optimize Salary Structure to Reduce Tax Burden?

An individual’s salary structure includes various components that can help in reducing his/her tax liability. If one can optimally utilize all the allowances that they receive as a part of their salary and claim all the applicable deductions while filing their ITR, they can reduce their tax burden significantly. This article will throw some light on how to better plan your salary structure to minimize tax liability.

What are the Allowances and Deductions that can Reduce the Tax Liability?

Following are the salary components that will help in reducing the tax burden:

House Rent Allowance

House Rent Allowance is a component that is provided to employees who are staying in rented accommodation. In order to claim this exemption, it is necessary that it forms a part of one’s salary structure. The lowest amount from the following is exempt from taxes:

  • Actual HRA received;
  • Actual rent paid less 10% of basic salary
  • 50 % of basic salary plus dearness allowance if staying in metro cities (Mumbai, Kolkata, Delhi or Chennai) or 40 % of basic salary plus dearness allowance if staying in non-metro cities.

Children Education Allowance

Children Education Allowance is given in order to support an employee’s child’s education. A monthly allowance of INR 100 per month i.e. INR 1200 per annum per child is exempt from taxation. This exemption can be claimed for a maximum of 2 children. Individuals can also claim deduction under section 80C for the tuition fees that are paid for the child’s education.

Hostel Expenditure Allowance

Hostel Expenditure Allowance of INR 300 per month i.e. INR 3600 per annum per child is provided to meet the hostel expenditure of the employee’s children. This exemption can be claimed for a maximum of 2 children.

Phone Bill Reimbursement

Phone Bill Reimbursement covers the cost of broadband Internet connection as well as a mobile phone bill. It is to be noted that this benefit may be given only to specific employees and not all.

Food Coupons

Food/Meal Allowance is provided by the employees to meet the food expense an employee may incur. This allowance is in the form of coupons. Coupons up to INR 50 per meal are exempt from taxation. This means that annually if there are 22 working days in a month and 2 meals a day then an employee can claim INR 26,400 as an exemption from his salary.

Leave Travel Allowance

Leave Travel Allowance is given by the employees to help meet the travel expenses incurred while travelling with family in India. The exemption is provided on the mode of travel to the destination and back i.e., economy air travel or AC railway travel. An employee can claim this allowance for two journeys taken in the block on four calendar years.

Gift Vouchers

The gift or voucher that given by the employer whose value is not more than INR 5000 annually can be claimed as an exemption if it becomes part of the salary.

Newspaper/Journal Allowance

If the employee has to gain extra knowledge for the job by subscribing to newspapers and journals, then he/she can claim a Newspaper/Journal allowance by showing the bills of the subscriptions taken.

Uniform Allowance

An employer provides Uniform Allowance to meet the expenses of purchase/maintenance for wearing a uniform while working.

Car Maintenance Allowance

An employee can claim an exemption of the car expenses partially or fully depending on the ownership of the car. If the ownership of the car is with the employer, the employee using that car will pay tax on a prerequisite of INR 2,700 per month (car with engine capacity up to 1,600 cc) or INR 3,300 per month (car with engine capacity more than 1,600cc) in respect of the aggregate of the actual lease rent, driver’s salary, maintenance expenses and fuel expenses borne by the employer. If the employee owns the car, he can claim an exemption of INR 2,700 per month or INR 3,300 per month.

How are these Allowances Calculated in a Salary?

Let us take an example to understand how to maximize tax savings by structuring your salary efficiently.

Ms Mehra is an employee at a reputed bank and earns INR 10,00,000 per annum. Let us examine her salary structure in two different manners:

Particulars Salary Structure 1 Salary Structure 2
Basic Salary 5,00,000 4,00,000
+ HRA 3,00,000 2,00,000
+ Provident Fund (12%) 60,000 48,000
(+) Standard Allowance (Conveyance allowance + medical reimbursement) 40,000 40,000
(+) Leave Travel Allowance 30,000 30,000
(+) Other Allowances 70,000 2,82,000
Total 10,00,000 10,00,000
(-) Exempted HRA 2,50,000 2,00,000
(-) Standard Allowance 40,000 40,000
(-) Leave Travel Allowance 30,000 30,000

(-) Other allowances

Meal allowance
Mobile bill reimbursement
Gift voucher
Child’s education allowance
Child’s hostel allowance
Newspaper/Journal allowance
Internet Bill reimbursement
26,400
10,000
5,000
2,400
7,200
16,000
 12,000
Total taxable Salary 6,80,000 6,51,000
Less: Profession Tax Paid 2,500 2,500
Income under the head Salary 6,77,500 6,48,500
(-) Deductions under Section 80C 1,50,000 1,50,000
Total Taxable Income 5,27,500 4,98,500
Tax on income 18,720 12,920
Saving in tax   5,800

Which ITR Form to file?

  • If an individual earns income from salary has to file ITR 1 if the total salary is below INR 50 lakhs, inclusive of both salary income and income from other sources.
  • ITR 2 must be filed if the individual has other income apart from salary like income from more than one house property, income from capital gains and IFOS.

Professional Tax : Meaning, Rates, and Applicability

In your Form 16 or Salary slips you may have come across “Professional Tax” along with other Salary breakups. Your employer pays this tax to the state government on your behalf. The deduction is generally of INR 200. The amount of professional tax differs from state to state. Not all states in India chose to levy this tax. State Government is also empowered to make laws with respect to profession tax.

What is Professional Tax?

It is not only the tax levied on professionals, but it is a tax on all kinds of professions, trades, and employment. And it is levied based on the income of such profession, trade, and employment. It is levied on employees, a person carrying on the business including freelancers, professionals, etc., subject to income exceeding the threshold if any. This tax is levied by a state government. Further, this tax can be paid either online/offline.

