Most Popular Exempt Allowances for Salaried Employees:

Salaried Employees
can avail the benefit
of various exemptions
with respect to the
allowances given by
their employers during
their tenure of service
like House Rent
Allowance, Gratuity
Allowance, Leave
Encashment, Conveyance/
Transport Allowance,
Leave Travel
Allowance and many
others. Today we are
enumerating the exemptions and benefits received by the employees with respect
to three most popular allowances namely:-
I) Leave Travel Allowance and
II) House Rent Allowance.
III) Conveyance/Transport Allowance
I) Leave Travel Allowance (LTA) is the most common element of compensation
adopted by employers to remunerate employees due to the tax benefits attached
to it. Section 10(5) of the Income-Tax Act, 1961, read with Rule 2B, provides for
the exemption and outlines the conditions subject to which LTA is exempt. Here I
would like to shed light on the taxability and some other interesting relevant
aspects which you as a salaried employee must keep in mind.
Who and what is covered?
LTA exemption can be claimed where the employer provides LTA to employee for
leave to any place in India taken by the employee and their family. Such
exemption is limited to the extent of actual travel costs incurred by the
employee. Travel has to be undertaken within India and overseas destinations are
not covered for exemption.
For example, where an employer provides LTA of Rs 35,000, but an employee
spends only Rs 30,000 on the travel cost, then the exemption is limited to only
Rs. 30,000.
Travel cost means the cost of travel and does not include any other expenses
such as food, hotel stay etc. The meaning of ‘family’ for the purposes of
exemption includes spouse and children and parents, brothers and sisters who are
wholly or mainly dependent on you.
An individual would not be able to claim the exemption in relation to his parents,
brother or sisters unless they are wholly or mainly dependent on the individual.
Further, exemption is not available for more than two children of an individual
born after October 01, 1998.
This restriction does not apply in respect of children born before this date, and
also in cases where an individual, after having one child, begets multiple children
(twins or triplets or quadruplets, etc.) on the second occasion. The term “Child”
includes a step-child and an adopted child of the individual.
Is exemption available every year?
No. The tax rules provide for an exemption only in respect of two journeys
performed in a block of four calendar years. The current block runs from
2014-2017. If an individual does not use their exemption during any block on any
one or on both occasions, their exemption can be carried over to the next block
and used in the calendar year immediately following that block.
In such cases, the journey performed to claim such exemption will not be counted
for the purposes of regulating future exemptions allowable for the succeeding
block. For example, Mr. X joins an organisation on April 1, 2012 and is entitled to
a LTA of Rs 35,000 per annum (financial year 2012-13).
X undertook a journey in December 2012 and used his exemption. However, for
his LTA entitlement for 2013-14, he did not undertake a journey during the
calendar year 2013.
He can undertake the journey in 2014 to claim the exemption in relation to the
LTA. He would also be able to use the LTA benefit for two other journeys which
he can undertake in the current block 2014-17 in relation to his LTA entitlement
for future years.
Proof of travel
The individual needs to submit proof of travel to his/her employer and also keep
copies for his or her own records. Such proofs are helpful at the time of the audit
of the tax return of the individual. Proof of travel could be, for example, tickets,
boarding passes, invoice of travel agent, duty slip etc .
Q. To qualify for exemption is it necessary to perform actual journey?
A. Yes, certainty. In case the L.T.C. is encashed without actually performing the
journey the entire amount received by the employee would be taxed in his hands.
During the Fringe Benefit tax (FBT) regime, provision of paid holidays, including
travel cost to any place, stay expenses etc. were subject to FBT in the hands of
employers and were not taxable in the hands of individuals. Many employers
extended the paid holiday benefit instead of LTA.
Now with the elimination of FBT, with effect from. April 1, 2009, paid holiday
benefit is fully taxable in the hands of employees.
Exemption Limit
What are the limits of exemption in L.T.C. is granted to an employee in
connection with the journey on leave by him or his family? It is exempt from
income tax within certain limits as under: -
(a) Where journey is performed by rail; railway-fare in Second AC class by
shortest route to destination.
(b) Where places of origin and destination are connected by rail but the journey is
performed by any other mode then Second AC class fare by shortest route to the
place of destination.
