scorecardresearchIncome Tax: From HRA to education allowance, salary components that can

Income Tax: From HRA to education allowance, salary components that can reduce your tax burden

Updated: 21 Jan 2023, 09:47 AM IST

There are some salary allowances that you may include to claim the much-needed tax exemptions.

Know about salary allowances that help avail of tax exemptions.

Know about salary allowances that help avail of tax exemptions.

Many taxpayers filing their belated income tax returns are busy inquiring about possible salary allowances that can reduce their tax burden. The deductions and exemption limits have not changed in the past few years, and there are many ways to avail of the same.

A salaried employee can benefit from a variety of financial advantages in the form of allowances to reduce their personal tax burden. These allowances are available monthly and must be claimed when filing income tax returns (ITR). Allowances such as House Rent Allowance (HRA), Leave Travel Concession or Assistance (LTC or LTA), Children's Education Allowance, and others are provided under Section 10 of the Income Tax Act so that one can significantly reduce his or her tax with these deductions and exemptions.

House Rent Allowance (HRA)

You can surely claim HRA tax exemption if you are salaried and living on rent. The exemption amount shall be the lower of the following:

-The total amount of HRA received

-40 percent of salary (Basic salary + Dearness Allowance) for non-metro cities; 50 percent, if the house is situated in Mumbai, Calcutta, Delhi, or Chennai

-Excess rent paid in excess of 10 percent of annual salary (Basic salary + Dearness Allowance)

To claim an HRA exemption, you must know that:

Employees living in their own houses or not on rent cannot claim HRA exemption while filing taxes. Which means the amount of HRA they receive as a part of their salary packages is fully taxable. 

Also, if the rent paid exceeds 100,000, employees are required to report the landlord’s Permanent Account Number (PAN) to their employers.

Leave Travel Concession or Assistance (LTC/LTA)

Employees can deduct the costs of a leisure trip to India as a tax deduction. To take advantage of this benefit, employees must take time off from work to travel anywhere in India, and the employer will allow the cost of the fare, which depends on the total salary package, as a tax-free allowance. The travel modes include rail, air, and public transportation.

Education Allowance for Children

Employees must keep in mind that the employer provides up to 100 per month per child, up to a maximum of two children, when submitting income investment proofs at the end of the year. All of this is tax-free.

Uniform Allowance 

If one’s job requires him or her to keep or buy a uniform for office hours, the employer will pay a set amount that is tax-free.

Books and Periodical Allowance 

This is a relatively lesser-known tax exemption clause as not many companies dole out such allowances to their employees. This is because certain sections in the Income Tax Act allow taxpayers for tax-free reimbursement for the purchase of books, newspapers, periodicals, journals, and so on. The amount varies depending on the individual and is included in the annual salary package provided to employees.

Relocation Allowance 

Companies used to provide relocation allowances when they asked employees to relocate to a different city for business reasons long before the Covid-19 era. This is distinct from the business trip allowance. The employer must pay for car transportation, registration, packaging, the first 15 days of lodging, and train/air tickets. All of these advantages are tax-free.

Helper Allowance 

When your employer allows you to appoint a helper to perform official duties of the office, such as when you are a high-ranking government official, you are entitled to the helper allowance.

Special Allowances

Beyond the aforementioned allowances, many salaried people also benefit from certain lesser-known allowances. Also, some of these allowances are listed in Central government employees' salary receipts. These include:

  • Allowance for working in hilly areas: These allowances, also known as climate allowances, are provided for working in high altitude or hilly areas.
  • Allowance for working in scheduled, tribal or agency areas: Employers in Karnataka, West Bengal, MP, Assam, Orissa, Tamil Nadu, Bihar, UP and Tripura provide employees with a 200 allowance for working in tribal areas.
  • Allowance for duty on the border, in remote areas, or in difficult or troubled areas: These allowances, which range from 200 to 1,300 per month, are tax-free under Rule 2BB of the Income Tax Act, 1961.
  • Island Duty Allowance: This is given to the armed forces of Andaman and Nicobar. The monthly allowance is fixed at 3,250, which they may include in their list of exemptions while filing their I-T returns.
  • Transport allowance: This benefit is given to physically disabled employees who are on duty and must travel to work. The monthly stipend is 1,600 for commuting between work and residence.

The discussions on the Union Budget 2023 would be held in the Indian Parliament on February 01 this year. Taxpayers have pinned their hopes on the country’s finance minister anticipating that this year’s Budget would include more scope for deductions and exemptions considering the impact of inflation on savings.

One can achieve financial independence on low salary as well.
First Published: 21 Jan 2023, 09:47 AM IST