Different types of allowances and tax benefits on them

Written by : Knowledge Centre Team

2024-08-02

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Data from the Income Tax Department clearly reveals that salaried people make the bulk of taxpayers in India. For FY 2019-20, individual taxpayers in the Rs. 2.5-5 lakh per annum income bracket constituted the lion share of income taxpayers in India.

In AY2013, 11.7 million salaried individuals filed their income tax returns (ITR), and by AY2019, the number jumped to 29 million. In the same period ITR by business increased from 15.3 million to 22.5 million. Ironically, in the corresponding period average business income grew by 7.2% per year, while average salaried income increased by a meagre 4.2%.

Salaried people have a limited scope of increasing their income but have to bear a larger burden of the country’s tax. In such a scenario, it is essential that you know how to minimize your tax outflow by using all the legal means and methods of saving tax at your disposal.

Your employer provides different types of allowances as a component of your salary to lighten your tax burden. You must know about each of these allowances, how to declare them, and use it to your advantage to enjoy maximum tax benefits.

House Rent Allowance (HRA)

HRA is the best among all types of allowances from an employee’s perspective. The extent of HRA tax deduction available to you is dependent on your basic salary, dearness allowance and other factors. If the value of your rent payments in a financial year is more than Rs. 1 lakh, you have to submit your landlord’s PAN Card.

The following factors will determine the extent of HRA tax deductions you can get on your tax return:

Total HRA provided by your employer on your salary structure
50% of basic salary + dearness allowance (DA) in metro cities
40% of basic salary + DA in non-metro cities
Actual rent paid minus 10% of basic salary + DA

Leave and travel allowance (LTA)

Leave and travel allowance is also a major component in your salary structure. With LTA you can avail tax deduction for a trip taken only with your spouse, children and dependent parents and siblings within India. The extent of exemption is equal to the actual expenses incurred on the trip which has to be claimed by submitting original bills. LTA exemption is available for only two journeys within a span of four years.

Dearness allowance

Some employers also provide dearness allowances (DA) to employees as part of the salary structure. However, DA is fully taxable at the hands of the employer. Thus, you cannot enjoy any tax benefits on them.

Standard deduction

Standard deduction is a default deduction that the government allows on your taxable income to help you bring down your tax burden. Prior to Budget 2019, individuals could claim a standard deduction of Rs. 40,000, but that has now been increased to Rs. 50,000.

If your annual income is Rs. 3 lakh, then Rs. 50,000 is taxable, but with a standard deduction of Rs. 50,000, your taxable income is reduced to 0; therefore you don’t have to pay any taxes. That is how standard deduction helps taxpayers.

Relocation allowance

As companies today operate in multiple locations, employees might be asked to report to work to a different city and it may even come along with a promotion. Relocation incurs huge costs as you have to move furniture, vehicles and make other costly arrangements in a new city. As per section 10(14) of the Income-tax Act, 1961, read with rule 2BB of the Income-tax Rules, 1962, any allowance granted to meet the cost of travel on transfer (including packing and transportation of personal effect) or the ordinary daily charges incurred during the period of journey in connection with transfer can be claimed as exempt from tax.So you can claim the relocation allowance as exempt from tax to the extent of actual specified expenses incurred on your transfer.

If the amount paid by the employer is more than the actual specified expenses incurred, the difference shall be taxable as salary income in your hands. You should maintain necessary documents substantiating payment of expenses towards transfer.

Utilizing Sec 80C, 80CCC, 80CCD(1) deductions

Apart from various types of allowances, you can reduce your tax burden by investing in tax-saving instruments such as ULIPs, pension plans, NPS, PPF and tax-saving fixed deposits. You can also avail tax deductions on home loan interest paid under Section 24 and on interests paid on education loan as per Section 80E of the Income Tax Act.

Investing in ULIPs is one of the best ways to avail maximum tax benefits, get life protection and generate wealth in the long term. Since ULIPs are EEE investment instruments, investors get the triple benefit of enjoying tax benefits on premiums paid, returns on investment, and on maturity/death benefit. Start with Invest 4G ULIP Plan from Canara HSBC Life Insurance and meet your financial goals while maximizing tax savings and returns.

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