ITR for Salaried Individuals
CA Assisted Income Tax Return filing for individuals having salary, one house property & income from other sources.
[Rated 4.8 stars by customers like you]
ITR for Salaried Individuals
CA Assisted Income Tax Return filing for individuals having salary, one house property & income from other sources.
[Rated 4.8 stars by customers like you]

Professional Tax Slab

The rate of professional tax varies from one state to another. However, the limit has been set to Rs. 2500 per year as per Article 276 of the Constitution. Therefore, each state declares a slab, and the tax is deducted on the basis of these slabs. Here are some illustrative Profession Tax slabs in a few states:

Maharashtra

Income per month (INR) Tax per month in INR
Up to 7500 for Men Nil
Up to 10000 for Women Nil
7500 TO 10000 for Men 175
10000 and above 200 ( And 300 for February)

Gujarat:

Income per month (INR) Tax per month (INR)
Upto 5999 Nil
6000 to 8999 80
9000 to 11999 150
More than 12000 200

Karnataka:

Income per month (INR) Tax per month (INR)
Upyo 15000 Nil
More than 15000 200

Tamil Nadu:

Income per month (INR) Tax per month (INR)
Upto 21000 Nil
21,001 to 30,000 100
30,001 to 45,000 235
40,001 to 60,000 510
60,001 to 75,000 760
75,001 and above 1095

Who is Responsible for deducting Profession Tax?

Self-employed persons who carry out their profession or trade on their own and fall in the ambit of profession tax are liable to pay the tax themselves to the state government. In the case of salaried individuals and wage earners, the employer is liable to deduct profession tax on a monthly basis. Therefore, the employer needs to register and obtain both the Professional Tax Registration Certificate to be able to pay professional tax on his trade or profession and Professional Tax Enrolment Certificate to be able to deduct the tax from his employees and pay. List of forms for payment of Profession Tax.

Consequences

If a person fails to get registration, then he will be liable to a penalty for the period during which he remains unregistered. However, the actual amount of penalty or interest shall depend upon State’s Legislation. Non-payment of tax or a late payment attracts a 10% additional tax.

Procedure to Pay Professional Tax

In general, a professional tax may be paid either online/offline. Further, depending on the State’s requirement, professional tax returns also need to be filed at specified intervals.

FAQs

Why does Profession tax differ from one state to another?

As professional tax is levied by the state government, it usually differs from one state to another. Each state has its own slab that it declares and the profession tax is deducted based on these slabs.

Is Profession tax applicable in Union territories?

As Union Territories are small regions of the country, they tend to generate lower revenue than states. Hence, professional tax is not applicable to employees working in a Union Territory.

Who is exempted professional tax?

There are a few categories of people that get benefit of tax exemption:
– Senior citizens are exempt from professional tax.
– Parent of a mentally challenged child is exempt from this tax.
– Persons or parents of children suffering from physical disability are exempt from paying professional tax.

Income Tax Refund in India: Eligibility, Procedure and Types

A taxpayer becomes eligible for an income tax refund when taxes paid are higher than your actual tax liability inclusive of interest. It could be in the form of advance tax, self-assessment tax, TDS, etc. In the following instances, the taxpayer becomes eligible to claim tax refund:

  • When the advance tax paid on estimated income is higher than the actual tax liability of a taxpayer.
  • If tax deducted at source (TDS) from salary, interest, professional or other incomes is higher than the tax payable on regular assessment.
  • When self-assessment tax paid is in excess of actual tax liability.
  • When an income is charged in India and in a foreign country. (with whom the Indian government has an agreement to avoid double taxation).

How to claim Income Tax Refund?

A few basic things to keep in mind if you want to claim a refund.

  • Don’t forget to submit Form 12BB Investment Declaration to your employer
    • It contains details about HRA, Leave Travel Allowance, and other section 80 tax deductions.
    • Your employer will calculate accurate TDS based on your investment declaration form and you will save yourself from excess TDS.
  • Entered all the deductions in your income tax return.
    • If you don’t enter deduction details in tax return then your tax liability will be higher than the TDS deducted by an employer.
    • You will end up paying tax which you are not liable to.
  • File an income tax return to claim a refund.
    • If you do not file an income tax return then all your tax credits including TDS and advance/self-assessment taxes will go in vain.
    • Income Tax Department will not automatically pay you a refund just because you have paid taxes.
    • Declare all the incomes and deductions in ITR to show that your taxes paid are greater than the actual tax assessed.

Once you have filed your income tax return, you need to wait for assessment from the Income Tax Department. Here what you need to do:

  • You will receive an intimation u/s 143(1) once the return is processed.
  • It will contain a comparison of income and tax calculation as per your tax return and as per the Income Tax Department.
  • The refund is correct if the refund amount as per ITR and Intimation is the same.
  • When there is a discrepancy you need to check the calculations for reasons of mismatch.
  • If there is any calculation error then you can rectify your return u/s 154(1)

File Your Tax Return

On Time , Online on Quicko.com

Open Your Account Today

File Your Tax Return

On Time , Online on Quicko.com

Open Your Account Today

Types of refund status

Once a tax payer files his return, they want to know the status of their refund. IT Department has classified different refund statuses for the taxpayer. It is important to understand the meaning of refund status. Since refund status determines the next course of action that needs to be taken by the taxpayer.

