News & Updates

Taxability of Salary Allowances and Deductions

May 4, 2020

Aspects Of Old Regime And New Regime

Taxability Of Allowances And Perquisites

Deductions Available With The Payer Opting For Old Tax Regime

How We As Mehra Goel & Co Can Contribute

Introduction

As the new financial year i.e. FY 2020-2021 is going to start, there is in mind of every salaried individual about their tax planning and where to invest to reduce the tax liability efficiently. Most of the taxpayer in India regularly have following most worrisome
thought every financial year:

  • What are the schemes that can provide deductions while computing the income?
  • What should be the salary structure?
  • Which incentive or perquisite is taxable and which are nontaxable?
  • What will be the impact of union budget on tax planning?

It’s high time to plan your tax savings referring to new union budget i.e. budget 2020. It’s time to know about deductions, exemptions provided under income tax act, investments which can provide us deductions to reduce the liability of income tax

Aspects Of Old Regime And New Regime

A brief comparison of both Tax regime and slab rates applicable to an individual resident in India aged less than 60 Years for AY 2021-2022 has been given below for your kind reference.

Income Slab

New Tax Rate

Existing Tax Rate

Up to ₹ 2,50,000

Exempt

Exempt

₹ 2,50,000 - ₹ 5,00,000

5%

5%

₹ 5,00,000 - ₹ 7,50,000

10%

20%

₹ 7,50,000 - ₹ 10,00,000

15%

20%

₹ 10,00,000 - ₹ 12,50,000

20%

30%

₹ 12,50,000 - ₹ 15,00,000

25%

30%

Above ₹ 15,00,000

30%

30%

If any individual opts for new slab rates following deductions/exemptions has to be surrendered (as specifically mentioned in Section-115BAC):

  • Exemption for Leave Travel Allowance under section 10(5)
  • Exemption for House Rent Allowance under section 10(13A).
  • Exemption from any other Allowance under section 10(14).
  • Exemption from allowance to MPs or MLAs under section 10(17).
  • Exemption of Rs. 1,500 in case of clubbing of minor child income under section 10(32).
  • Standard Deduction of ₹ 50,000.
  • Entertainment Allowance of ₹ 5,000
  • Professional Tax under section 16.
  • Interest under section 24 in respect of self-occupied or vacant property
  • referred to in sub-section (2) of section 23.
  • Deduction from family pension income, equal to 33 1/3 per cent of such income or Rs. 15,000, whichever is less under section 57(IIA).
  • Any deduction under chapter VI-A (like section 80C, 80CCC, 80CCD, 80D, 80DD, 80DDB, 80E, 80EE, 80EEA, 80EEB, 80G, 80GG, 80GGA, 80GGC, 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA, etc).

Deduction: under sub-section (2) of section 80CCD (employer contribution on account of employee in notified pension scheme) and section 80JJAA (for new employment) can be claimed under New Tax Regime as well.

Allowances Under Section 10 Allowed Under New Tax Regime

  • Transport Allowance granted to a specially-abled employee to meet the expenditure for the purpose of commuting between place of residence and place of duty.
  • Conveyance Allowance granted to meet the expenditure on conveyance in performance of duties of an office.
  • Any Allowance granted to meet the cost of travel on tour or on transfer. Daily Allowance to meet the ordinary daily charges incurred by an employee on account of absence from his normal place of duty.

We have further summarized the various other Exemptions/ Deduction allowed or dis-allowed under New & Old Tax Regime as following:

Exemption/ Deduction

New Tax Regime u/s 115BAC

Old Tax Regime

Leave Salary u/s 10(10AA)

Allowed

Allowed

Gratuity

Allowed

Allowed

Commutation of Pension u/s 10(10A)

Allowed

Allowed

VRS Compensation u/s 10(10C)

Allowed

Allowed

House Rent Allowance u/s 10(13A) and Rule 2A

Not Allowed

Allowed

Standard Deduction (if claimed Transport Allowance & Medical Reimbursement shall had be forgone).

Not Allowed

Allowed up to ₹ 50,000

Entertainment Allowance u/s 16(ii)

Not Allowed

Allowed

Entertainment Allowance u/s 16(ii)

Not Allowed

Allowed

Professional Tax

Not Allowed

Allowed

Leave Travel Concession U/s 10(5)

Not Allowed

Allowed

Tour and Transfer Allowance

Allowed

Allowed

Conveyance Allowance (paid to an employee to meet the actual cost of travelling during the course of employment)

Allowed

Allowed

Daily Allowance (as explained above in point-4)

Allowed

Allowed

Helper Allowance

Not Allowed

Allowed

Any allowance granted for encouraging the academic, research and training pursuits in educational and research institutions

Not Allowed

Allowed

Study Allowance

Not Allowed

Allowed

City Compensatory Allowance

Not Allowed

Allowed

Children Education Allowance

Not Allowed

Allowed ₹ 100 p.m. per child up to 2

Hostel Allowance

Not Allowed

Allowed

Travel Allowance to a specially abled employee

Allowed ₹ 3,200 p.m.

