Tax Allowances in IT Act

The salary of an employee comes with different types of allowances and benefits. They all have various rules for tax exemption. Some of them are fully exempted allowances, while the others are partially exempted. You can decrease your tax liability if you can smartly claim the income tax deductions and exemptions on different allowances.

The different sections provide a wide range of benefits that can help you maximize the tax savings and optimize the salary structure. These sections are HRA, LTA, standard deduction, and many more.

Exemption of Allowances

The tax exemptions of different types of allowances vary from each other. In this section, below are the different allowances in income tax:

Allowance on House Rent

If you are a salaried employee and living in a rented apartment, then you can get the benefit from the House rent allowance. The given allowance can be completely or partially exempted from taxation. Although it will be taxable if you are not living in a rented accommodation and are still getting the HRA from your employer.

If you are not able to show the rent receipts to your employer as proof of claiming HRA, then you can still get the exemption while filing the income tax return. So, it is important to keep the receipts of the rent and any payment that was made in the direction of rent.

The HRA, which you are allowed to claim, should be the lower of the following:

Total amount of HRA received from your employer.
Amount = (rent paid) - ( 10% of the basic salary + dearness allowance)
50% of the salary (basic salary + DA) for metros and 40% of the salary ( basic salary + DA) for the non-metros.

Note:

If the rent payment exceeds Rs 1 lakh per annum, the employee must submit the PAN details of the house owner.
If you pay your taxes under the old tax regime, then you can claim this exemption. If you choose the new tax regime, then the entire HRA received by you will be taxable, and you won't be allowed any exemption.

Standard Income Tax deductions

The standard salary deduction for individuals is considered as per the old and new tax regimes. Here are the standard deductions for the employees as per the financial year 2024-25:

As per the old tax regime: Rs 50,000
As per the new tax regime: Rs 75,000

Leave Travel Allowances

The salaried employees are given the Leave Travel Allowance or leave travel concession as per the income tax laws. This is only for the travel expenses they incurred during the leave. You should keep in mind that these exemptions are not given for the whole trip, including food, shopping, entertainment, etc.

You can claim this LTC twice in one block (four years). In case you didn't use this exemption in the course of four years, you can carry it forward for the next four years. Here are the restrictions that are applied to an LTA:

Only domestic travels are allowed for the LTA. It does not cover the cost of international travel.
The transportation mode for such types of travel should be air travel, railways, or public transport. The route should be the shortest route to the destination.

Food Coupons

The food coupons are provided to the employees by their employers. These types of coupons are taxable as perquisites in the hands of the employee. However, you can consider these meal coupons as exempt from the tax up to Rs 50 per meal.

You can get the monthly benefit of up to Rs 2200 as per the calculation of two meals a day. Similarly, the yearly exemptions are up to Rs 26,400.

Mobile Reimbursement

A taxpayer can incur the expenses of the telephone and mobile phones used at the residence. According to the income tax law, it is allowed for an employee to claim a tax-free reimbursement on these expenses.

The employee is allowed to claim the reimbursement for the lower amount between the total of the bill paid and the amount mentioned in the salary package.

Books and Journals

Employees can incur expenses on newspapers, books, journals, periodicals, and many more. The laws made by the income tax department allow them to claim the tax-free benefits on these expenses.

It is also the same as the upper one. The allowed amount of reimbursement is the lower of the bill amount paid or the amount mentioned on your salary package.

Relocation Allowance

In today's time, businesses operate from multiple locations in a country. So, there are some possibilities that at some point in time you will be asked for relocation for job purposes. This type of relocation can cost a lot of money. These expenses may include the house shifting expense, car transportation cost, furniture moving cost, car registration cost, and more.

Fortunately, if you will be relocating, then these expenses will be covered by your employer. In some cases, the employer makes the direct payment for such expenses. You should keep in mind that the tax liability for different expenses can be different.

Allowance for Children's Education

Some of the employers also provide an allowance for your children's education as part of your salary. These types of allowances, which an employee gets for the education of their children, are tax-exempt. The employee can claim a maximum amount of Rs 100 as part of the allowance, making the total Rs 1,200 per year. Additionally, they can receive this allowance for up to two children.

Allowances for Children's Hostel

Some of the employers provide an allowance for the children's hostel fee, which is included in the salary. The employees are allowed to claim the maximum benefit of Rs 300 per month per child. They can only claim this amount for a maximum of two children.

Gratuity

Gratuity is a type of salary allowance that is voluntarily given to an employee by their employer in return for the service he had provided. The employee should have worked for a minimum of 5 years in the company. Here are the two criteria to decide whether the exemption is taxable or not:

If the employee receives the gratuity during the time of his service, then the amount will be completely taxable. It applies to both government and non-government employees.
If the gratuity is given at the time of the retirement or death of the employee, then it will be fully exempted. These employees could be in the defense services, members of the civil service, government employees, or local authority personnel.

Leave Encashment

As per the laws of labour, every salaried person is given a minimum number of leaves every year, which are paid. It is not necessary for the employee to use all the paid leave they have been given in a year. The employees are allowed to carry forward their unused leave to the next year.

If the employee hadn't used his leaves in the last few years, then he will have a collection of unutilized leaves at the time of his resignation or retirement. In this condition, the employer has to provide compensation for all these unused paid leaves. This whole concept is known as leave encashment.

Here are the two conditions for the allowance in salary from the point of view of taxes:

If the leave encashment received by an employee during the time of his service in the company, then it will be fully taxable.
If the employee received the leave encashment at the time of his retirement, then it will be fully exempted.