Check Income Tax Refund Status
Track Income Tax Refund online using PAN. The Income Tax Department issues the refund once the ITR is processed. Check your ITR refund status.
Explore
Check Income Tax Refund Status
Track Income Tax Refund online using PAN. The Income Tax Department issues the refund once the ITR is processed. Check your ITR refund status.
Explore

Different Refund Status on income tax e-filing website:

Refund Status Meaning Course of Action
No e-filing has been done for this assessment year You have missed filing the return for that assessment year. OR The paper return was filed for that year.    File your Income Tax Return immediately. You can file your return from here.
Not Determined IT Department has still not processed your return Confirm if your return is filed and duly e-Verified. 
Refund Paid IT Department has sent the refund to you.  If you have not received a refund yet: In case of direct credit to your bank account contact your bank. In case of refund cheque, check out with the post department.
No Demand No Refund This means you have claimed a refund in your return but as per the department’s calculation, you are not liable for a refund.  In case of any error in a filed return, revise your return. OR If you have received an intimation then understand the reason of difference and then file rectification return.
Refund Unpaid Income Tax Department has sent a refund to you but either your address is wrong or bank details provided are incorrect.   Find out the reason for refund failure and then raise a refund reissue request
ITR processed refund determined and sent out to Refund Banker The department has sent the refund details to the refund banker. Contact your bank. 
Demand determined Department has rejected your refund claim and raised an outstanding demand.  Understand the notice. If you find that your own refund request was erroneous then pay the demand. OR If there is a mistake made by the department, you can file a rectification.
Contact Jurisdictional Assessing Officer Whenever the department needs some more information regarding your ITR. You receive this message. Contact your AO via telephone, mail or post.
Ask an Expert (Income Tax)
Talk to an expert via call, whatsapp or messages. Ask questions about tax returns, applicability & compliance etc.
[Rated 4.8 stars by customers like you]
Ask an Expert (Income Tax)
Talk to an expert via call, whatsapp or messages. Ask questions about tax returns, applicability & compliance etc.
[Rated 4.8 stars by customers like you]

Interest on Income Tax Refund

Many times the taxpayer does not get the refund in due time, in such a case Income Tax Department pays interest on late refund. However, no interest shall be payable if the amount of refund is less than 10% of the tax as determined under section 143(1) or tax determined under regular assessment. Section 244A mentions the provisions in this regard which are as follows:

Amount of Interest on Refund

  • Where the refund arising to the taxpayer is out of any TDS/TCS or tax paid by way of advance tax, then the taxpayer shall be entitled to interest calculated at the rate of 0.5% for every month or part of a month. Interest shall be allowed for a period commencing from the 1st day of April of the assessment year to the date on which the refund is granted if the return is furnished on or before the due date of filing of return specified under section 139(1) otherwise interest shall be allowed from the date of furnishing of return of income to the date on which the refund is granted
  • Where the refund arises to the taxpayer is out of taxes paid by way of self-assessment tax then the taxpayer shall be entitled to interest calculated at the rate of 0.5% for every month or part of a month. Interest in such a case shall be allowed for a period commencing from the date of furnishing of return of income or payment of tax, whichever is later, to the date on which the refund is granted.
  • In any other case (i.e., a case in which refund is due to reasons other than those stated above), interest shall be calculated at the rate of 0.5% for every month or part of a month for a period commencing from the date/dates (as the case may be) of payment of the tax or penalty to the date on which the refund is granted. Further, the expression “date of payment of tax or penalty” means the date on and from which the amount of tax or penalty specified in the notice of demand issued under section 156 is paid in excess of such demand.

Taxability of Interest on Income Tax Refund

The interest amount is taxable under the head “Income from other sources”. Further, while filing returns for the financial year (FY) in which the refund was given, the interest will be taxable as per the tax slab rate of the person.

FAQs

Why am I not getting any refund?

Your may not be getting refund for one of the following reasons:
1. You may not have filed an income tax return for the relevant assessment year
2. Your taxes paid matches your total tax liability for a relevant assessment year
3. You might have forgotten to claim taxes paid on your return
4. You might have furnished incorrect bank account details in your return

Is income tax refund taxable?

No, refund received by a taxpayer is not taxable. But, any interest received on the refund is taxable in the year in which refund is received by a taxpayer.

How long does it take to get a tax refund?

Income Tax Department processes the refund only after processing your ITR. Generally, it takes 30-45 days from the date of e-verification of your Income Tax Return to get your refund credited. Further, IT Department is planning on processing refund faster in coming years.

What needs to be done if the refund is not processed?

Taxpayer’s records are transferred to the jurisdictional assessing officer by CPC after a particular time period for every assessment year. Taxpayers receive an intimation regarding the same. Therefore, once the AO receives the files, one can follow up for a refund by submitting a letter in this regard to the jurisdictional assessing officer and follow up personally at regular intervals.

Where will I get my income tax refund?

You will receive your refund directly in your Primary bank account. You can choose the primary bank account while filing your ITR.

What to do if my tax Refund is returned?

If your tax refund status is ‘refund returned’ then it means when ITD had tried to credit the refund to your bank account, but it failed. In such a case you are required to submit a refund reissue request.

Dearness Allowance (DA): Rules, Exemptions, and Calculations

What is the Dearness Allowance?

Dearness Allowance (DA) is an allowance paid to meet the cost of living. It helps to offsets the impact of inflation. It varies from employee to employee based on their presence in the urban, semi-urban or rural area. DA is only paid to:

  • Central Government Employees,
  • Public Sector Employees,
  • Pensioners of Central Government.

The allowance is decided by the Pay Commission in India. The pay commission must evaluate and change the salaries of central/public sector employees based on the various components that make up the final salary of an employee. 

Dearness Allowance increased by 5% from 12% to 17% from July 2019. Nearly 50 lakh government employees and 65 lakh pensioners will be benefited from this hike.
Tip
Dearness Allowance increased by 5% from 12% to 17% from July 2019. Nearly 50 lakh government employees and 65 lakh pensioners will be benefited from this hike.

Types of Dearness Allowance

It is broadly categorised in the following two types:

  • Industrial DA (IDA)
    • It is applicable to Public Sector employees. It is revised quarterly depending on the rising levels of inflation.
  • Variable DA (VDA)
    • It is applicable to Central Government employees. It is revised on a half-yearly basis depending on the rising levels of inflation.

