As a salaried professional in India, you contribute significantly to the nation's growth while navigating the often complex tax system.
But fear not! You can minimise your tax burden by leveraging the power of exempt allowances. These allowances, offered by employers, offset specific expenses incurred by employees, leading to significant tax savings.
This blog will be your guide to understanding and maximizing exempt allowances available for the assessment year 2024-25.
1. House Rent Allowance (HRA):
House Rent Allowance is paid by the employers to the employees to meet the cost of rented houses taken by them. [Section 10(13A)] The exemption limit is the lower of:
● Actual HRA received
● 50% of Basic Salary (40% if not in Delhi, Mumbai, Kolkata, or Chennai)
● Actual rent paid minus 10% of Basic Salary Income
For example, if an employee's salary is Rs. 1 Lakh per month, mostly in companies, 50% of the amount is a basic salary and 25% of the total salary is HRA. So HRA will be Rs. 25000 per month.
If the Employee Pays Rent of Rs. 20,000 and leaves in Mumbai then his Maximum HRA deduction will be lower of
a. HRA – Rs 25,000
b. 50% of Basic Salary (Mumbai) - Rs 25,000
c. Rent Paid minus 10% of Basic Salary - Rs 20,000 – 5000 (10% of Rs 50,000) = Rs 15,000
Thus, monthly HRA deduction will be Rs 15000 and annual will be Rs 1.8 Lakhs
2. Transport Allowance (TA):
Transport Allowance is granted to an employee working in any transport system to meet his expenditure during the performance of his duties for going from one place to another, provided he does not receive the daily allowance. Lower of
● 70% of such transport allowance or
● Rs. 10,000 per month
In the case of handicapped personnel, irrespective of where they work, transport allowance is Rs. 3200 per month
3. Children Education Allowance (CEA):
Children's Education Allowance - Granted to meet the tuition fees of a maximum of two children.
The exemption limit is Up to Rs. 100 per month per child for a maximum of 2 children. Thus, the Maximum Deduction Annually will be Rs. 2400.
4. Hostel Allowance
It was granted to meet the Hostel expenditure of a maximum of two children Up to Rs. 300 per month per child for a maximum of 2 Children. Thus, the Maximum Deduction Annually will be Rs. 7200.
4. Meal Allowance:
Food in office premises or through non-transferable paid vouchers usable only at eating joints provided by an employer is not taxable, if the cost to the employer is Rs. 50(or less) per meal.
Thus this may go up to Rs 1500 per month and Rs. 18000 per year.
5. Entertainment Allowance:
Only Government employees are eligible for entertainment allowance deductions under Section 16(ii). They can claim a deduction of Rs. 5,000, 20% of their gross salary or the actual entertainment allowance received in a financial year, whichever is lower
6. Professional tax
Professional tax paid by the employee, by way of deduction from his salary, is allowed as a
deduction from the taxable salary income. Even if paid in advance, the professional tax paid
during the year is deductible from the salary income.
If the employer pays the professional tax out of his pocket, without deducting it from the
employee’s salary, then it shall be first included in the employee’s income as a perquisite.
After that, a deduction on such professional tax is allowed from gross salary.
7. Leave Travel Allowance
Leave Travel Concession or Assistance (LTC/LTA), extended by an employer to an employee for going anywhere in India along with his family
he exemption shall be limited to fare for going anywhere in India along with family twice in a block of four years:
i. Exemption limit where journey is performed by Air - Air fare of economy class in the National Carrier by the shortest route or the amount spent, whichever is less
ii. Exemption limit where journey is performed by Rail - Air-conditioned first class rail fare by the shortest route or the amount spent, whichever is less
iii. Exemption limit if places of origin of journey and destination are connected by rail but the journey is performed by any other mode of transport - Air-conditioned first class rail fare by the shortest route or the amount spent, whichever is less
iv. Exemption limit where the places of origin of journey and destination are not connected by rail:
a. Where a recognized public transport system exists - First Class or deluxe class fare by the shortest route or the amount spent, whichever is less
b. Where no recognized public transport system exists - Air conditioned first class rail fare by shortest route or the amount spent, whichever is less
8. Allowances Fully Exempt - Expenses Done for Performance Duties:
a. Tour Allowance - any allowance granted to meet the cost of travel on tour or transfer.
b. Helper Allowance - any allowance granted to meet the expenditure incurred on a helper where such helper is engaged for the performance of the duties of an office or employment of profit
a. Research Allowance - any allowance granted for encouraging academic, research and training pursuits in educational and research institutions.
b. Uniform Allowance- This allowance covers purchasing and maintaining uniforms required for your profession. This allowance is completely exempt.
c. Mobile Reimbursement – Mobile expenses incurred for performance of duties
9. Medical Expenses by Employer:
1) Expense incurred or reimbursed by the employer for the medical treatment of the employee or his family (spouse and children, dependent - parents, brothers and sisters) in any of the following hospitals is not chargeable to tax in the hands of the employee:
a) Hospital maintained by the employer.
b) Hospital maintained by the Government or Local Authority or any other hospital approved by the Central Government
c) Hospital approved by the Chief Commissioner having regard to the prescribed guidelines for treatment of the prescribed diseases.
2) Medical insurance premium paid or reimbursed by the employer is not chargeable to tax.
Illustrative Salary Structure:
Thus, for instance, an employer for employees earning Rs 1,00,000 a month can structure their salary structure as follows:
Particulars | Annual Salary | Monthly Salary |
Basic Salary | 6,00,000 | 50,000 |
HRA | 3,00,000 | 25,000 |
LTA | 1,00,000 | 8,333 |
Meal Allowance | 18,000 | 1,500 |
Child Allowance | 2,400 | 200 |
Hostel Allowance | 7,200 | 600 |
Tour Allowance | 20,000 | 1,667 |
Uniform Allowance | 20,000 | 1,667 |
Special Allowance | 1,32,400 | 11,033 |
Total Salary | 12,00,000 | 1,00,000 |
In the above structure, the subject employee paying rent of Rs. 20,000 and providing proof of expenses done for various allowances can claim exempt allowance up to Rs. 3,47,600/-. Further employees will get the Standard Deduction of Rs . 50,000 and benefits of other Investment Related Deductions under Chapter VIA of the Income Tax Act (80C / 80D / 80G, etc…).
The above structure is illustrative and employers can do various combinations of other allowances as per their organization structure also all allowances exemptions are subject to providing valid documentary evidences by the employee as prescribed under Income Tax Act and rules therein.
Additional Tips:
●Explore deductions under Section 80C, 80CCC, and 80CCD(1b) for further reducing your taxable income.
●Invest in tax-saving instruments like Public Provident Fund (PPF), National Pension System (NPS), and ELSS mutual funds.
●Consider claiming deductions for medical expenses, home loan interest, and donations.
●By understanding and leveraging these exempt allowances effectively, you can significantly reduce your tax burden and maximize your savings. Remember, proper planning, meticulous documentation, and compliance are key to enjoying the full benefits of these provisions. Take advantage of these opportunities and optimize your taxes for a more financially secure future.
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