From FY 2020-21, an individual taxpayer has to choose whether he/she wants to be taxed as per new tax regime or existing/old tax regime. The new tax regime introduced in Budget 2020 offers lower tax rates but with almost zero tax exemptions on the allowances and reimbursements received as a part of the salary.
However, if an individual opts to continue with the existing/old tax regime then he/she is eligible to claim the permissible tax-exemptions on allowances received as a part of the salary. Do remember, that many allowances are either partially or fully taxable. Further, reimbursements are exempted from tax subject to the submission of bills.
If a taxpayer is opting for the old tax regime then it is important to know the limit to which certain allowances/reimbursements are exempt from tax and the ones that are not exempt at all to properly calculate the tax payable on one's income.
As per experts, one should compare the tax liability in both tax regimes and then decide which tax regime will be beneficial to one. Do keep in mind that salaried individuals with no business income are required to choose between old and new regime every financial year.
Following is the list of the allowances and reimbursements which are often common components of the salary structure. Some of these allowances and reimbursements are either fully or partially taxable even under the existing tax regime.
1. House Rent Allowance (HRA): If you are receiving HRA as part of your salary and also pay rent for residential accommodation then you can claim the HRA paid to you as exempt from tax subject to certain limits and restrictions. These are as follows:
Minimum of the following HRA is exempt from tax:
(i) Actual HRA received
(ii) 50% of annual salary* if living in metro cities or else 40%
(iii) Excess of annual rent paid over 10% of annual salary*
*Salary here is considered as basic plus dearness allowance (if it forms part of retirement benefits) and commission received on the basis of sales turnover.
However, if no rent is paid by you, then whole HRA received is taxable.
Also Read: All you need to know about HRA
2. Dearness Allowance (DA): Normally, Dearness Allowance or DA is only paid by the Government to its employees. However, it is fully taxable for every salaried taxpayer irrespective of whether he/she is a government or non-government employee.
3. Leave Travel Allowance (LTA): Employees who receive LTA from their employers can claim exemption. However, this exemption is subject to the following rules:
(i) The exemption is available on 2 journeys in one block of 4 years.
(ii) The amount of exemption available is lower of the actual amount spent to reach the destination via shortest route or the amount received from the employer.
(iii) To claim exemption, the cost of reaching the destination can be taken as A/C first class (for railways) or economy class of national carrier (for air travel).
(iv) Exemption is allowed only if actual expenditure has been incurred for travelling anywhere in India.
Also Read: All you need to know about LTA
Due to novel coronavirus pandemic and travel restrictions, the government has announced LTC Cash Voucher Scheme to provide tax-exemption. As per the scheme, an employee can claim tax-exemption on the LTA received provided following conditions are satisfied:
a) An employee spends three times the amount of deemed LTC fare on the purchase of goods/services, attracting GST rate of 12% or more;
b) The amount must be spent between October 12, 2020, and March 31, 2021;
c) The payment for the purchase of good/services must be made via digital mode which includes cheque, UPI, debit/credit card etc; and
d) To claim tax benefit, an employee is required to furnish a copy of invoices to the employer having GST number and amount of GST paid.
The maximum amount of tax benefit available to a private sector employee is Rs 36,000 per person. There are various other conditions related to the scheme.
Also Read: How private-sector employees can benefit from LTC Cash voucher Scheme
4. City Compensatory Allowance: This is one of the common components of the salary structure. It is similar to DA as it is offered to employees to compensate for the high cost of living in cities. Just like DA, it is also fully taxable in an employee's hands.
5. Special Allowance: Any Allowance received by an employee which does not fall under any other allowances head, is fully taxable in his/her hands.
6. Overtime Allowance: Some employers compensate for the overtime done by their employees. This allowance is taxable in the employee's hands.
7. Children Education Allowance: If you are receiving children education allowance from your employer then you are eligible to claim a tax exemption under the Income-tax Act. However, the maximum amount exempted is Rs. 100 per month or Rs. 1200 per annum for a maximum of up to 2 children. Along with this, you can also claim deductions for fees paid for your children under section 80C.
Also Read: How to claim tax benefit on tuition fees under Section 80C
8. Hostel Expenditure Allowance: Similarly, any hostel expenditure allowance received by you for your children from an employer is eligible for exemption up to Rs. 300 per month or Rs. 3600 per annum for maximum up to 2 children.
9.Fixed Medical Allowance: The medical allowance received by you is fully taxable. Further, you are not required to submit bills to claim a medical allowance. Do remember, this is not to be confused with medical reimbursement (where submitting medical bills was mandatory to claim tax exemption) which was available till FY 2017-18.
10. Phone bills reimbursement: Another common component of the salary structure is phone bill reimbursements. This type of reimbursement includes both mobile phone, telephone bills and broadband internet connection.
As per income tax laws, there is no limit on the expenses on the mobile phone bills, however, as per experts, such reimbursement should be a reasonable amount considering salary and grade of an employee.
Do keep in mind that to claim the reimbursement, you are required to submit the bills to your employer. The reimbursement amount received by you on the submission of the bills will be tax-exempt in your hands.
Transport Allowance and Medical Reimbursement: Both these allowances were available till FY 2017-18. However, from FY 2018-19, the standard deduction was introduced in lieu of transport allowance and medical reimbursements.
If these two allowances are still part of your salary components, then the amount received by you is fully taxable.
On the other hand, the standard deduction is not an allowance. It is a deduction from gross salary income. For the current FY 2020-21, a standard deduction of Rs 50,000 is available to a salaried employee. While computing TDS on salary, employers are required to take into account standard deduction.
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10 Comments on this Story
TOIFan 563 days ago
My CTC includes Car/Petrol reimbursement.
I have a personal car which I use for going to office.
My understanding is that I can claim exemption on 1800 900(driver) = 2700 per month.
Is this correct?
And in which section do I apply for this exemption while filing the income tax in saral-1 : Sec 10(14)(i) or Sec 10(14)(ii)
Capt.Salim A Chagla686 days ago
a-game was as piyush goyal ''as income/ railway minister lost'' thus arun was ill [abroad]
Rakesh1275 days ago
Whoever made this exemption rule on HRA, needs to be recommended for nobel prize in economics. The government is continuing the nobel winner idea which seems to have no logic over the three options. They should at least increase the exemption on HRA, the rules are of which are of archiac era. To sum up, govt acts like a leecher.