File Your Tax Return

On Time , Online on Quicko.com

Open Your Account Today

File Your Tax Return

On Time , Online on Quicko.com

Open Your Account Today

How to Calculate Dearness Allowance?

It is calculated at a fixed percentage of Basic Salary. It is directly related to the employee’s location. The consumer price index in India is provided for the urban sector, semi-urban sector, and rural sector. Hence DA will be different for employees working in each of these sectors. DA is calculated as per the following formula:

For the Central Government Employees

DA % = [(Average of AICPI(Base year 2001=100) for the past 12 months – 115.76)/115.76]*100

AICPI means All India Consumer Price Index.

For the Public Sector Employees

DA % = [(Average of AICPI(Base year 2001=100) for the past 12 months – 126.33)/126.33]*100

Role of Pay Commissions to Calculate Dearness Allowance

The pay commission must evaluate and change the salaries of public sector employees based on the various components that make up the final salary of an employee. Therefore, DA is also considered by the Pay Commissions while preparing the subsequent pay commission report.

It is the responsibility of the pay commissions to take into account every factor that helps with the calculation of the salaries. This also includes the periodic reviewing and updating of the multiplication factor for the calculation of the Dearness Allowance.

ITR for Salaried Individuals
Let an expert help you file your salary return.
[Rated 4.8 stars by customers like you]
ITR for Salaried Individuals
Let an expert help you file your salary return.
[Rated 4.8 stars by customers like you]

Taxability of Dearness Allowance

It is fully taxable in the hands of the employees. It is added to the salary of employee u/s 17(1) of the Income Tax Act. A taxpayer can file ITR 1 if he/she only has a salary income up to INR 50,00,000.

Income Tax Calculator
Calculate income tax liability for FY 2020-21. Compare tax liability as per New vs Old Tax Regime.
Explore
Income Tax Calculator
Calculate income tax liability for FY 2020-21. Compare tax liability as per New vs Old Tax Regime.
Explore

Dearness Allowance for Pensioners

Pensioners are the retired employees of the central government. They are eligible for individual pension or family pension. The pension also gets revised every time the Pay Commission rolls out a new salary structure. Pensioners DA is calculated on the Basic Pension.

Dearness Allowance Changes as per Budget 2018

There are roughly more than 50-lakh central government employees who receive the salary from the government. Then there are another 55-lakh retired central government employees who are eligible for a pension. As per the recent announcement by the central Government in Budget 2018, the Dearness Allowance was hiked by 2%.This came as a significant relief for all these beneficiaries as their Dearness Allowance was enhanced from 5% to 7%. These changes are going to significantly benefit all the employees and pensioners of the Central Government.

FAQs

Is Dearness Allowance applicable to the employees and pensioners of the private sector?

No. It is not applicable to the employees/ pensioners of the private sector.

Is Dearness Allowance granted to pensioners who stay abroad?

Pensioners who are staying abroad without re-employment are allowed to receive DA on pension. But DA is not allowed to pensioners who are re-employed abroad.

Does Dearness Allowance differ on the basis of work location of an employee?

Yes, D.A. differs for the employees depending on their work location. Since D.A. is directly connected to the cost of living, it is not the same for all employees and varies for employees working in rural, urban, and semi-urban areas.

When is Dearness Allowance merged with the basic salary of an employee?

D.A. is merged with the basic salary of an employee when it exceeds the limit of 50%. This merging results in a significant hike in the salary of the employees. Currently, D.A. stands at 50% of the basic salary of an employee.

Medical Allowance & Reimbursement : Difference, Exemption & Claim

What is Medical Allowance?

Medical allowance is a fixed allowance provided to employees of the company. It is given on a monthly basis to cover any medical expenses. It is paid irrespective of whether any proofs of expenses have been submitted by the employee or not. However, in order to claim tax benefits, an employee must submit medical bills.

Medical Allowance vs Medical Reimbursement

Sometimes people use the words Medical Allowance and Medical Reimbursement interchangeably. Although both medical allowance and medical reimbursement are payable to employees against the medical expenses of the employees. The tax implication is different for both.

Medical Allowance is payable on a monthly basis as a part of the salary. However, it is completely taxable irrespective of any submission of expense proof under the head Salary Income. So an employee does not have to submit any medical bills to the employer in order to receive a medical allowance. It is paid to him as a monthly fixed amount which is part of his salary.

ITR for Salaried Individuals
CA Assisted Income Tax Return filing for individuals having salary, one house property & income from other sources.
[Rated 4.8 stars by customers like you]
ITR for Salaried Individuals
CA Assisted Income Tax Return filing for individuals having salary, one house property & income from other sources.
[Rated 4.8 stars by customers like you]

Medical reimbursement is tax-free to a certain extent. As per section 17(2) of the income tax act, reimbursement against medical expenses of Rs. 15,000 in a year is exempt from tax.

From FY 2018-19 onward, Medical Reimbursement has been discontinued. Instead, a Standard Deduction of up to INR 40,000 has been introduced for all salaried employees. Standard Deduction up to INR 50,000 is allowed from FY 2019-20 onwards.
Tip
From FY 2018-19 onward, Medical Reimbursement has been discontinued. Instead, a Standard Deduction of up to INR 40,000 has been introduced for all salaried employees. Standard Deduction up to INR 50,000 is allowed from FY 2019-20 onwards.

Who is Eligible to Claim Medical Reimbursement?

There are specific conditions under the income tax act that prescribe such expenses are not considered as a prerequisite in the hands of the employee:

  • Employees should have spent the amount on medical treatment
  • The amount should have been spent on his own or his family members’ treatment.
  • Such amount should be reimbursed by the employer
  • Amount reimbursed by the employer does not exceed INR 15,000 in the financial year

How to claim Medical Reimbursement?

