SALARY COMPONENTS: TRADES & TACTICS TO USE
02.02.2021
House rent allowance (HRA)
This is the most common CTC component. Those staying in rented accommodation can avail of an exemption against the HRA received and only the balance will be taxable
THE EXEMPTION IS LIMITED TO THE LOWEST AMONG
1 Rent paid less 10% of salary*
2 50% of salary* if the house is situated in Delhi, Mumbai, Kolkata or Chennai OR 40% of salary in other cities
3 Actual HRA received
*Salary means basic salary and dearness allowance
If your CTC doesn’t contain HRA, deduction for rent paid is available from gross taxable income, subject to various limits (maximum deduction 5,000 per month)
If you live in a house you own, the HRA component is fully taxable
Work from home expenses
If you are working from home fulltime and your employer is reimbursing certain expenses such as telephone, internet, printing and stationery expenses you need not pay tax on these reimbursements. You may need to provide the requisite bills to the employer for claiming these reimbursements, as per the corporate policy.
While computers and laptops provided by employers do not give rise to any taxable perquisite, provision of any other asset say a swivel chair, computer desk or printer, would be taxed as a perquisite as per Rule 3 (7) (vii) in the hands of the employee, at the rate of 10% of the original cost of the asset as reduced by any charges recovered from the employee.
Leave travel concession (LTC)
LTC exemption is allowed on two domestic journeys taken in a block of four years. The new block commenced on January 1, 2018. Restrictions apply. For example, if you are travelling by air, it is limited to economy class airfare for the shortest route to your destination. No exemption is available for hotel and local conveyance expenses.
LEAVE ENCASHMENT: If you haven’t availed of your entitled leave, you may have an option to get it encashed – your employer may permit this only on retirement or resignation. The maximum aggregate exemption available in a lifetime is 3 lakh.
LTC cash voucher scheme
You may have made plans to travel in 2020 (during the four-year block period starting January 1, 2018), but owing to the pandemic found yourself stuck at home. Well, if you have not opted for the simplified personal tax regime, you can avail of the LTC cash voucher scheme that lets you purchase some goods and services.
However, some conditions have to be met:
You need to buy goods or services worth three times the deemed LTC fare between October 12, 2020 and March 31, 2021. If you spend less you don’t get the full exemption. For instance if the deemed LTC fare for a family of four is 80,000, then the employee is required to spend 2.4 lakh. However, if he spends only 75% of this amount ( 1.8 lakh). In this case, only 60,000 (75% of the deemed LTC) will be eligible for tax exemption.
The money must be spent on goods or services attracting GST of 12% or more.
The payment must be made through digital mode and employee must produce the GST invoice.
The tax exemption will be restricted to the deemed LTC fare up to a maximum of 36,000 per person. This exemption is only available for the financial year 2020-21.
Employee Provident Fund (EPF)
PF withdrawal after five or more years in continuous service is tax free. However, interest earned on accumulated balance in PF account post end of employment or retirement is taxable. If employee’s contribution to PF on or after 1 April 2021 exceeds 2.5 lakh in any year, Interest on contribution above 2.5 lakh shall be taxable on withdrawal.
Gratuity
Gratuity received under the Payment of Gratuity Act after completion of 5 years of continuous service is eligible for exemption of up to 20 lakh. But remember the exemption is the cumulative of all gratuity payments received by an individual in his/her lifetime.
