Income can be charged under this head only if there is an employer-employee relationship between the payer and payee. Salary includes basic salary or wages, any annuity, gratuity, advance of salary, leave encashment, commission, perquisites in lieu of or in addition to salary and retirement benefits. The aggregate of the above incomes, after exemptions available, is known as Gross Salary and this is charged under the head income from salary. An allowance is a fixed monetary amount paid by the employer to the employee for expenses related to office work. Allowances are generally included in the salary and taxed unless there are exemptions available. Some allowances are fully taxable such as dearness allowance, city compensatory allowance, overtime allowance, servant allowance and lunch allowance. Whereas specific exemptions are available for some allowances. Here are some deductions/allowances which can be claimed.
Standard Deduction: The Budget 2018 has re-introduced standard deduction of up to Rs 40,000 in lieu of the earlier conveyance allowance and medical re-imbursement of Rs 19,200 and Rs 15,000, respectively.
Basic salary along with commissions and bonuses is fully taxable.
House Rent Allowance (HRA): This allowance is given by the employer to take care your rental or accommodation expenses. The employer can choose to offer you HRA in the salary package irrespective of whether you live in a rented accommodation or in your own house. It is important to understand how the income tax department treats HRA to use it efficiently. HRA exemption depends on a simple calculation and to arrive at HRA, salary is defined as sum total of basic, dearness allowance and a percentage of commissions of turnover achieved by employee.
Eligibility for HRA exemption
To be eligible for HRA exemption, you must first receive HRA in your salary and live in a rented accommodation for which you pay the rent. So if you live in a house of your own, you will not be eligible for HRA exemption.
To claim HRA exemption
- You should receive HRA from your employer in your salary
- You should live in a rented accommodation for which you pay the rent
- Your rent should be more than 10 per cent of your salary
Calculation of HRA exemption
The actual exempt HRA from tax is the lowest of the three possibilities:
- Actual HRA received from employer
- 50 per cent of salary in case of metros or 40 per cent for of non-metros
- Actual rent paid minus 10 per cent of salary
Other considerations with HRA
If you stay in a house which belongs to your parents and you pay rent to them, then you can claim HRA. However, the income that your parents earn will need to be shown as salary in their income tax returns.
Ram Prasad's basic monthly salary is Rs 6,000 and the dearness allowance is 80 per cent of the basic. He resides in Delhi and pays an actual rent of Rs 3,000 a month while his employers pay him a monthly HRA of Rs 2,500. His annual salary works to: (6,000 x12) + (0.80 x 6,000 x 12) = Rs 1,29,600.
HRA is calculated as
- Actual annual HRA received is Rs 30,000. Since Ram Prasad is based in Delhi, take 50 per cent of his salary, which works to Rs 64,800.
- The actual rent paid is Rs 36,000 and 10 per cent of his salary works to Rs 12,960; the difference being Rs 36,000 - 12, 960 = Rs 23,040
- The minimum of these is Rs 23,040. So, Rs 23,040 of HRA is exempt from tax, while the remaining Rs 6,960 is taxed.
- Rent receipts need to be produced as proof to your employer to show that you are indeed paying rent to claim HRA.
If you own a house and have a house loan on it, you can still avail of the HRA benefits along with the home loan tax benefits. It does not matter where your house is located, as both the home loan income tax benefits and the house rent allowance benefits can be availed simultaneously. For instance, if your house is in the same city where you are living on rent, you can justify your choice of staying on rent and still claim the HRA exemption.
Leave Travel Allowance (LTA): LTA accounts for expenses for travel when you and your family go on leave. While this is paid to you, it is tax free twice in a block of four years and the travel to avail LTA is restricted within India.
Perquisites: Perquisites (or personal advantage) are benefits in addition to the normal salary to which an employee has a right by way of his employment. Examples of these are rent free accommodation or car loan. There are some perquisites that are taxable in the hands of all categories of employees, some which are taxable when the employee belongs to a specific group and some that are tax free.
After the financial year ends, your employer will give you Form 16 which will contain all the earnings, deductions and exemptions available.