Allowances are like financial benefits that a salaried employee receives from his employer which helps the former in reducing its tax burden. Allowances are segregated into various categories and can be claimed by an employee on a monthly basis. These allowances help when filing income tax returns (ITR) which contains information such as net tax liability, claiming of tax deductions, and an overall view of gross taxable income. ITRs are mandatory to be filed by taxpayers every year. With 2023 kicked in, it is important to understand different allowances and their tax benefits which will come in handy when filing ITR that further helps in reducing income tax liability.
It needs to be noted that there are taxable, partly taxable, and non-taxable allowances. Chances are you might not be even aware of which allowances to claim for maximum benefit. One of the most popular would be allowances under section 10 whose details are mentioned in Form 16 that salaried individuals receive from their employers. Form 16 is a certificate that includes details of tax deducted at sources (TDS), exempted allowances under section 10, and salary breakup. It is a vital form needed for filing ITR on their scheduled period.
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Taxpayers are required to file their ITR for the fiscal year 2022-23 (the assessment year 2023-24) by July 31st of the current year.
Abhishek Soni, co-founder & CEO of Tax2win, a Fisdom company said, the 1st of every month is the happiest day in a salaried individual’s life. This is the day we all work end to end the whole month. However, the most disheartening situation arises when the expected salary doesn’t come in. This is because a significant portion of salary is deducted under taxes.
Explaining further, Tax2win CEO further added that salaried individuals make the most contribution towards overall tax collection. So, it becomes vital for salaried employees to benefit from maximum taxes while filing ITR. In the salary part of an employee, any monetary benefit provided over the basic salary is called an allowance. The more you claim allowances, the less your tax liability, as some expenses are exempt, and some are partially taxable.
Hence, Tax2win CEO lists down some of the major allowances to remember and their tax benefit while filing ITR. These are:
1. House Rent Allowance (Sec. 10(13A)):
Salaried individuals who live in a rented house can claim tax exemption on HRA.
Amount of exemption shall be lower of the following:
– The total amount of HRA received
– 50 percent of salary (Basic salary + Dearness Allowance) if living in metro cities or 40 percent for non-metro cities
– Excess of rent paid annually over 10% of annual salary (Basic salary + DA)
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2. Leave Travel Concession or Assistance (LTC/LTA) (10(5)):
Under this allowance, the traveling costs incurred by the employee on a leisure trip in India are allowed as a tax-free expense. Employees can, therefore, take a leave from work and travel on vacation in India, and the costs incurred for fare would be allowed as a tax-free allowance by the employer. The mode of travel should be a railway, air, or public transport. (Note: Two journeys in a block of 4 calendar years is exempt) This exemption is limited to LTA provided by the employer.
Further, there are certain allowances under Section 10 (14) that are exempted from the limit of the amount earned as allowance or amount spent on certain duties, whichever is the minimum figure. These are:
3. Children Education Allowance: Up to Rs. 100 per month per child up to a maximum of 2 children is exempt.
4. Uniform Allowance: The expenditure on maintaining or purchasing the uniform for wear during the duties of an office or employment is exempted from the limit of the actual amount spent.
5. Books and Periodical Allowance: A tax-free reimbursement is provided per income tax law on the expenses made towards books, newspapers, periodicals, journals, etc. The reimbursement provided is the lower of the bill amount or the amount provided in the salary package.
6. Relocation Allowance: Companies do ask employees to shift to a different city for business reasons. The employer reimburses the expenses made on car transportation costs, car registration charges, packaging charges, initial 15 days accommodation, and train/air tickets. These reimbursements are tax exempted.
7. Helper Allowance: The helper allowance is granted in those cases where the employer allows you to appoint a helper to perform official duties of the office.
Also, Soni said, these components and many other allowances can help salaried employees make the most of the income tax deductions. Next time, make sure you sit with your employer and get the salary structure in a way that more of the allowances can be added, which are tax exempted.