  • An employee has to submit proof of medical expenses to claim exemption.
  • An employee can claim the medical expenses for himself as well as his family members. Family for the purpose of reimbursement includes:
    • Spouse and children
    • Parents, brothers, and sisters who are wholly or mostly dependent on the employee.
  • Medical bills can be related to the purchase of medicines, medical checkups, doctor’s consultation fees, etc.
  • There are no restrictions in terms of medical systems. (allopathy, homeopathy, or any other type of treatment)
  • Medical reimbursement is not taxable if the treatment of an employee or his/her family member takes place in any of the following facilities:
    • Hospital or clinic
      • Maintained by an employer
      • Maintained by state government/central government/local authority
      • Approved by Government
    • Hospital approved by Chief Commissioner of Income Tax
Income Tax Calculator
Calculate income tax liability for FY 2020-21. Compare tax liability as per New vs Old Tax Regime.
Explore
Income Tax Calculator
Calculate income tax liability for FY 2020-21. Compare tax liability as per New vs Old Tax Regime.
Explore

What Amount can be Claimed?

The employee can take the tax benefit of the expenditure incurred by him limited to the extent of INR 15,000. The exemption is available only on the reimbursement of actual expenses that are incurred on medical bills. An employer can only reimburse what is actually spent by the employee.

FAQs

Is the medical allowance taxable?

Medical Allowance is completely taxable. However, Medical reimbursement up to INR 15,000 is not taxable up to FY 2017-18. However, from FY 2018-19 onwards medical reimbursement has been discontinued.

How do I show medical reimbursement in ITR?

Medical Reimbursement is tax-free perquisites under Section 17(2) till INR 15000. However, the employee can incur an amount higher than INR 15,000 on the medical bills. In this case, the excess amount is added to the head salary of the employee at the time of filing ITR on Income Tax Portal.

What is covered under medical reimbursement?

Eligible medical expenses are the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body. These expenses include payments for legal medical services rendered by physicians, surgeons, dentists, and other medical practitioners.

Conveyance Allowance or Transport Allowance – Exemptions & Update on the New Tax Regime

What is Conveyance Allowance or Transport Allowance?

Conveyance allowance or transport allowance is an allowance offered to taxpayers who receive income from salary to meet the cost of transportation in the course of official work. Usually, it is provided to employees only if there is no transportation provided by the employer.

Update in the Finance Act 2018 for the Transport Allowance

Finance Act, 2018 introduced the standard deduction of INR 40,000 in lieu of a transport allowance of INR 1600 per month and also a medical allowance of INR 15,000. This change shall take effect from the financial year 2018-19 and accordingly, no separate transport allowance of INR 1,600 per month is available to employees other than physically challenged employees and employees of a transport business.

Amount of Exemption on Conveyance Allowance

The Section 10(14) with Rule 2BB provides for exemption of transport allowance. Following explain the amount of exemption:

Particulars Exemption limit
Transport allowance for commuting from place of residence to place of duty
(with effect from FY 2018-19 no such separate transport allowance is allowed)
INR 1,600 per month or INR 19,200 per annum
Transport allowance for commuting from place of residence to place of duty for an employee who is physically challenged such as blind/deaf/dumb or orthopedically handicapped with disability of lower extremities INR 3,200 per month or INR 38,400 per annum
Transport allowance for employee of transport business for meeting personal expenditure during the running of such transport Exemption amount shall be lower of following: a) 70% of such allowance; or b) INR 10,000 per month

Tax Exemption on Conveyance Allowance

There is no limit on the amount of conveyance a company can provide to its employer. As per section 10(14) of the income tax act & Rule-2BB, the exemption is allowed to an employee to the extent of expenditure actually incurred for official purposes.

Because of such exemption conditions, companies usually provide this allowance on a reimbursement basis. So if an employee incurs any transportation expenses out of pocket for official purposes, the company will reimburse the same amount to him upon submission of proof of expense.

Income Tax Calculator
Calculate income tax liability for FY 2020-21. Compare tax liability as per New vs Old Tax Regime.
Explore
Income Tax Calculator
Calculate income tax liability for FY 2020-21. Compare tax liability as per New vs Old Tax Regime.
Explore

Tax Exemption on Transport Allowance

As per Section 10(14) of the income tax act and Rule-2BB, Transport allowance is exempt up to INR 1600 per month. So a total of INR 19,200 is exempt as a transport allowance. For differently-abled employees, the exemption limit for transport allowance is INR 3200 per month (INR 38,400 per annum)

From FY 2018-19 onward Transport Allowance has been discontinued. Instead, Standard Deduction up to INR 40,000 has been introduced for all salaried employees. Standard Deduction up to INR 50,000 is allowed from FY 2019-20 onwards.
Tip
From FY 2018-19 onward Transport Allowance has been discontinued. Instead, Standard Deduction up to INR 40,000 has been introduced for all salaried employees. Standard Deduction up to INR 50,000 is allowed from FY 2019-20 onwards.

Up until FY 2014-15, the exemption limit on transport allowance was Rs. 800 per month (INR 9600 per annum). But the limit was enhanced to Rs. 1600 per annum in Budget 2015. This step was taken to provide a tax benefit to middle-class commuters in the country.