Allowed ₹ 3,200 p.m.

Travel Allowance to other than divyang employees (if standard deduction was not claimed)

Not Allowed

Allowed

Free food and beverage through vouchers (Nontransferable) provided to the employee

Not Allowed

Allowed up to ₹ 50 per meal

Interest u/s 24B on housing loan (in repect of property mentioned u/s 23(2)

Not Allowed

Allowed

Note: Taxpayer is advised to structure their salary to get the maximum benefit of the above-allowed allowance subject to the statutory limit given in the prescribed provision.

Tax Comprarison old Regime Vs. New Regime

Annual Taxable Income

Tax as per old regime (deduction u/s 80C & 80D and standard deduction considered*)

Tax as per new regime (no exemption & no deduction)

Tax Payable

Net Salary in-hand

Tax Payable

Net Salary in-hand

2,50,000

Nil

2,50,000

Nil

2,50,000

5,00,000

Nil

5,00,000

Nil

5,00,000

6,50,000

-

4,50,000

28,600

6,21,400

7,50,000

-

5,50,000

39,000

7,11,000

8,00,000

23,400

5,76,600

46,800

7,53,200

10,00,000

65,000

7,35,000

78,000

9,22,000

12,50,000

1,17,000

9,33,000

1,30,000

11,20,000

15,00,000

1,95,000

11,05,000

1,95,000

13,05,000

17,50,000

2,73,000

12,77,000

2,73,000

14,77,000

20,00,000

3,51,000

14,49,000

3,51,000

16,49,000

25,00,000

5,07,000

17,93,000

5,07,000

19,93,000

*Total deduction claimed is ₹ 1,50,000 (u/s 80C) + ₹ 50,000 (u/s 80D) + ₹ 50,000 (Standard Deduction) = ₹2,50,000

**Also it’s worth considering that the above table shows that Old Tax regime is beneficial it’s up to the taxpayer as well that he needs to invest for claiming deduction u/s 80C & 80D amounting to ₹2,00,000. Before making such amount of investment one needs to analysis his/ her cash liquidity status to avoid any cash crush.

Aspects Of Old Regime And New Regime

  • The option shall be exercised for every previous year where the individual or the HUF has no business income, and in other cases, the option once exercised for a previous year shall be valid for that previous year and all subsequent years.
    So for taxpayer who does not have any income from PGBP they have an option available with them every Financial Year to opt between both the tax regimes.
  • The option shall become invalid for a previous year or previous years, as the case may be if the Individual or HUF fails to satisfy the conditions and other provisions of the Act shall apply.
  • Timing of selection of the Regime
    • The selection should be made at the time of filing the tax return in case the individual or HUF has no business income. However, most salaried individuals will need to make this decision much sooner, and convey such decision to their employer who will be required to deduct TDS, in order to avoid cash flow issues.
    • In case, taxes are deducted from their salaries at a lower rate, they may have to pay additional interest at the end of the year for delay/ default in payment of advance tax as per stipulated due dates or suffer a fairly high TDS later. Whereas in case taxes are deducted from their salaries at a higher rate, they may have to claim huge refunds from the tax department, which is seldom an easy task.
    • Therefore, tax planning before the end of the financial year will be essential to avoid distress at the time of return filing. Further, employers will insist on deducting tax on salaries at higher rates if such selection is not made by the Taxpayer. Whether employees will be able to change their selection during the year will also depend on the flexibility provided by their employer in this regard and may not be possible in all cases
  • Set off loss of the following shall not be allowed in case person opts for taxation under New Tax Regime:
    • Carried forward of loses and deprecation of previous years only which had been attributed due to any of the deductions mentioned in above clause
    • Loss from house property from any other head of income (including PGBP)
  • Further, NO DEDUCTION SHALL BE AVAILABLE FOR donation u/s 80G under New Tax Regime.

Following illustration has been made to make you understand the application of the tax regime and it application:

Illustration

Particulars

Amount (Rs.)

