Income Tax: Salaried employees can benefit from many financial benefits offered to them in the form of allowances to reduce their tax burden. Allowances are offered on a monthly basis and must be claimed when filing an income tax return (ITR). The Centre offers many such allowances, which are part of the salary structure. These are House Rent Allowance (HRA), Leave Travel Concession or Assistance (LTC or LTA), Children’s Education Allowance, and others, which are all under Section 10 of the Income Tax Act. Opting for these deductions and exemptions can reduce one’s tax burden substantially.
We can note here that there is a difference between deductions and exemptions. Tax deductions reduce taxable income by subtracting allowable expenses. In India, common deductions cover health insurance, home loans, education loans, and charitable donations.
Tax exemptions also cut down your taxable income by excluding a set amount from the total income. In India, allowances like house rent allowance (HRA), travel allowance, and leave travel allowance (LTA) are available to reduce the outgoing tax.
1. House Rent Allowance under Sec. 10(13A)
Employers provide House Rent Allowance (HRA) as a component of your CTC to assist in meeting expenses for rented housing. Salaried individuals who live in a rented house can claim tax exemption on HRA.
The amount of exemption shall be lower of the following:
The total amount of HRA received
> 40 per cent of salary (Basic salary + Dearness Allowance) for non-metro cities; 50 per cent, if the house is situated in Mumbai, Calcutta, Delhi, or Chennai.
> Excess of rent paid annually over 10 per cent of annual salary (Basic salary + DA)
> Salary = Basic + DA (if part of retirement benefit) + Turnover based Commission
HRA is
> Fully Taxable, if HRA is received by an employee who is living in his own house or if he does not pay any rent
> It is mandatory for employees to report the PAN of the landlord to the employer if the rent paid is more than Rs 100,000.
LTA or LTC
Leave Travel Allowance (LTA)/Leave Travel Concession (LTC) is a particular exemption that can help salaried taxpayers cut down their tax burden. LTA can be claimed for any two years in a block of four calendar years. It is to be noted that the LTA exemption is not available for those who choose the new tax regime.
The cost of traveling to India for leisure purposes can be claimed as a tax-free expense by an employee. In order to qualify for this concession, employees must take a leave of absence and travel anywhere within India. The employer would cover the cost of fare, based on the total salary package, as a tax-free allowance. The mode of travel can be anything: railway, air, or public transport. Only domestic travel is considered for exemption, i.e., travel within India. No international travel is covered under LTA/LTC. Valid Proof of travel is essential to claim the exemption.
Education Allowance for children
Section 80C of the Income Tax Act allows you to deduct up to Rs 1.5 lakh from your taxable income for school or college fees. Other components of fees, like development fees and transport fees, are not eligible for deduction under Section 80C. An annual deduction can be claimed on the tuition fees of two children.
The deduction can only be claimed by one parent. Adopted child’s school fees are also valid for this deduction. The maximum deduction limit is Rs 1.50 lakh per year. It is to be noted that the total deduction under Sections 80C, 80CCC, 80CCD limited to Rs 1,50,000. This deduction is allowed for any university, college, school or other educational institution situated in India. International colleges are not included under this.
Pension amount
As per Section 10(10A), the pension amount has certain tax exemptions for government and non-government employees. For government employees, if they receive a lump sum amount as commuted pension instead of monthly payments, the entire amount is exempt from tax. However, this exemption only applies to the commuted pension, not the monthly pension.
For non-government employees, the exemption for commuted pension varies based on whether they receive gratuity or not:
If a non-government employee receives gratuity along with the commuted pension, one-third of the total commuted pension amount is exempt from tax.
If a non-government employee does not receive gratuity, half of the total commuted pension amount is exempt from tax.
Capital gains exemption
As per Section 10(37), individuals or Hindu Undivided Families (HUFs) can prevent from paying capital gains tax when their agricultural land in an urban area is compulsorily acquired, and they receive compensation on or after April 1, 2004. This exemption applies if the taxpayer (or their parents, in the case of an individual) used the land for agricultural purposes for at least 2 years before the transfer.