CA Assisted Income Tax Return filing for individuals having salary, one house property & income from other sources.
ITR for Salaried Individuals
[Rated 4.8 stars by customers like you]
CA Assisted Income Tax Return filing for individuals having salary, one house property & income from other sources.
ITR for Salaried Individuals
[Rated 4.8 stars by customers like you]

Transport Allowance under the New Tax Regime

Starting from FY 2020-21, the government provides the taxpayers with the option to choose from the new tax regime for individual and HUF taxpayers. In the new tax regime, there are flat tax rates and no deductions or exemptions. Also, the individual cannot claim deductions for any tax-saving investments. However, the new tax regime allows an individual to claim the following tax-exempt allowances:

  • Allowance by the employer to meet the cost of travel on tour or transfer. It includes an allowance for the cost of travel such as airfare, rail fare, and other transportation costs.
  • Any allowance by the employer to meet the ordinary daily charges incurred by an employee on account of absence from the usual place of duty. The allowance should be in respect of tour or for the period of journey in connection with a transfer. The allowance includes expenses an employee incurs for food and other daily costs while traveling.
  • Allowance to meet conveyance expense incurred while performing duties of an office or employment of profit. However, in this case, the employer should not provide a free conveyance to the employee. The allowance includes traveling expenses an employee incurs while performing official duties.

FAQs

What is the difference between Conveyance and Transport Allowance?

Conveyance is provided to meet transportation expenses in the course of official work. Whereas transport allowance can be claimed for expenses related to commute between home and work.

How much conveyance allowance can I claim?

This allowance is completely exempt from tax. However, Transport allowance, up to INR 1600 per month or INR 19,200 per year can be claimed as an exemption up to FY 2017-18.

LTA : Rules, Tax Exemptions and Conditions to claim

LTA (Leave Travel Allowance) is an allowance paid by employers to their employees when they are on leave and traveling alone or with family within India. Subject to certain conditions, it is tax-free in the hands of the employees.

What is LTA – Leave Travel Allowance?

LTA is an allowance received by the employee from his employer for travelling on leave. There are many situations that need to be considered before planning a trip for the purpose of claiming LTA.

Conditions to Claim LTA Exemption

  • Leave travel allowance should be part of employees Salary i.e employer pays an allowance to an employee as part of his/her salary
  • An exemption is applicable for incurred expenses by the employee and his/her family for the purpose of travel in India.
  • Family for purpose of leave travel allowance includes:
    • Spouse and children
    • Parents, brothers, and sisters who are wholly or mostly dependent on employee.
  • It covers only cost of travel for the trip (travel through rail, air or any other public transport). It does not cover the cost of hotel accommodation, food, etc.
  • Leave Travel Allowance covers only domestic travel and does not cover international travel
  • An exemption is available only for two trips in a block of four calendar years. The current block for leave travel is 2018 to 2021.
  • If an exemption is not availed during the block period, it can be carried over to the next block and used in the first year of the next block.

LTA Exemption

Section 10(5) of the Income Tax Act along with and Rule 2B have prescribed the conditions and amount of exempt leave travel allowance. Subject to these conditions, Leave Travel Allowance is tax-free in the hands of the employees.

ITR for Salaried Individuals
CA Assisted Income Tax Return filing for individuals having salary, one house property & income from other sources.
[Rated 4.8 stars by customers like you]
ITR for Salaried Individuals
CA Assisted Income Tax Return filing for individuals having salary, one house property & income from other sources.
[Rated 4.8 stars by customers like you]

Eligibility to Claim LTA

The LTA exemption is available only on the actual travel costs. Expenses such as sightseeing, hotel accomodation, food, etc are eligible for this exemption. It is also limited to the LTA provided by the employer.

How to Claim Exemption on Leave Travel Allowance?

Employees can claim Leave Travel Allowance exemption by submitting details in Form-12BB. With the newly introduced Form 12BB, employees can provide detail of their travel during the financial year. They should also submit the proof in support of their claim. Employees can submit boarding passes, air tickets, train tickets, invoices of travel agents, etc, as documentary proof to their employers.

Income Tax Calculator
Calculate income tax liability for FY 2020-21. Compare tax liability as per New vs Old Tax Regime.
Explore
Income Tax Calculator
Calculate income tax liability for FY 2020-21. Compare tax liability as per New vs Old Tax Regime.
Explore

FAQs

Can I claim LTA on internation travel?

No. LTA can be claimed only for domestic travel. You can only claim LTA if the Employer provides it as part of your salary structure. You can claim an exemption on LTA under section 10.

Can I claim LTA every year?

No. You can claim LTA only twice in a block of 4 years. The current block of four years is 2018-2021. However, you can claim LTA reimbursement every year from your employer.

Do I have to submit any document proof to claim LTA?

Employees do not have to submit any proof to Income Tax Department while filing ITR on IT Portal. However, employees are advised to maintain proofs such as flight tickets, invoices from travel agents, passes, etc.

How to know exempt LTA amount?

Employees can know exempt Leave Travel Allowance amount from Form 16 issued by the employer at the end of the financial year. It is exempt u/s 10(5) of the Income Tax Act.

Which ITR can be filed if LTA exemption is claimed?

Since Leave Travel Allowance is a part of salary income. An employee can file ITR-1 while claiming exempt HRA. However, salaried needs to file ITR-2 if income is more than Rs. 50,00,000.

House Rent Allowance : Rules, Exemptions, and Calculations

What is House Rent Allowance?

The full form of House Rent Allowance. It is paid by an employer to employees as a part of their salaries. It is paid to meet the accommodation expenses. Salaried individuals who live in rental premises can claim exemption of House Rent Allowance.

From FY 2020-21 onward, employees opting for New Tax Regime can not claim an exemption on House Rent Allowance. House Rent Allowance Exemption is only available if an employee opts for the Old Tax Regime.
Tip
From FY 2020-21 onward, employees opting for New Tax Regime can not claim an exemption on House Rent Allowance. House Rent Allowance Exemption is only available if an employee opts for the Old Tax Regime.

Employees are required to submit the rent receipts to their employers to claim the tax benefit. The employers, in turn, will calculate exempt House Rent Allowance and deduct the same from the employee’s taxable salary. You can know exempt house rent allowance from your Form 16.