Basic

6,30,000

HRA

3,15,000

Special allowance

2,55,000

Total Salary

12,00,000

Professional tax

2,400

Mr A also invested in tax saving mutual fund (ELSS) amounting to INR 1,50,000 and pay medical insurance premium amounting to INR 25,000. Interest income from saving bank account amounting to INR 10,000. House Rent Allowance give to employee amounting to INR 3,50,000. Rent paid by employee amounting to INR 4,00,000.

Calculate taxable income and tax

Now Mr. A has to check his tax liability under both the tax regimes and opt for the best in his tax planning:

Particulars

As per Old Tax Regime

As per New Tax Regime

SALARY

Total Salary

12,00,000

12,00,000

Less:

HRA

3,15,000*

Not Allowed

Professional tax

2,400

Not Allowed

Standard Deduction

50,000

Not Allowed

Net Taxable Salary

8,32,600

12,00,000

INCOME FROM OTHER SOURCES

Interest on saving Bank Account

10,000

10,000

Gross Income

8,42,600

12,10,000

Less: Deductions

Investment in saving funds

1,50,000

Not Allowed

Particulars

As per Old Tax Regime

As per New Tax Regime

SALARY

80D: Medical Premium

25,000

Not Allowed

80TTA: Interest Income

10,000

Not Allowed

Total Deduction

1,85,000

NIL

Net Taxable Income

6,57,600

12,10,000

Tax Amount:

44,020

1,17,000

Add: Cess @ 4%

1761

4,680

Total Tax Liability

45,780

1,21,680

Calculation of HRA Exemption

The minimum figure out of these three is the HRA that you can claim for tax deductions:

The actual rent paid minus 10% of your basic salary

3,37,000

The actual amount of HRA given

3,50,000

50% of your basic salary (for a metropolitan city)

3,15,000

Amount of HRA allowed for deduction

3,15,000

Note: The taxpayer is required to pay an annual rental payout amounting to Rs. 4,00,000 to claim to above HRA deduction
We can see from illustration how in old tax regime Mr A will get the benefit of tax
Hence, a salaried individual has to choose the tax slab rate keeping by in mind all his investments, deductions on investments, other deductions and exemptions. Further one has to analysis his liquidity as well while selecting the appropriate Tax regime. The person has to plan well in advance about its future.

TAXABILITY OF ALLOWANCES AND PERQUISITES:

Further to help our reader to understand various allowance and perquisites available to him we have provided you with the basis of some major deduction available. We hope one can be benefited from the same.

House Rent Allowance (‘HRA’) – Section 10(13A) & Rule 2A:

Least of the following is exempt:

  • Actual HRA received
  • Rent (-) 10% of Basic salary and Dearness Allowance for the relevant period
  • 50% of Basic Salary plus Dearness Allowance for the relevant period in case of Delhi, Mumbai, Chennai & Kolkata and 40% in other cases

Additional Points

  • HRA fully taxable in the hands of the employee where no rent expenditure has been incurred by the employee.
  • Also to claim the deduction of the HRA employee is required to provide the PAN of the landlord to his/ her employer where the annual rent paid is more than Rs 1,00,000 per annum

TAXABILITY OF GRATUITY RECEIPT – Section 10(10)

  • Government Employees: Fully exempt u/s 10(10)
  • Non-Government Employees:
    • Employees Covered by the Payment of Gratuity Act, 1972: Least of the following is exempt:
      • Rs 20 lacs
      • Gratuity actually received
      • 15/26 (x) last drawn salary (x) number of completed years or part of the year in excess of six months
    • Employees Not Covered by the Payment of Gratuity Act, 1972:
      Least of the following is exempt:
      • Rs 20 lacs
      • Gratuity actually received
      • 1/2 (x) average salary of last 10 months immediately preceding the month of retirement (x)number of completed years of service (fraction to be ignored)
  • Additional Points
    • Gratuity received during the continuity of service fully taxable in case of govt as well as non-govt employees.
    • Non-government employee can claim a total exemption of Rs 20L u/s 10(10) during his entire lifetime.

LEAVE TRAVEL ALLOWANCE

Conditions for claiming the exemption

  • Actual journey is a must to claim the exemption.
  • Only domestic travel is considered for exemptions i.e., travel anywhere in India not restricted to travel to home town. No international travel is covered under LTA.
  • The exemption is available only on the actual travel costs incurred i.e., the air, rail or bus fare incurred by the employee.
  •  No expenses such as local conveyance, sightseeing, hotel accommodation, food, etc., are eligible for this exemption.
  • The exemption is also limited to LTA provided by the employer.

