What is tax exempt?
Tax-exempt refers to income or transactions which are free from Income Tax. The reporting of tax-exempt items may be on a taxpayer's individual or business tax return and shown for informational purposes only.
What is tax reimbursement/tax refund?
A tax refund(tax rebate) is a refund on taxes when the tax liability is less than the taxes paid. Tax payers can often get a tax refund on their income tax if the tax they owe is less than the sum of the total amount of the withholding taxes and estimated taxes that they paid, plus the refundable tax credits that they claim. (Tax refunds are often paid after the end of the tax year.)
Many of the allowances, reimbursements paid to us as a part of salary are either fully taxable or tax-exempt up to a certain limit but the tax exemption is subject to certain conditions. This limit determines how much of these allowances/reimbursements are taxable or otherwise in our hands. As a tax payer, it is must for you to know about the limits and conditions inorder to claim your tax exemption.
Some of these allowances are fully taxable and it is an important factor that has to be considered while calculating one's tax. We have combined the list of a few allowances and reimbursements that are often paid to employees as part of salary which are fully taxable, partially tax-exempt and the limits up to which these are exempted from tax.
1. House Rent Allowance (HRA): If you are receiving HRA as part of your salary and you pay for residential accommodation then you can claim the HRA paid to you as exempt from tax subject to certain limits and restrictions. These are as follows:
Minimum of the following HRA is exempt from tax:
(i) Actual HRA received
(ii) 50% of annual salary* if living in metro cities or else 40%
(iii) Excess of annual rent paid over 10% of annual salary*
*Salary here is considered as basic plus dearness allowance (if it forms part of retirement benefits) and commission received on the basis of sales turnover.
However, if no rent is paid by you, then whole HRA received is taxable.
2. Dearness Allowance (DA): Dearness Allowance is most of the time received by Government employees. However, it is fully taxable for every salaried taxpayer irrespective of whether they are a government or non-government employee.
3. Leave Travel Allowance (LTA): Employees (an Indian or foreigner) who receive LTA from their employers can claim exemption.
However, this exemption is subject to the following rules:
(i) The exemption is available on 2 journeys in one block of 4 years.
(ii) The amount of exemption available is lower of the actual amount spent to reach the destination via shortest route or the amount received from the employer.
(iii) To claim exemption, the cost of reaching the destination can be taken as A/C first class (for railways) or economy class of national carrier (for air travel).
(iv) Exemption is allowed only if actual expenditure has been incurred for travelling anywhere in India.
4. City Compensatory Allowance : This is offered to employees to compensate for high cost of living in cities. Just like DA, it is fully taxable in an employee's hands.
5. Overtime Allowance: This allowance is taxable in the employee's hands.
6. Children Education Allowance : If you are receiving children education allowance from your employer then you are eligible to claim a tax exemption under the Income Tax Act. However, the maximum amount exempted is Rs. 100 per month for maximum of up to 2 children. Along with this, you can also claim deductions for fees paid for your children under section 80C. Similarly, any hostel expenditure allowance received by you for your children from employer is eligible for exemption up to Rs. 300 per month or Rs. 3600 per annum for maximum up to 2 children.
7. Other allowances to meet specific expenses in course of employment under section 10(14(i) : Your salary can also include components like, Attire allowance ( granted to meet the expenses on dress code requirement), Telephone allowance ( To meet expenditure on telephone and internet expenses), Vehicle allowance ( to meet expenses on vehicle, if vehicle is used for performance of office duties), Helper Allowance etc. These allowances are exempt to the extent actual expenditure incurred.
Want to know about your own tax exemptions and reimbursements? call or Walk into ADCA's office - one of the top audit firms in bangalore.