Income Tax Exemptions – The layman’s look up

Income Tax Exemptions - How to make the most out of it

Talking about Tax Exemptions, the Salaried individual would have heard lot of jargon from the HR or finance personnel in the company regarding elements in the pay structure which are exempt from tax. Well, if you really want to know what these exemptions are all about, and the effect it has on your taxable salary read on….


What are Tax exemptions really?

Tax exemptions are monetary exemptions. It reduces the total taxable salary. An item from the income that is exempt from tax or not taxable has a tax exempt status. It provides complete or partial relief from taxes. This reduces the overall tax burden of the individual as it reduces the total amount of taxable income.

For example; If Sanjay is earning INR 7,00,000/- per annum; assuming he has some items in his salary that are exempted from Tax to an extent of INR 2,00,000/-, then his taxable salary is INR 5,00,000/- Sanjay will pay tax depending on the tax bracket this taxable salary falls into.

Now let’s look at the different tax exemptions the Salaried individual can avail.

  1. HRA Exemption:

House Rent Allowance is offered by companies to its employees to help them live in a good place. A portion of this allowance is exempted from tax. The balance becomes part of the taxable salary. Said to be the most useful of all exemptions for the Salaried individual, the exempted part of HRA is usually large.  HRA exemption is calculated as follows:

The lowest of the below three is the exemption the salaried individual receives under HRA:

  • The actual amount received as HRA from the employer.
  • Rent paid less 10% of basic salary.
  • 50% of Basic Salary (if staying in a non-metro – 40%).
  1. Leave Travel Allowance:

Companies offer it employees a Leave Travel Allowance which are exempt from tax subject to the following conditions:

  • Exemption is allowed twice in a block of four years.(The periods of these blocks are pre-determined by the Income Tax Department and you can look them up).
  • Exemption only for travel fare and not for boarding or lodging or food expenses.
  • For travel in India only.
  • Travel Expense : Upto Economy fare on Air

Upto First Class Air-conditioned on rail

Upto First Class Deluxe fare in any other form of transport or equivalent to Air-conditioned First Class by Rail fare in the shortest possible route to the destination where no recognizable form of transport exists.

  • Upto the amount exempted.
  • Can be availed for the journey undertaken during leave while in service or after retirement from service.
  • Travel Expense for all the employee’s dependents are also eligible for exemption.

Devender travelled to Kul from Bangalore with his wife, mother and two kids. He took a flight to Chandigarh and then reached the Kul valley by road. His total expenditure to and fro for his family was INR 65000/- He travelled in the economy class by air and took a taxi to reach Kul. Devender is eligible for a full exemption on his air travel. His taxi fare would be limited to the amount equivalent to the fare on first class air-conditioned travel by train to Kulu. Devender’s leave travel expense eligible for exemption now totalled to INR 56000/- . However, his company had an upper limit on the LTA exemption which was INR 50,000/- . Hence Devender’s leave travel expense eligible for exemption is INR 50,000/-

Also Read: GST: How it impacts the common man
  1. Exemption on Leave Encashment

Some employers allow encashment or offer to pay cash for the leaves not taken by the employee. This cash paid is also eligible for exemption up to a certain limit.  These are the leaves that the employee is eligible or allowed, but has not availed the same.

  1. Exemption on Pension

Pension received by an employee after retirement is also eligible for exemption up to a certain extent. Pension can be commuted (paid as a lump sum at the time of retirement) or uncommuted (paid at regular intervals for the rest of the life time of the individual). Sometimes the pension is purchased as an annuity from a company and the employee receives this annuity at regular intervals from this company which is also exempted from tax.

  1. Income Tax Exemptions on payments received under Voluntary Retirement Scheme.

Payments made to an employee under the Voluntary retirement Scheme or the Golden Handshake scheme are also eligible for Income Tax exemption under sec 10(10C).

  1. Exemptions on Perquisites

Cars, company owned accommodation, Stock Options and Medical/Fuel reimbursement, Domestic help may all be taxable perks at the hands of the assesse. However, they are subject to ceilings and limits and reimbursement on telephone expenditure is fully exempt from tax.

Medical Expenditure is exempt to a maximum of INR 15000/- per annum. Use of company owned cars completely for official purposes are also exempt from tax. When cars are used partly for official and partly for personal purposes it is subject to a limit on exemptions. Ceilings are also applicable on company owned accommodation. Stock options are taxable as capital gains when the employee sells them to realize their value.

Know your exemptions to avail them. While a number of companies do their bit to educate their employees on exemptions, it is important to understand the exemptions you are eligible, to avail them in full. Exemptions explain the tax friendly structure of the pay package of a salaried individual. Reach out to a financial advisor today to get the right understanding about Income tax exemptions and structure of your pay package.

This article has been contributed by Right Horizons

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