Eligible LTA Exemption
The exemption is available only on the actual travel costs i.e., the air, rail or bus fare incurred by the employee and does not include any expenses incurred for local conveyance, sightseeing, hotel accommodation, food, etc. The exemption is also limited to LTA provided by the employer. Further LTA exemption is available only for two journeys performed in a block of four calendar years.

PERSONAL ALLOWANCES – Section 10(14) & Rule 2BB:

Exemption available shall be lower of the amount received from the employer and the following limits:

  • Children Education Allowance: Rs 100 p.m. per child (maximum 2 children)
  • Hostel Expenditure Allowance: Rs 300 p.m. per child
  • (maximum 2 children)
  • Tribal Area Allowance: Rs 200 p.m.
  • Underground Allowances: Rs 800 p.m

OFFICIAL ALLOWANCES – Section 10(14) & Rule 2BB

Exemption available shall be lower of the amount received from the employer and the amount spent by the employee. If any amount is saved by the employee, such saving would be taxable.

  • Daily Allowance (for meeting the cost of boarding and lodging when the employee is on official tour)
  • Uniform Allowance (for meeting the expenditure incurred on purchase/maintenance of office uniform)
  • Conveyance Allowance (for meeting the expenditure incurred on conveyance in connection with official duties)
  • Helper Allowance (for meeting the expenditure incurred on a helper hired in connection with official duties)
  • Academic Allowance (for encouraging academic, research and training pursuits)
  • Travelling Allowance (for meeting the cost of travel on tour or on transfer of duty)

TAXABILITY OF PENSION: Commuted Pension {Section 10(10A)}

Government Employees: Fully exempt u/s 10(10A)
Non-Government Employees:

  • Employee in receipt of gratuity: 1/3rd of commuted pension is exempt
  • Employee not in receipt of gratuity: 50% of commuted pension is exempt

TAXABILITY OF LEAVE SALARY – Section 10(10AA)

Government Employees: Fully exempt u/s 10(10AA)
Non-GovernmentEmployees:
Least of the following is exempt:

  • Leave salary actually received
  • Rs 3,00,000
  • 10 times (x) average salary p.m.
  • Leave at the credit of the employee (x) average salary p.m.

Meaning of ‘average salary’:
Average of salary* of last 10 months immediately preceding the date of retirement
*Salary for this purpose includes basic salary, dearness allowance and commission based on fixed percentage of turnover secured by employee

Meaning of ‘leave at the credit’:
Leave entitlement (max 30 days leave per completed year) (-) Leave availed/encashed

Additional Points:

  • Leave salary received during the continuity of service fully taxable in case of govt as well as non-govt employees.
  • Non-government employee can claim a total exemption of Rs 3,00,000 u/s 10(10AA) during his entire lifetime.

ANY OTHER ALLOWANCES

Fully-taxable in the hands of employees (such as Overtime Allowance, Medical Allowance, Telephone Allowance, City Compensatory Allowance, Dearness Allowance, etc.)
Moreover under section 10(14) read with rule 3 of the Income Tax Rule,1962 any reimbursement made by the employer in respect of the telephone expenses incurred by employee on actual cost basis shall be non-taxable in the hands of the employees.

DEDUCTIONS AVAILABLE WITH THE PAYER OPTING FOR OLD TAX REGIME

Deduction u/s 80C

  • As per Section 80CCE maximum amount of deduction cumulatively u/s 80C, 80CCC & 80CCD(1) is limited to Rs 1,50,000/-.
  • Resident and Non Resident both can claim the deduction u/s 80C.
  • Following investments/payments are eligible for deduction u/s 80C:
  • Life insurance premium {Premium paid for self, spouse & children (minor/major) is available as deduction subject to a maximum limit of 10%/15%/20% of sum assured, as the case may be}.
  • NSC {in the name of self, spouse & minor children}. NSC in the name of major children, parents, brother, sister, any other relative cannot be claimed as deduction u/s 80C.
  • PPF {in the name of self, spouse & children (minor/major)}. PPF in the name of parents, brother, sister, any other relative cannot be claimed as deduction u/s 80C.
  • Fixed Deposit of 5 years or more with Banks/Post Office {in own name only} – Lock-in period of 5 years.
  • Principal repayment of housing loan taken from banks, notified financial institutions or specified employer for purchase/construction of a residential house to be used for residential purposes – Lock-in period of 5 years from the end of the year in which the house is purchased/constructed.
  • Tuition fees of any two children paid to any educational institution in India for full-time education (excluding donation/development fees).
  • Employee’s contribution to recognized provident fund/ statutory provident fund
  • Contribution to Equity Linked Savings Scheme such as Unit Linked Insurance Plan (ULIP).

