CA Sandeep Kanoi
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.
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.
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.
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)