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  • Tax Exempt Allowances for Employees

    With many taxpayers being salaried employees, there are a few allowed exemptions, by the Income Tax Act, which in turn helps them save on taxes. These exemptions are provided to the employees during their years of service by employers. An employee would need to inform his or her employer, that he or she would like to claim these allotted exemptions, available for them as per the Income Tax Act of 1961. The employer would then, need to compute their taxes as per their tax slabs and minus tax deducted at source accordingly. They types of incomes which are exempt to tax on different levels, and at different amounts. Some of the common allowance given to employees are: House Rent Allowance, Gratuity Allowance, Leave Encashment, Conveyance/Transport Allowance, Leave Travel Allowance and many others.

    Popular Allowances received by Salaried Employees:

    1. Leave Travel Allowance:

      LTA or leave travel allowances is one of the most popular forms of allowances received by salaried individuals. You can claim this allowance when apply for leave for travel. It covers the cost of your travel and you get exemption on your cost incurred in travel. LTA covers the following exemptions:

      • exemption is provided up to a limit of the actual travel costs incurred by the employee within India only. Again, this is only travel cost, and doesn’t include expenses such as stay at hotels, food expenses, etc.
      • exemption will be allowed twice in a period of 4 years, with respect to 2 journeys. If the LTA isn’t used in this 4 year period, it can be carried over to the next 4 year block.
      • An employee needs to provide proofs of travel to his he/her employer.
    2. House Rent Allowance:

      House Rent Allowances or HRA is provided by employers to employees. It is a part of an employee's salary. The employee can claim the amount received as HRA while filing his/her tax returns.

      • The least of these items will be calculated as HRA: The actual HRA which is provided by the employer for the period of occupancy of the house; or the actual rent paid by the employee for accommodation, which is lesser than 10% of basic pay; or the amount paid is 50% of the basic salary in cities like Mumbai, Delhi, Chennai, and Kolkata, while other cities of the country will receive 40% of their basic salary as HRA.
      • Proof of rent must be provided by the employee in the form of rent receipts signed and stamped by the owner of the property leased to them. The residential agreement of the leased property mentioning the tenure of stay and the amount of rent, along with the landlord’s PAN information.
    3. Leave Encashment:

      This exemption is allowed for employees, who have not taken their leaves allotted for the year, and have opted to take them in the form of encashed leaves. This income will not be allowed under the Income for salary head for taxation. Leave Encashment is available for exemption under section 10(10AA) and it has 2 categories: Government Employees and other employees. Leave encashment for government employees is fully exempt from tax. While other employees will be exempted on the least of the below:

      1. 10 months’ average salary.
      2. Actual leave encashment received.
      3. 30 days of cash equivalent of unavailed leave for every year of service.
      4. Maximum limit allowed by the government is Rs. 3,00,000.
    4. Conveyance or Transport Allowance:

      This allowance is provided to a maximum of Rs. 800 per month or Rs 9,600 per annum, irrespective of actuals. There is no requirement of bills for this type of exemption.

    5. Pension Income:

      The pension is an income an employee receives for the past services done to his/her employer.. There are 2 types of pension:

      1. Commuted pension wherein the employee will receive a lump sum payment the past services.
      2. Uncommuted pension is received by an employee on a regular basis. This can be paid either by an employer directly or through the option of a pension scheme.
      3. Government employees are fully exempted from paying tax on the pension received.
      4. For non-government employees, one third of their pension or Rs. 15, 000 whichever is less, if it is received along with gratuity and if 100% of pension is commuted. If pension is paid to family members, no tax is levied.
    6. Gratuity:

      It is payable to employees after they have terminated their employment after a period of 5 years minimum. The amount of gratuity is payable to them either on retirement or resignation, or death considering that the employee has fulfilled the 5 year period. Tax exemption is available for employees receiving gratuity under section 10(10) of the Income Tax Act 1961.

      1. Government employees of both State and Central governments will be exempted from tax. Defense employees and local authorities as well are exempt from tax payment .
      2. Other employees, who have gratuity received shall be exempt to a limit of half month salary for each year of completed service or Rs. 10,00,00 whichever is less.
      3. All employees covered under the Payment of Gratuity Act, 1972 shall be exempt up to the limits of:
        1. For each year of service completed, gratuity will be calculated at a rate of 15 days wages as per the last drawn wages of the employee.
        2. Maximum amount of Rs. 1,00,000.
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