Many of the allowances, reimbursements paid to us as part of wages are either fully taxable or exempt from tax up to a certain limit, but the tax exemption is subject to certain conditions. This limit determines how much of these allocations / refunds are taxable or otherwise in our hands.
Consequently, it is important to know these limits and the attached conditions to claim the tax exemption. Also, some subsidies are fully taxable and it is important to know this also to calculate the tax itself.
Below is a list of some allowances and reimbursements that are often paid to employees as part of their salary, along with which they are fully taxable, partially exempt from tax, and the limits up to which they are exempt from tax.
1. Home Rental Subsidy (HRA): If you receive HRA as part of your salary and also pay the rent for residential accommodation, you can claim the HRA payment as tax exempt subject to certain limits and restrictions. These are as follows:
The minimum of the following HRA is tax exempt:
- Actual HRA received
- 50% of annual salary * if you live in metropolitan cities or 40%
- Excess annual rent paid more than 10% of annual salary *
* The salary here is considered as a basic capital gain subsidy (if it is part of the retirement benefits) and the commission received based on the volume of sales.
However, if you do not pay the rent, the entire HRA received is taxable.
2. Recognition Allowance (DA): The recognition allowance or DA is primarily received by government employees. However, it is fully taxable for all salaried taxpayers, regardless of whether he / she is a government or non-government employee.
3. Travel License Leave (LTA): Employees who receive LTA from their employers can claim the exemption. An employee here can be an Indian or a foreigner.
However, this exemption is subject to the following rules:
The exemption is available on 2 trips in a 4-year block.
- The amount of the exemption available is less than the actual amount spent to reach the destination by the shortest route or the amount received from the employer.
- To claim the exemption, the cost of reaching the destination can be taken as first class A / C (for railroads) or in economy class of national carrier (for air travel).
- Exemption is allowed only if actual expenses have been incurred to travel anywhere in India.
4. Compensatory subsidy of the city: this is one of the common components of the salary structure. It is similar to DA in that it is offered to employees to offset the high cost of living in cities. Like DA, it is also fully taxable in the hands of an employee.
5. Special subsidy: any subsidy received by an employee who is not under any other subsidy head, is totally taxable in her hands.
6. Overtime allowance: Some employers compensate overtime for their employees. This subsidy is subject to tax in the hands of the employee.
7. Early Childhood Education Grant: If you receive a Early Childhood Education Grant from your employer, then you are eligible to claim a tax exemption under the Income Tax Act. However, the maximum exempt amount is Rs. 100 per month or Rs. 1200 per year for a maximum of up to 2 children. Along with this, you can also claim deductions for the fees paid by your children in section 80C.
8. Shelter Expense Allowance: Similarly, any shelter expense allowance you receive for your children from the employer is eligible for an exemption of up to Rs. 300 per month or Rs. 3,600 per year for a maximum of up to 2 children.
9. Transportation and Medical Reimbursement Grant: Both grants were available until fiscal year 2017-18. However, from fiscal year 2018-19, the standard deduction of Rs 40,000 was introduced in place of the transportation allowance and medical reimbursements.
If you received a transportation allowance from your employer until fiscal year 2017-18, as a taxpayer, you can claim up to Rs 1,600 per month or Rs 19,200 per year as tax-exempt before reaching the taxable gross income. For blind, deaf or disabled employees, the exemption limit is Rs 3,200 per month. This subsidy does not require you to submit invoices to your employer for claiming it. However, there is a caveat to this benefit. This exemption can only be used if the employer does not provide free transportation.
Likewise, any reimbursement granted by an employer to her employee for any medical expenses incurred by herself or her family may be claimed as tax exempt up to Rs 15,000 annually until the 2017-18 fiscal year. However, the exemption was only available if you submitted actual invoices to your employer.
10. Fixed medical subsidy: the medical subsidy received by you is fully taxable. Furthermore, you are not required to submit invoices to claim medical subsidy.