Salaried taxpayer receives emoluments(benefits) from his/her employer generally referred as his package. The emoluments consists of various items such as Basic Salary, Dearness Allowance, Bonus, Commission on sales, Perquisites etc. All these items are covered separately in the Form 16 of the taxpayer. Out of these, allowances play a vital role in saving your Income-tax.
Allowance refers to a fixed amount of money received on monthly basis by the taxpayer from his employer. There are three kinds of Allowances based on their tax-ability viz.
1. Taxable Allowances,
2. Exempt Allowances and
3. Partly Exempt Allowances.
We will look into Partly Exempt Allowances, since the other two cannot be considered for tax planning.
Learn how partly exempt allowances save the Income-tax?
- House Rent Allowance (HRA)- The salaried taxpayer living in a rented accommodation requires to pay the monthly rentals. House rent allowance is paid to him to meet the cost of such rentals.HRA is exempt to the extent of minimum of the following-
- Actual HRA received,
- Rent paid minus 10% of the basic salary,
- 50% of the basic salary, in case where the house is located in metro cities (whereas 40% of basic salary in case where the house is located in other cities).
- Tax Planning tips for HRA –
A] You can get the benefit of HRA even if you pay house rental to your parents – In case you are living with your parents and the house is owned by your parents. You can still claim the benefit of HRA deduction if you receive HRA from your employer.
B] Claim deduction of both, HRA and housing loan EMI – It is quite possible that you live in a rented house whereas your family lives in your owned house. In such cases if you receive HRA, you can claim the deduction of the same.Here, if you have taken a housing loan for your own house, you can claim the deduction on Interest and Principal too, in your Income-tax Return. You can also claim the deduction of Interest and Principal even if your residential house has been let out or vacant during the financial year.
C] Claim of HRA in the return – It may happen that you fail to submit the proofs of house rentals paid by you to your employer within time, the same is considered in your Form 16. No need to worry, you can still claim the benefit of HRA while filing of your Income-tax return.
2. Conveyance Allowance- Conveyance allowance refers to amount paid to the salaried taxpayer to meet the travelling expenditure from house to office and vice versa.From the financial year 2015-16, Conveyance Allowance is exempt upto Rs. 1,600 per month.
- Tax Planning tip for Conveyance Allowance – If your salary slip does not consists of conveyance allowance, you may insist your employer for the same upto the exemption limit of Rs. 1,600/- per month. If you avail the whole limit, a sum of Rs. 19,200/- is eligible for exemption in one financial year.
3. Children Education Allowance- The allowance paid to the salaried taxpayer to meet the cost of education of his children is referred to as Children Education Allowance.This allowance is exempt upto Rs. 100 per month per child (maximum of 2 children).
- Tax Planning tip for Children Education Allowance – If your salary slip does not consists of Children Education Allowance, you may insist your employer for the same upto the exemption limit of Rs. 100/- per month per child. If you avail the whole limit, Rs. 2,400/- is eligible for exemption in one financial year.
4. Hostel Expenditure Allowance- The allowance paid to the salaried taxpayer to meet the cost of living of his children in the hostel is referred to as Hostel Expenditure Allowance. This allowance is exempt upto Rs. 300 per month per child (maximum of 2 children).
- Tax Planning tip- If your salary slip does not consists of hostel expenditure allowance, you may insist your employer for the same upto the exemption limit of Rs. 300/- per month per child. If you avail the whole limit, Rs. 7,200/- is eligible for exemption in one financial year.