KNOWLEDGE CENTRE Tax Planning / How to Save More Tax with Tax-Exempt Allowances Given by Corporates

How to Save More Tax with Tax-Exempt Allowances Given by Corporates

How to save tax using corporate tax exemptions?

A quick look at your salary slip will tell you the number of allowances that your employer pays you as a part of your salary. These allowances are not mandatory by law, but are there to help you save tax. When doing your tax planning exercise, you should account for all the exemptions you are eligible for, including those on the allowances that you receive as a part of your salary.

What are some corporate tax exemptions that can be used to save tax?

Below detailed are some of the allowances that are most commonly paid by employers:

Transport Allowance (TA)

If your employer does not provide you with a free pick-up and drop facility and pays TA, then you may claim up to INR 1,600 a month or INR 19,200 a year as exempt from taxable salary. In case of differently-abled individuals, the claim is capped at INR 3,200 per month or INR 38,400 annually.

Leave Travel Allowance (LTA)

There are few rules applicable to claiming exemption on LTA:

  • A maximum of two journeys may be claimed for exemption over a period of four years
  • Out of the allowance received and the actual amount spent to reach the destination via the shortest route, the lesser amount is eligible for exemption.
  • First air-conditioned coach fare in case of train travel and economy class flights of any national carrier in case of air travel may be considered for calculating the exemption amount.
  • The trip must be within India.

House Rent Allowance (HRA)

The minimum of the below-listed amounts may be claimed for tax exemption.

  • Actual HRA received
  • 50% of salary if living in a metro city, else 40% if living in non-metro cities
  • Excess of annual rent paid over 10% of salary

Salary considered for this calculation includes the sum of basic salary, dearness allowance (DA), and commission received based on the sales turnover.

Medical reimbursements

Reimbursements paid by your employer for medical expenses incurred by you on your family are tax-exempt up to a maximum of INR 15,000 per year.

Children education allowance

An upper limit of INR 100 per month per child for a maximum of two children is eligible for tax exemption along with the tuition fee exemption under Section 80C.

Hostel expenditure allowance

An upper limit of INR 300 per month per child for a maximum of two children is eligible for tax exemption.

In addition, there are other allowances paid by employers, which are taxable. Although they are not amongst the best tax-saving options, they help reduce your liability. Some of them include:

  • Dearness Allowance (DA) – Principally received by government employees
  • City compensatory allowance
  • Medical allowance
  • Special allowance

Section 80C of the Income Tax (IT) Act provides for the maximum amount of tax exemption, up to INR 1.5 lakh per annum on investments made in tax-saving schemes.

However, when it comes to investing, researching the available options tends to be the most time consuming and cumbersome task, followed by the rather technical task of analyzing and comparing the options.

Risk-free investments such as fixed deposits (FDs) or savings accounts earn a maximum of 7% per annum interest. If you are looking for tax-saving schemes, you may consider Public Provident Fund (PPF) and National Pension System (NPS) among others that help you reduce your tax payments and earn better returns than that on FDs.

However, the best tax-saving options in investments are ELSS funds. The investments you make in ELSS are exempt under Section 80C and they earn better as compared to FD and PPF because the corpus is invested in market securities. ELSS does come with a lock-in period of three years, which is the least when compared to other options like NPS and PPF. Additionally, the cherry on the cake is that the earnings and maturity proceeds from ELSS are also tax exempt once you have stayed invested for the three-year lock-in period. Therefore, it is recommended you include ELSS investments while doing your tax planning exercise.

In order to find the right investment instrument that fulfills your requirements, you will be required to carry out an extensive research on the available options, analyze them, and compare the earnings thereof. ARQ, our proprietary investment search engine, may help you do the same with minimal effort and give you reports and technically accurate suggestions that are free of any human bias.

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