(c) Where place of origin of journey and destination, or part thereof, are not
connected by rail and journey is performed by any other transport; then
(i) If a recognised public transport system exists between such places the first
class or deluxe class fare of such transport by shortest route, or,
(ii) If in other case, Second AC class fare for the distance of the journey by the
shortest route, as if the journey has been performed by rail.
Exemption will, in no case exceed actual expenditure incurred in the performance
of journey.
Leave Travel Concession Rules have been amended on the recommendation of
the Fifth Pay Commission to extend the facility of travel by air economy Y- Class
to certain categories of employees of the Central Government with effect from
1st October, 1997.
Consequently, where the journey is performed on or after 1st October, 1997 by
air, an amount not exceeding the air economy fare of the National Carrier by the
shortest route to the place of destination.
Also, where the entitlement was previously for air-conditioned Second Class Rail
fare, it has been upgraded to air-conditioned First Class Rail fare. [l.T. (First
Amendment) Rules 1998, O.O.I. Gazette Notification No. S.O. 34(E) dt. 12th Jan.
1998; CBDT F.No. 142/85/97-TPL No. 105021].
Q. Will the above change apply only to government employees or does it apply
also to employees of other sectors?
A. The change applies to all employees.
Taxability of Leave Travel Allowance (LTA) – Section 10(5)
II) House rent allowance (HRA) is received by the salaried class. A deduction is
permissible under Section 10(13A) of the Income Tax Act, in accordance with
Rule 2A of the Income Tax Rules. You can claim exemption on your HRA under
the Income Tax Act if you stay in a rented house and get a HRA from your
employer.
How is HRA Exemption calculated?
The HRA deduction is based on salary, HRA received, the actual rent paid and
place of residence. The place of residence is important. For Mumbai, Kolkata,
Delhi or Chennai, the tax exemption on HRA is 50 percent of the basic salary,
while for other cities it is 40 percent of the basic salary.
The city of residence is to be considered for calculating HRA deduction.
The least value of these is allowed as tax exemption on HRA:
1) Actual rent allowance the employer provides as part of salary in the relevant
period during which the rental accommodation was occupied
2) Actual rent paid for the house, less 10 per cent of basic pay
3) 50 percent of basic salary if you reside in Mumbai, Calcutta, Delhi or Chennai,
or 40 per cent if you reside in other cities.
In order to claim the exemption, the rent must actually be paid for the rented
premises which you occupy.
Also, the rented premises must not be owned by you. As long as the rented
house is not owned by you, the exemption of HRA will be available up to the limits
specified.
For the purpose of this deduction, salary means basic salary and includes
dearness allowance, if the terms of employment provide it, and commission based
on a fixed percentage of turnover achieved by the employee.
The deduction is available only for the period during which the rented house is
occupied by the employee and not for any period after that. It is to be noted that
the tax benefits for home loans and HRA are two separate aspects.
In case you are paying rent for an accommodation, you can claim tax benefits on
the HRA component of your salary, while also availing tax benefits on a home
loan.
Proof of Rent :
You need to submit proof of rent paid through rent receipts, duly signed and
stamped, along with other details such as the rented residence address, name of
the owner, period of rent, PAN of Owner etc.
How it applies:- Assume one earns a basic salary of Rs 20,000 per month and
rents a flat in Mumbai for Rs 5,000 per month. His actual HRA is Rs 8,000. He is
eligible for 50 percent of the basic pay for HRA exemption.
Least of:
Actual HRA received – Rs 8,000
50 percent of basic salary – Rs 10,000
Excess of rent paid over 10 percent of salary, i.e., Rs 5,000 less Rs 2,000 – Rs
3,000.
As such, Rs 3,000 per month is the least and will be the exemption allowable for
HRA deduction.
House Rent Allowance (HRA) Taxability & calculation
III) Conveyance/Transport Allowance – Tax Exempt up to Rs. 9,600 per annum
(800 Per Month) irrespective of actual expense. (No bills/receipts needed).
Finance Bill 2015 has proposed to increase the Exempt Limit to Rs. 19200 per
annum (1600 Per Month).
(Republished with Amendments).

Thanks,
CA SANDEEP KANOI