Salaried taxpayers form a major chunk of the overall taxpayers in the country and the contribution they make to the tax collection is quite significant. Income tax deductions offer a gamut of opportunities for saving tax for the salaried class. With the help of these deductions and exemptions prescribed under Income Tax Act, 1961, one could reduce his/her tax substantially.
In this article, we list some of the major deductions and allowances for the FY2019-20 available to the salaried persons, using which they can minimize their tax burden and plan their salary structure and savings accordingly.
A. Allowances (sec 10)
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Allowances are part of salary given to employees to meet some particular requirements connected with the services rendered by the employee. They may be fully taxable, partially taxable or fully exempt.
♦ House Rent Allowance (HRA)
This component of salary helps take care of rent paid by an employee for the premises in which he lives. To be able to claim this deduction, it is essential that it forms a part of one’s salary. Amount paid as HRA can be claimed as tax exempt, subject to certain terms and conditions as below.
Least of the following is exempt:
- Actual HRA Received
- 40% of Salary (50%, if house situated in Mumbai, Kolkata, Delhi or Chennai)
- Rent paid minus 10% of salary [* Salary= Basic + DA (if part of retirement benefit) + Turnover based Commission]
It 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. Further, it is mandatory for employee to report PAN of the landlord to the employer if rent paid is more than Rs. 1 lakh.
♦ Entertainment Allowance:
It is taxable as salary income. In case of government employees, it is first added to salary and thereafter least of following is deductible from salary in respect of entertainment allowance:
- Rs. 5,000/- or
- 20% of Salary or
- Amount of entertainment allowance
*Salary for this purpose excludes any allowance, benefit or other perquisites.
♦ Special Allowances: Under Special Allowances, allowances are divided in following two categories:
I) When exemption depends upon actual expenditure incurred by the employee (Official Allowances): In this category, allowances are exempt u/s 10 to the extent of amount of allowance is used for the purpose for which the amount is received. The amount of exemption under this category is least of following:
- Amount of allowance; or
- Amount used for the purpose for which allowance is given
On the above basis, exemption is available in case of the following allowances:
- Travelling Allowance / Transfer Allowance
- Conveyance Allowance
- Daily Allowance
- Helper/ Assistant Allowance
- Research Allowance
- Uniform Allowance
II) When exemption does not depend upon actual expenditure incurred by the employee (Special Allowances): In this category, the amount of exemption does not depend upon actual expenditure incurred by the employee but depends upon amount specified in the income tax rule in respect of concerned allowance specified under this category. Allowances received under this category exempt to the extent of lower of following:
- The amount of allowance; or
- The amount specified in the income tax rules
Such allowances are as below:
♦ Children education allowance
An education allowance of Rs. 100 per month or Rs. 1,200 per annum per child (maximum of 2 children) paid to an employee by an employer is allowed as deduction from taxable income to the employee.
♦ Hostel expenditure allowance
Hostel expenditure allowance of Rs. 300 per month or Rs. 3,600 per annum per child paid to an employee is also allowed as a deduction from taxable income towards meeting hostel expenditure for the child. This deduction is granted up to a maximum of 2 children for the employee.
An optimum salary structure is that which enables you to meet your day-to-day expenses while leaving sufficient money in your hands for long-term financial goals. Hence, in each individual case, you have to gauge whether the benefits offered by the employer holds value for you and accordingly, you should structure your salary package.
♦ Leave Travel Allowance (LTA)
An employer provides LTA to employees to help them meet travel expenses incurred for travel with family to any place in India. Exemption from tax is only for an amount equal to the cost of travelling the shortest distance to the destination whether by air, rail or recognized public transport system.
♦ Food coupons
Food allowance can be given by the employer through the provision of food at working hours or through pre-paid food vouchers/coupons. For instance, vouchers (not transferable) are tax-exempt to the extent of Rs 50 per meal.
♦ Gifts or vouchers provided by employer
Gifts or vouchers given by an employer in cash or in kind are tax exempt up to Rs 5,000 per year.
♦ Others
Others are Special Compensatory Allowance, Border/ Tribal Area Allowance, Compensatory/ Highly Active Field Area Allowance, High Altitude Allowance, Island Duty Allowance and Underground Allowance.