House Rent Allowance Exemption

The House Rent Allowance exemption rule is that the least of the following will be deducted from salary as an exemption under House Rent Allowance:

  • Actual House Rent Allowance from employer
  • Actual rent paid less than 10% of basic salary
  • 50% of basic salary if you live in a metro city or 40% of the basic salary if you live in a non-metro city.
Upload Form 16
File ITR Online

India’s fastest growing Tax Filing Platform

[Rated 4.8 stars by customers like you]

Upload Form 16

File ITR Online

India’s fastest growing Tax Filing Platform

[Rated 4.8 stars by customers like you]

House Rent Allowance Calculation

The House Rent Allowance calculation formula has been explained below with the help of an example:

Example

Raj works in a company in Kanpur. He lives in a rented flat. He pays INR. 15,000/month as rent. Following is his salary structure.

Particulars Amount (In INR)
Basic Salary 5,00,000
House Rent Allowance 1,75,000
LTA 25,000
Other Allowances 12,500
Gross Salary 6,15,000
Actual Rent Paid 1,80,000

The least of the following will be the exempt House Rent Allowance:

  1. Actual House Rent Allowance: INR. 1,75,000
  2. Actual Rent Paid (-) 10% of Basic Salary: INR. 1,30,000 [1,80,000 – 10%(5,00,000)]
  3. 40% of the Basic Salary: INR. 2,00,000 [40%(5,00,000)]

INR. 1,30,000 will be exempt from House Rent Allowance. Hence taxable House Rent Allowance will be INR. 45,000 (1,75,000-1,30,000).

HRA Calculator
HRA(House Rent Allowance) is given by the employer as a part of their salaries. The HRA amount exempted from Income Tax differs based on salary and city.
Explore
HRA Calculator
HRA(House Rent Allowance) is given by the employer as a part of their salaries. The HRA amount exempted from Income Tax differs based on salary and city.
Explore

What if I don’t receive any House Rent Allowance?

Under Section 80GG, a deduction is allowed to an individual who pays rent without receiving any House Rent Allowance. So you can claim a deduction from total income if you:

  • Are paying House rent
  • Don’t receive any House Rent Allowance from your employer
  • Or your spouse or minor children do not own residential accommodation at the place of employment
  • Do not own self-occupied residential accommodation at any other place

If all these conditions are fulfilled, a deduction is available as the least of the:

  • Rent paid minus 10% of the total income
  • INR. 5000 per month i.e annually INR. 60,000
  • 25% of the total income

The important point to keep in mind is that deduction under Section 80GG is not allowed to an individual who receives House Rent Allowance from an employer. Hence, check your Salary Slip to see if you are receiving any House Rent Allowance. If you do, you can’t claim a deduction for rent paid under section 80GG.

Example

Sameer works for a pharma company in Ahmedabad and receives a salary of INR 7,20,000. He receives a House Rent Allowance of INR 3,00,000 per month. He pays house rent of INR 2,40,000 to his landlord

The least from the following will be exempt from Taxes:

  • Rent paid (-) 10% of the total income: INR 1,68,000 [2,40,000-10%(7,20,000)]
  • INR 5000 per month i.e annually INR 60,000.
  • 25% of the total income: INR 1,80,000 [25%(7,20,000)]

INR 60,000 will be exempt from Sameer’s total income under section 80GG.

ITR for Salaried Individuals
Let an expert help you file your ITR
[Rated 4.8 stars by customers like you]
ITR for Salaried Individuals
Let an expert help you file your ITR
[Rated 4.8 stars by customers like you]

Can I claim both House Rent Allowance and deduction on the Home loan?

Yes, you can. The benefits of House Rent Allowance and deduction for Home Loan can be availed simultaneously.

If you are living in a rental house & your own house is occupied by your spouse, children, and/or your parents, you can claim:

  • House Rent Allowance for the rent you pay to landlord &
  • Deduction for Home Loan interest up to a maximum of Rs. 2,00,000

If you are living in a rental house & your own house is also given on rent, you can claim:

  • House Rent Allowance for the rent you pay to the landlord &
  • Deduction for Home Loan interest without any limit

FAQs

How to calculate exemption on House Rent Allowance?

Exemption on House Rent Allowance is the lowest of
– Actual House Rent Allowance received from an employer
– 50% (for Metro) or 40% (for Non-Metro) of Basic Salary
– Annual Rent Paid – 10% of Basic Salary

Is House Rent Allowance deductible under section 80C?

No. House Rent Allowance is an allowance and is exempt from Salary Income. House Rent Allowance exemption is allowed u/s 10(13A) of the Income Tax Act. You can know your exempt House Rent Allowance from Form 16 issued by your employer.

Can I claim the House Rent Allowance exemption if I live with my parents?

You can go for a rental agreement with anyone except your spouse and claim House Rent Allowance. So, if you have a rental agreement with your parents, you can ask for the House Rent Allowance tax benefit from your employer.

Which ITR needs to be filed if House Rent Allowance is claimed?

Salaried individuals can file ITR-1 while claiming exempt House Rent Allowance. However, salaried needs to file ITR-2 if income is more than INR 50,00,000.

When do I need to submit PAN of landlord to employer?

An employee needs to submit the PAN of the landlord if the total rental payment for a year exceeds INR 1,00,000. If the monthly rental payment is more than INR 50,000 then the employee needs to deduct TDS at the rate of 5% u/s 194IB and need to file Form 26QC. In the case of NRI Landlord, an employee needs to deduct TDS on payment and TDS Return in Form 27Q needs to be filed every quarter.

Understanding Salary Slip and its Format

It is important to understand the Salary Slip format to do better tax planning.

What is Salary Slip?

A salary slip is laymen’s terms is a document issued to employees by their employers. This document contains components like HRA, LTA, Bonus paid and deductions usually a month.

Salary Slips are generally given to the employees via email or is delievered on paper.

