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The financial year is drawing to a close and taxpayers have started looking for options to minimise taxes. However, you will be happy to know that the income tax act offers many more incentives and allowances, apart from the popular 80C, which could reduce the tax liability substantially for salaried individuals.
The components of salary include basic salary, dearness allowance (DA), house rent allowance (HRA), conveyance, city compensatory allowance, variable incentives and perks.
You can opt for the following options to get tax benefits.
Salary restructuring with allowances and perks: Instead of going for a high basic salary, you can take reimbursements, allowances and perks, which are exempt from tax. However, your employee provident fund (EPF), gratuity and superannuation are all a percentage of your basic. So, by reducing your basic to allow for higher allowances and reimbursements, you will reduce your EPF, gratuity and superannuation. While EPF is totally tax-exempt, gratuity up to Rs 10 lakh is non-taxable as also the commuted pension portion of superannuation.
Transport allowance: Transport allowance provided by an employer for commuting between your residence and your place of work is exempt up to Rs 800 per month (if free conveyance is not provided by the employer).
House rent allowance:
Individuals living in a rented accommodation should include HRA as part of salary. The least of the following amount is exempt under Section 10(13A):
i) HRA actually received;
ii) Rent paid in excess of 10 per cent of salary; iii) 50 per cent of salary (if rent paid in a metro), or 40 per cent of salary (other than metro city).
Maximum benefit of HRA can be derived by having all the above three components to be of more or less the same amount. Salary for this purpose means: Basic plus DA (forming part of benefits) +commission on sale at fixed rate. There is no exemption if you live in your own house or a house for which you don't pay any rent. You have to provide to the employer a proof of the rent payment. However, if the HRA is up to Rs 3,000 per month, you don't need to provide a receipt to the employer.
HRA and home loan:
Suppose you are living in a rented house in the city where you work and you are repaying a home loan on a property elsewhere. In this case, you can get HRA deduction as well as take the tax benefit of the home loan. The provisions dealing with HRA and home loan benefits are separate in the income tax act. (rental income is taxable after standard deduction of 30 per cent).
Leave travel allowance (LTA):
You can claim your LTA, which is available twice in a block of four years.
It is based on expenses actually incurred on travel fare, if
(i) the travel is undertaken by you and can include your family members; and
(ii) (ii) is for proceeding on leave to any place in India.
The LTA block is measured in calendar years; the current block is from January 1, 2010, to December 31, 2013.
"Family" here is defined as spouse, children, parents, brothers and sisters. Family members have to be wholly or mainly financially dependent on you for claiming LTA. Also, LTA exemption does not apply to more than two children born after October 1, 1998.
If you cannot take the benefit of LTA in a block, only one of the two allowed journeys can be carried forward. It should be carried forward to the first calender year of the immediately succeeding block. The carry forward has no detrimental effect on the new block of four years.
Apart from one journey carried forward from the last block, you will still be eligible for LTA of the two journeys in the new block.
The exemption on LTA is subject to limits. For example, if you travel by air, the exemption will be on economy class air fare of the national carrier by the shortest route to the place of destination, or amount actually spent, whichever is less.
Where the places of origin of journey and destination are connected by rail, the exemption will be equal to AC first class rail fare by the shortest route to the place of destination or the amount actually spent, whichever is less.
You can also claim exemption on the following:
Children education allowance: up to Rs 100 per month per child for maximum two children
Hostel expenditure allowance: Rs 300 per month per child for maximum two children
Allowance to meet the cost of travel on tour or transfer, including packing and transportation of personal items
Allowance on tour or for the period of journey in connection with the transfer to meet the ordinary daily charges incurred by employees during absence from their normal place of duty
Allowance to meet expenditure incurred on a helper, who is engaged for the performance of duties of an office or employment of profit.
Allowance for encouraging academic, research and training pursuits in educational and research institutions
Allowance to meet the expenditure incurred on the purchase or maintenance of uniform to be worn during performance of duties.
Amount of employer's contribution towards recognised PF (up to 12 per cent of salary); approved superannuation fund; group insurance schemes; employees state insurance schemes; fidelity guarantee scheme.
Any allowance to compensate for the increased cost of living prescribed under Rule 2BB. It includes city compensatory allowance, border area, hilly area and field area compensatory allowances, special allowance to members of armed forces, subject to limits under Section 10(14).
Knowing these alternative avenues to trim your tax liability will help you avoid last minute hassles of tax planning. Plan well in advance to file well in time.
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