B. Deduction from salary (sec 16)
♦ Standard Deduction:
Rs. 50,000 or the amount of salary, whichever is lower
♦ Entertainment Allowance
Entertainment Allowance received by the Government employees (Fully taxable in case of other employees)
♦ Employment Tax/Professional Tax:
Amount actually paid during the year is deductible. However, if professional tax is paid by the employer on behalf of its employee than it is first included in the salary of the employee as a perquisite and then same amount is allowed as deduction.
C. Perquisites (sec 17)
Perquisites are fringe benefits that are received over and above the salary as a result of their official position. This is taxed separately for accountability and taxability. They may be provided in cash or in kind. Perquisites may be fully taxable, partially taxable or fully exempt. They are discussed as below:
♦ Rent free accommodation:
The rent free accommodation provided to employees by their employer is taxable. Since the employees are provided rent free accommodation, the amount of income accruing to them cannot be determined by them. Accordingly, there is prescribed manner for calculating income chargeable to tax as perquisite.
The Companies in appreciation of its employees or with an aim to achieve a particular objective grants an option to the employees to subscribe equity shares at nil value or at concessional rates than the current market prices to its workforce. If the employee exercises such option and subscribes to such shares at nil or concessional rates, then it forms part of perquisites.
♦ Employer’s contribution towards superannuation fund:
Employer’s Contribution up to Rs. 1,50,000/- is exempt in the hands of the employee. Employee’s Contribution to Superannuation Fund is allowed as deduction under Chapter VIA.
♦ Interest free loan or Loan at concessional rate of interest:
The value of the benefit to the employee as a result of interest-free loan or concessional loan for any purpose provided to the employee or any member of his household is a taxable perquisite.
♦ Payment by the employer in respect of an obligation of employee:
In this case, the amount is liable to be paid by the employee and the employer pays the same. However, if the employer pays taxes on behalf of employees on non-monetary perquisites provided to them, then such taxes are exempt in the hands of the employee.
♦ Others
- Furnished accommodation in a Hotel
- Motor Car / Other Conveyance
- Supply of gas, electricity or water for household purposes
- Services of a domestic servant including sweeper, gardener, watchmen or personal attendant
- Education Facilities
- Free food and beverages
- Gift or Voucher or Coupon on ceremonial occasions or otherwise
- Medical facilities in/ outside India
D. Retirement Benefits (sec 10(10))
♦ Gratuity
Gratuity is a payment received by an employee by his employer as a gratitude for the employee’s services to the organization. It is over & above normal salary & other retirement benefits received by an employee.
♦ Pension
Pension means the employer provides to the employee a fixed monthly amount after his retirement in consideration of past services. Pension can also be called as annuity.
It also covers pension under National Pension System (NPS).
♦ Leave Encashment
In employment, the employer allows a few number of paid leaves to the employees. If the employee fails to take leaves, then the employer may allow him to either accumulate the leaves for future or lapse the leaves. If the employee does not take such leaves then the balance of leaves accumulates. On retirement, the employer pays to the employee the salary that would accrue to him on the accumulated leaves. This is known as leave encashment. Leave Encashment is also known as leave salary.
♦ Retrenchment Compensation
If the employer relieves an employee of his duties for reasons other than death, retirement or disciplinary action against the employee, then the employer is liable to compensate the employee. The compensation received is known as Retrenchment Compensation.
♦ Voluntary Retirement Receipts
Sum received by an employee who opts for a Voluntary Retirement Scheme is known as Voluntary Retirement Receipt. The employer provides such option to the employees in order to reduce his surplus workforce.
♦ Employees’ Provident Fund
It is a savings scheme wherein employer and employee contributes a certain amount of money every year and employee receives the cumulative amount of money on retirement. There are various types of Provident Funds:
- Public Provident Fund (PPF)
- Statutory Provident Fund
- Recognized Provident Fund
- Unrecognized Provident Fund
Maturity amount and interest earned are fully exempt from tax.
About the Author
Author is Ms. Gloria Jaggi, an expert with more than 25 years of experience in Internal Control, Statutory Compliance, Finance and Professional Consulting. She is also the CEO of PK Chopra & Co. Chartered Accountants, a Chartered Accountancy firm established in the year 1963 with its head office at New Delhi.