Deduction u/s 80GGA [Donations to Institutions Notified u/s 35, 35AC & 35CCA]

  • Any person not having PGBP income can claim the deduction u/s 80GGA whether he is a resident or non-resident.
  • No maximum limit on the amount of deduction.
  • Donations exceeding Rs 2,000 should have been made by any mode other than cash.

Deduction u/s 80TTA [Interest on Savings Deposit With Banks & Post Offices]

  • Individuals other than senior citizens and HUF can claim this deduction whether he is a resident or non-resident.
  • Savings account interest received is allowed as deduction, subject to a maximum limit of Rs 10,000 p.a.

Deduction u/s 80TTB [Interest from Banks & Post Offices in case of Senior Citizens] :

  • Resident individual who is a senior citizen can claim the deduction u/s 80TTB.
  • Interest received from banks & post offices on savings deposits as well as time deposits is allowed as deduction, subject to a maximum limit of Rs 50,000 p.a.

Deduction u/s 80CCD [Contribution to New Pension Scheme (NPS) of Central Government {Atal Pension Yojana has been notified u/s 80CCD}] :

  • Individual’s Own Contribution {80CCD(1) & 80CCD(1B)}:
    • 80CCD(1): Individual’s contribution to NPS eligible for deduction (Salaried – Max 10% of Salary; Self Employed – Max 20% of GTI)
    •  80CCD(1B): Additional deduction of maximum Rs 50,000 available u/s 80CCD(1B) if deduction not fully available u/s 80CCD(1) due to the following reasons:
      • Contribution to NPS exceeds 10% of Salary/20% of GTI; or
      • Contribution to NPS exceeds Rs 1,50,000; or
      • Total investments eligible for deduction u/s 80C, 80CCC & 80CCD(1) exceeds Rs 1,50,000.
  • Employer’s Contribution {80CCD(2)}:
    • Employer’s contribution to be first added to the gross salary of the employee.
    • Thereafter, such contribution is allowed as a deduction to the employee u/s 80CCD(2). Deduction u/s 80CCD(2) should not exceed 14% of Salary (if the employer is Central Government) and 10% of Salary (in case of any other employer).

Note: Salary for the purposes of Section 80CCD would mean retirement benefit salary.

Deduction u/s 80D [Medical Insurance Premium, Contribution to CGHS, Preventive Health Check-up] :

  • individual can claim the deduction u/s 80D whether he is a resident or non-resident.
  • Quantum of Deduction :
    • Block 1 (Self, Spouse & Dependent Children):
      Maximum Rs 25,000 (Rs 50,000 for senior citizens)
    • Block 2 (Parents – Dependent/Independent):
      Maximum Rs 25,000 (Rs 50,000 for senior citizens)
    • Note: Maximum deduction of Rs 5,000 is admissible in respect of preventive health check per assessee.
  • Additional Points :
    • Medical insurance premium and contribution to CGHS should have been paid by any mode other than cash which includes net-baking, A/c Payee Cheque etc.
    • Preventive health check-up can be paid by any mode including cash.
    • Where no medical insurance policy has been taken for resident senior citizens, deduction available for actual medical expenses instead of medical insurance premium and maximum deduction can be claimed amounting to Rs. 50,000.

Deductions under Section 16

Standard Deduction under Section 16(ia)

Entertainment Allowance – Section 16(ii)

Professional Tax – Section 16(iii)

Least of the following available as deduction to all employees:

  • Income under the salary or;
  • Rs 50,000

Least of the following available as deduction to only government employees:

  • Actual entertainment allowance received
  • 20% of basic pay
  • Rs 5,000

Paid by person carrying on business/profession: Professional tax to be debited to P&L A/c on actual payment basis.

  • Paid by the employee himself: Professional tax allowed as deduction from gross salary u/s 16(iii) on actual payment basis.
  • Paid by the employer on behalf of the employee: First taxable as a monetary perquisite in the hands of the employee u/s 17(2)(iv) and subsequently allowed as deduction from gross salary u/s 16(iii) on actual payment basis.

HOW WE AS INMACS CAN CONTRIBUTE

  • We can help you analysis and select the best and most appropriate Tax Regime according to your requirement
  • We can provide assistance in analysis your Advance Tax Liability well in advance to avoid any future liabilities.
  • We can help you plan your taxability receipt of Income or any exceptional income received during the period.
  • We can assist you for making appropriate investment to reduce or minimise your tax liability.
  • We can also guide you with your arrears receipt or any other tax related purpose as may one required.

Need more Information or wish to Connect !!

Write to us and we shall get back to you at the earliest.

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