In the third part of the series on how to save taxes, I will discuss certain common tax exemptions. Certain allowances offered by your employer are exempt from income tax i.e. whole or part of these allowances (paid with your salary) won’t form part of your taxable income. In this post, I will cover some of these common tax exemptions. Smart use of these tax-exempt allowances can bring down your tax liability.
Please understand these allowances must be part of your salary structure. If these allowances are not part of your salary structure, you won’t be able to get tax exemptions.
Must Read: How to save Income Tax? Part-I (Section 80C)
1. Medical Reimbursement
Amount paid (reimbursed) by your employer towards expenses for medical treatment of you and your family is exempt from income tax to the extent of Rs 15,000 per financial year (Section 17 of the Income Tax Act). Family includes self, spouse, children, dependent parents and siblings.
This exemption is not available to self-employed.
This exemption is on actual basis i.e. you are required to submit medical bills to your employer.
If you have received Rs 15,000 from your employer as medical allowance and submit medical bills only to the extent of Rs 9,000, only Rs 9,000 shall be exempt from tax. Remaining Rs 6,000 shall be added to your taxable income.
If your employer reimburses your medical bills of Rs 25,000, only Rs 15,000 will be tax-exempt. Remaining Rs 10,000 will be added to your income and taxed accordingly.
For more on medical reimbursements and medical allowance, please go through this post.
Read More: Tax Benefit of Health Insurance
2. Conveyance or Transport Allowance
This allowance can be offered by your employer for commuting between the place of residence and place of work. This allowance is exempt up to Rs 1,600 per month (Rs 19,200 per annum). This is under Section 10(14) and Rule 2BB of the Income Tax Act.
If the taxpayer is blind or orthopedically handicapped with disabilities of lower extremities, the exempt allowance goes up to Rs 3,200 per month (Rs 38,400 per annum)
3. House Rent Allowance (HRA)
Salaried individuals who stay in a rented accommodation can avail HRA tax exemption. HRA is paid by employer as part of your salary. Entire HRA is not exempt.
HRA tax exemption is covered under Section 10(13A) and Rule 2A of the Income Tax Act.
If you receive HRA as part of your salary and do not stay on rent, the entire HRA is taxable.
HRA Tax Exemption Calculation
Depends on four parameters:
- City of residence (metro or non-metro)
- House Rent Allowance (HRA) received
- Basic Salary (including dearness allowance)
- Actual Rent Paid
If you are staying in a metro city (Delhi, Mumbai, Chennai, Kolkata),
Exempt HRA = Minimum of (HRA, Rent paid -10% of basic, 50% of Basic Salary)
If you are not staying in a metro city,
Exempt HRA = Minimum of (HRA, Rent paid -10% of basic, 40% of Basic Salary)
The basic salary per month is Rs 40,000. HRA is Rs 30,000 per month and Rent is Rs 25,000 per month.
Consider two cases of living in metro and a non-metro city.
How do I claim HRA tax exemption?
To claim HRA exemption, you need rent receipts with revenue stamp affixed and duly signed by your landlord. You must submit these to your employer. You also need to submit PAN of the landlord if the annual rent is more than Rs 1 lac.
I stay in a house owned by my parents. Can I avail HRA exemption?
You can do so by paying rent to your parents. Your parents will have to pay tax on this rental income and show this income while filing their income tax returns.
Can I pay rent to my spouse and avail HRA exemption?
Don’t do that. Though there is nothing in Income Tax Laws that disallows this, payment of rent to spouse won’t be taken kindly by Income Tax Authorities.
Even your employer may refuse to accept payment of rent to spouse as valid exemption for HRA.
I own a house but stay on rent
You can avail HRA tax exemption along with interest deduction under Section 24 of the Income Tax Act.
Read more: Tax Benefits on Home Loan Repayment
My employer doesn’t give my HRA. What should I do?
In case you are self-employed or you do not receive HRA as part of your salary, you can avail limited tax benefit up to a maximum of Rs 2,000 per month under Section 80GG. Even this is subject to many sub-conditions.
You can avail deduction under Section 80GG to the least of (Rs 2,000 per month, 25% of total income, Rent – 10% of annual income). There are a few conditions to be met.
You, your spouse or minor children shall not own residential accommodation at the place of your employment. Additionally, you must not have availed any HRA during the entire financial year. You should not have any self occupied residential premise in any other place. If you were employed for 2 months in the year (and availed HRA) and were self-employed during the remaining period, you can not avail this deduction.
Read more: 15 lesser known Income Tax deductions
4. Leave Travel Allowance
Allowance paid by employer for travel (self and family) during leave taken by the employer is exempt from tax under Section 10(5) and Rule 2B. This allowance is commonly known as Leave Travel Allowance (LTA). Family includes spouse children and dependent parents or siblings. Exemption is available for only up to 2 children (this rule does not apply to children born before October 1, 1998).
Entire LTA (leave travel allowance) given by your employer is not tax- exempt.
Do I have to be on leave to claim LTA?
Though not mentioned explicitly, it is a deemed provision that you have to be on leave for the period for which you are submitting travel bills.
How is LTA paid? How much of LTA is exempt?
LTA is part of your CTC (cost to company). If you don’t claim it, employer still pays to you but it becomes part of your taxable income (in this case, LTA is not tax exempt). If you claim LTA (tax concession under LTA), the amount accepted towards LTA is tax-free in your hands. Remaining unclaimed portion of LTA becomes your taxable salary.
When can I avail LTA tax exemption?
The exemption for LTA can be availed twice (for two journeys) in blocks of four calendar years (and not financial years). To and fro journey is considered one journey.
The four year blocks (specified by Government) are 2006-2009, 2010-2013, 2014-2017 and so on. Block 2014-2017 means period from January 2014 to December 2017.
If you have not used LTA in a four year block (or availed only once), you can avail LTA exemption (for the previous block) in the first year of next block. This is known as Carry-over Concession. For instance, if you availed LTA just once in 2010-2013, you can avail LTA in 2014. Your two exemptions for 2014-2017 will still be intact.
If your spouse is also working, you can avail LTA in two years while your spouse can avail in the remaining two years of 4 year block. For instance, you availed LTA concession in 2014 and 2015. Your spouse can avail it in 2016 and 2017.
I am planning to go abroad for vacation. Can I claim LTA exemption?
The exemption is limited to actual travel cost incurred by the employee. The travel shall be to a place in India. Foreign vacation or travel is not eligible. Unclaimed LTA shall be added to your taxable income.
Which travel costs are covered?
The total cost of vacation or holidays is not covered. Only the fare (cost of travel) is covered. Other costs including hostel stay, food, recreation etc are not covered.
Even for the cost of travel (fare), there are certain limitations.
5. Child education Allowance
Rs 100 per month per child up to a maximum of two children
6. Hostel expenditure Allowance
Rs 300 per month per child up to a maximum of two children (for children staying in hostel)
The list of exemptions discussed above is not the holistic list. For the complete list of exemptions, refer to the following link on income tax website.
As mentioned above, these allowances have to be part of your salary before you can avail these tax exemptions. A number of companies allows employees to structure their salaries at the start of the financial year i.e. you can choose quantum for various heads/allowances within your overall cost to company (CTC). Structure your salaries accordingly to get the maximum tax benefit.