Your salary package comprises various components such as basic salary, allowances towards housing, reimbursements for expenses, and so on. It is important to know your salary structure as that would determine your take-home pay. Knowledge of the various tax exemptions would help you in maximising the benefit of various allowances given by your employer. We provide below a list of components, which would enable you to minimise your tax outgo on your salary:
1. House Rent Allowance
House rent allowance (HRA) is given by an employer to meet the cost of residential accommodation of an employee. Salaried taxpayers who pay rent for their residential accommodation are entitled to claim HRA exemption. The exemption is allowed at the least of the following amounts:
- Actual HRA received
- Rent paid in excess of 10% of basic salary (plus dearness allowance if any)
- 40% of basic salary (plus dearness allowance) in case of accommodation situated in a non-metropolitan city; 50% of basic salary (plus dearness allowance if any) in case of metro cities of Delhi, Mumbai, Kolkata, and Chennai
An employee has to furnish the PAN of the landlord to claim the HRA exemption. However, no PAN would be required in case of annual rental payments up to Rs 1 lakh. The employee has to furnish rent receipts to claim HRA exemption and/or the rent agreement with the house owner.
2. Contribution to Employees Provident Fund
Under the Employee Provident Fund Act, a sum of 12% of the basic salary plus dearness allowance of an employee is contributed towards the provident fund. This employee’s contribution is eligible for deduction under Section 80C up to Rs 1.5 lakh. The contribution towards employee provident fund is towards retirement benefits for the employee. The employer also contributes a similar sum. The withdrawal from the EPF is also tax-exempt subject to fulfilment of certain conditions.
3. Leave Travel Allowance
An employer also allows leave travel allowance (LTA) to employees as a component of their salary package. The LTA can be claimed for the cost of travel to any part of India by the shortest distance to the point of destination. The LTA component can be claimed on a reimbursement basis by employees by furnishing travel receipts such as air tickets, rail tickets or travel receipts from a recognised public transport system. The benefit is available for two journeys in a block of four years. The current block is 2018-21.
4. Telephone reimbursement
Employees can also claim phone bill reimbursements from their employer. The claim would cover telephone including a broadband connection. For this purpose, employees have to submit their phone bills to their employer. The reimbursements received are tax-exempt in the hands of the employee.
5. Food coupons
Many employers provide pre-paid meal coupons/food vouchers/food wallets to their employees. These meal coupons should be non-transferable. This meal allowance is exempt up to two meals a day for the working days. Consequently, based on 22 working days of a month, a sum of Rs 26,400 ( Rs 100X22X12) can be claimed tax-exempt for a financial year.
6. Car maintenance allowance
In the case of reimbursement of car expenses (used partly for official and partly for personal purposes), an employee will be taxed only on the calculated value of perquisite, and not on the entire expenses incurred by the employer on behalf of the employee.
In case the car is owned/leased by the employer, the employee availing the facility of the car would be taxed on a perquisite of Rs 2,700 per month (for a car with engine capacity up to 1,600 cc) or Rs 3,300 per month (for a car with engine capacity more than 1,600cc). The balance expense incurred by the employer would be tax-exempt.
In case the employee owns the car and employer reimburses expenses while calculating the perquisite benefit in the hands of the employee, an exemption of Rs 2,700 or Rs 3,300 per month would be allowed to the employee.
7. Children education allowance
The income tax law also allows an employee to claim an exemption of Rs 1,200 (Rs 100 per month X 12) towards the education of their child. This allowance is available for up to 2 children. In addition to this, an employee can claim deduction under Section 80C towards tuition fees paid for children, up to a maximum of Rs 1.5 lakh.
8. Hostel expenditure allowance
In addition to children education allowance as discussed above, an employee can also claim an exemption of Rs 3,600 (Rs 300 X 12) towards the hostel expenditure incurred for the child. This allowance is also available up to two children.
9. Gift voucher
An employee can also claim an exemption in respect of a gift voucher provided by an employer. The exemption can be claimed for gifts of an aggregate value of Rs 5,000 annually.
10. Uniform allowance
In a case where a uniform is required to be worn by an employee, the employee can claim an exemption for the amount spent on the purchase and/or maintenance of the uniform.
The above components would enable you to meet your day to day expenses towards house rent, telephone (with broadband) connection, cost of meals during working hours, car maintenance and fuel expenses, and towards the education of your children.
A tax-free reimbursement is also allowed towards travelling on vacation, as well as a deduction for a contribution towards your retirement. You can maximise your take-home pay with the benefit of all the allowances mentioned above.
In addition to the above, you are allowed a standard deduction of Rs 50,000 (FY 2019-20) from your salary income. The standard deduction has replaced the conveyance allowance and medical reimbursement allowed by employers till FY 2017-18.
A deduction is also allowed for interest paid on housing loan up to Rs 2 lakh annually. The deduction allowed for repayments of the principal portion of the housing loan is allowed in aggregate with other tax-saving, retirement savings and tuition fee payments up to Rs 1.5 lakh under Section 80C.
After taking into account the above tax exemptions and deductions, if your total income (net taxable annual income) of Rs 5 lakh or less (FY 2019-20), a complete rebate can be claimed on the tax payable of Rs 12,500. Thus you can maximise your take-home pay, and in case of net taxable annual income up to Rs 5 lakh, you would have a zero-tax liability.