Benefits of Understanding Salary Slip and its Format

  • Plan your investments so that you can optimally utilize the deductions and reduce the tax liability. This will reduce the TDS deducted from your salary every month.
  • Understand how much of your total salary goes into forced savings like Employees’ State Insurance (ESI), Employees Provident Fund (EPF), etc. The employer determines these components. And are not under your control.
  • Evaluate different job offers in order to determine which one is more beneficial in terms of salary structure.

Importance of Salary Slip

Salary Slip is an important employment certificate. It helps the employees seek loans, future employment, income tax planning, availing government subsidies, and acts as a legal document of employment.

  • Proof of Employment
    • A salary slip serves as legal proof of employment. While applying for travel visas or universities and colleges, applicants must submit a copy of salary slip as legal proof of the last drawn salary and designation. The document holds as legal proof against the salary claim
  • Income Tax Planning
    • It contains the monthly break-up of earnings and deductions. It also has components that include tax deductions. It also includes the break-up of earnings. TDS helps an employee plan his/her tax liability in advance. The tax is calculated on the take-home salary based on income tax slabs
    • Thus, it helps in availing maximum benefits of tax deductions, rebates, allowances, and concessions within the accepted bounds under the Income Tax Act of 1961. Salary slips also assist in calculating the TDS returns and income tax refund. Therefore, it is essential to keep track of the salary break-up to keep up with Income Tax
  • Acquiring Loans
    • A salary slip has all the details of the salary and designation. It serves as legal proof of the credit-paying ability of an employee. Further, availing of loans, credit cards, mortgages, and other borrowing is based on the salary slip. The salary slip helps in setting a credit limit. Also, it acts as an eligibility criterion to avail of a loan or credit card. With this, the salary slip determines your taxes in the financial year as well
  • Access to Government Subsidies
    • The salary slip can be used to avail of certain free services. Such services include medical care, food grains, etc.

Sample Salary Slip Format

ITR for Salaried Individuals
CA Assisted Income Tax Return filing for individuals having salary, one house property & income from other sources.
[Rated 4.8 stars by customers like you]
ITR for Salaried Individuals
CA Assisted Income Tax Return filing for individuals having salary, one house property & income from other sources.
[Rated 4.8 stars by customers like you]

Components of Salary Slip

Earnings contain the components which you earn. Deductions contain the amount deducted from what you earn.

Salary Format and its Taxability

Serial No. Component Definition Taxability
1 Basic salary This is the main component of your salary. It is also the basis for other components of Salary.  It is 100% taxable. And a part of your take-home salary.
2 Dearness Allowance (DA)  Only Government employees get DA. DA is paid to counter the inflation impact. It is calculated as a percentage of the Basic Salary.   It is 100% taxable. And a part of your take-home salary.
3 Conveyance Allowance


This allowance is granted to cover the cost of traveling between home and work. The lower of the following will be exempt from tax:
1. Rs. 1600 per month or
2. Conveyance actually received

4
HRA 
HRA is paid to cover the house rent expense. This may consist of 40% – 50% of your basic salary.

The lower of the following will be exempt from tax:
1. 40% of your Basic Salary
2. Actual rent paid minus 10% of the Basic Salary
3. HRA actually received from the employer

In the case of No Rent is paid then HRA will be 100% taxable.

5 Medical Allowance This allowance is given to employees to cover the medical expenditures incurred during the employment period. These are usually in the form of reimbursement so the employee has to submit the proof of expenditure incurred.


Maximum Rs. 15,000 is exempt per annum subject to the submission of proof of medical bills. Discontinued from FY 2018-19. 

6
Special Allowance and performance bonus


These allowances are over and above your Basic Salary. A performance bonus is usually linked to your past performance and is usually paid once or twice a year. 
It is 100% taxable. And a part of your take-home salary.


7 LTA It allows an employee to take on a trip within India. The allowance is based on actual expenditure incurred An employee can take two trips in a block period of four years. 
The exemption is allowed for the actual expenditure incurred for the trip subject to certain limits. Any expenditure incurred during the trip for the purpose other than travel will not be exempt LTA.

Income Tax Calculator
Calculate your tax liability. Compare your tax liability as per New vs Old Tax Regime
Explore
Income Tax Calculator
Calculate your tax liability. Compare your tax liability as per New vs Old Tax Regime
Explore

Deductions Component and its Taxability

Serial No. Component Definition Taxability
1 Professional Tax It is a tax on employment. This tax is deducted from your salary by the employer and deposited to the state government. Professional Tax is allowed as a deduction from your salary income.
2 Employee’s Provident Fund (EPF)  Usually, 12% of your basic salary goes towards the Employee’s provident fund. This amount is matched by the employer subject to certain limits which may vary as per company policies. This is a forced investment since every company with over 20 employees, has to contribute towards PF. It is allowed as a deduction from total income.
3 Tax Deducted at Source (TDS)  Based on your total taxable income, your tax is calculated as per the applicable slab rate. This tax is deducted from your salary by your employer and deposited to the Government on your behalf. You can find your TDS from form 16, part A which is generated by TRACES and provided to you by your employer. This amount represents the tax deducted from your salary and deposited to the government by your employer. This can be lowered by utilizing the deduction limits optimally.

FAQs

Is family pension taxed as salary income?

No, it is taxable under the head income from other sources while filing Income Tax Return on Income Tax Portal

My employer reimburses to me all my expenses on grocery and children’s education. Would these be considered as my income?

Yes, these are in the nature of perquisites. Hence, they are taxable as per the rules prescribed in this behalf.​​

Can I ask my employer to consider this loss against my salary income while computing the TDS on my salary? My income from let out house property is negative.

Yes but only to the extent of Rs. 2 lakh, however, losses other than losses under the head ‘Income from house property’ cannot be set-off while determining the TDS from salary.​​