A HEFTY gross package that’s reduced to near peanuts at the net level due to taxes is of little utility. And there’s no use blaming the tax mandarins for this. There are ways and means to structure your salary package to ensure maximum tax-efficiency. The trick lies in using perks and allowances to your advantage.
It is prudent that Basic Pay and dearness allowance, which do not find any exemption, should be kept to a basic lower limit depending on the employee’s designation and salary.
What is Allowance:
It is the amount received by an individual paid by his/her employer in addition to salary. Under section 15 of the Income Tax Act, 1961 these allowance are taxable excluding few condition where they are entitled of deduction/ exemptions.
Under Income Tax Act following types of allowance are defined
The exemption of House Rent Allowance (HRA) received is exempt to the least of the following:
HRA received the period during which the rental accommodation is occupied by the employee in the previous year.
- Excess of rent paid over 10 percent of salary.
- 50% of the salary, if the rented accommodation is situated at Mumbai, Calcutta, Delhi or Chennai and 40% of salary in other cities. The salary is taken for the period during which the rental accommodation is occupied by the employee in the previous year.
Includes basic salary and dearness allowance if terms of employment so provide but does not include any other allowance. However, any commission payable at a fixed percentage of turnover achieved by the employee is included.
Any amount received by the employee, as entertainment allowance is taxable as salary. However, deduction is available to the employee if he has been:
In continuous service with the present employer from a date before April 1, 1955, and Receiving Entertainment Allowance from his present employer continuously from a date before April 1, 1955 till the year for which the income is to be taxed.
The amount of deduction available is restricted to least of the following:
- In case of government employees: Rs. 5,000; 20% of salary; or amount of entertainment allowance granted during the previous year.
- In case of non-Government employees: Rs. 7,500; 20% of salary; amount of entertainment allowance granted during the previous year, or
- Amount of entertainment allowance received during the financial year 1954-55. Salary means basic salary and excludes all allowances, benefits or perquisites.
Transport allowance provided to an employee for commuting between his residence and the place of his duty shall be exempt up to Rs. 800 per month. However, in case blind or orthopaedically handicapped employee's, a sum of Rs. 1,600 per month is exempt from tax.
Education allowance of Rs. 50 per month per child for up to 2 children of the employee is exempted. In case the children are in hostel, the exemption available is Rs.150 per month per child for up to 2 children.
The following allowances are exempt from tax:
- Expenses incurred on conveyance in the performance of duties of office;
- Cost of travel on tour or on transfer;
- Daily ordinary charges incurred by the employee on account of absence from his normal place of duty during a tour;
- Expenditure on a helper where such helper is engaged for the performance of the duties of office;
- Allowances granted for encouraging the academic research and training pursuits in educational and research institutions; or
- Expenditure incurred on the purchase or maintenance of uniform for wear during the performance of the duties of office.
6.Leave Travel Assistance
LTA is paid for meeting travelling expenses incurred by an individual as also family members (this includes only the spouse, two children and dependent parents, brothers and sisters) while on holiday in India. The amount of exemption depends upon the mode of journey. This exemption is available in respect of 2 journeys undertaken in a block of four calendar years.
This exemption is available in respect of :
- Reimbursement upto Rs.15,000 for medical treatment of the employee and family members.
- Reimbursement of expenditure incurred by an employee and family members in approved hospitals, dispensaries etc.
- Group medical insurance for an employee and family members or reimbursement of premium paid by an employee for medical insurance.
- For medical treatment abroad, the actual expenditure incurred, including on travel and stay abroad of the patient and one attendant (if permitted by the RBI). The ceiling for the gross total income excluding the amount to be reimbursed is Rs.2 lakhs.
- Medical treatment of the employee whose family is outside India; Travel and stay abroad of the employee or his family including one attendant accompanying the patient for medical treatment.
8.Lunch and Refreshment
Refreshment at free or concessional rate is not taxable.
Exemptions of medical expenses incurred by or on behalf of the employee
- The following medical facilities provided to an employee are exempt from income tax:
- Treatment of an employee or his family in any hospital maintained by the employer;
- Reimbursement of any medical expenditure actually incurred by the employee for himself or his family :
In any hospital maintained or approved by the Government, any local authority; or For prescribed diseases or ailments in any hospital approved by the Chief Commissioner, or
9. Dearness Allowance
Dearness Allowance (DA) is paid to the employees to compensate them for the erosion in their wages due to increase in the price level. The system of payment of DA has its own diversity and disparity in the pattern of payment of remuneration to employees. It not only differs from industry to industry but also within the same industry.
A fairly large number of industrial establishments in the country pay a separate allowance known as the dearness allowance to supplement the wages of their employees. It includes any payment made to protect the employees against the inflation and rising prices, such as, dearness allowance (DA), variable dearness allowance (VDA), interim relief, dearness pay, etc. Since the payment of dearness allowance is not occupation specific, therefore, the information collected during the survey covered all the employees in the sample units.
10.Other Special Allowances
- Children Education Allowance
- Tribal Area Allowance
- Hostel Expenditure Allowance
- Remote Area Allowance
- Compensatory Field Area Allowance
- Counter Insurgency Allowance
- Border Area Allowance
- Hilly Area Allowance