Exemptions in Respect of Salary Income

Several exemptions are available for salary income under the Income Tax Act 1961. These exemptions can help to reduce the tax liability of individual assessees.  Exemptions under the Act, commonly available, are listed below:

1. Standard Deduction: 

A standard deduction of up to Rs. 50,000 is available for salaried individuals, which can be claimed as a deduction from their salary income.

2. House Rent Allowance (HRA): 

If you receive HRA as a part of your salary and live in rented accommodation, you can claim exemptions under Section 10(13A) of the Income Tax Act. The amount exempted is the least of the following:

1. actual HRA received;
2. rent paid over 10% of salary;
3. 50% of salary (for individuals living in metro cities) or 40% of salary (for individuals living in non-metro cities).

3. Leave Travel Allowance (LTA): 

LTA received from your employer for travel within India can be claimed as an exemption for two journeys in a block of four years (the block period relevant to the AY23-24 is 2018-2022). The exemption is limited to travel expenses incurred, subject to some conditions specified in Rule 2B.

4. Children’s Education Allowance: 

A maximum of Rs. 100 per month per child (up to a maximum of two children) is exempt from tax.  Apart from this, tuition fees paid in a year are eligible for deduction u/s 80C within the overall limit of Rs. 1.5 lakhs.

5. Hostel Expenditure Allowance: 

A maximum of Rs. 300 per month per child (up to two children) is exempt from tax.

6. Gratuity: 

Gratuity received by an employee on retirement, resignation, or death is exempt up to a specific limit, depending on the employee’s status and subject to the provisions of section 10(10) of the Act.  

1. Payment of Gratuity in the event of Retirement or Resignation before completing five years of services is fully taxable in all cases.
2. Payment of Gratuity in the event of the death of an employee is fully exempted in all cases.
3. Payment of Gratuity in the event of Retirement after completing five years of services of a Non-Govt. Employee (Covered under Payment of Gratuity Act), the exemption is lower of the following:
   1. 15 days’ salary (last drawn) for every completed year of service
   2. Rs. 20 lakhs
   3. Gratuity received
4. Payment of Gratuity in the event of Retirement after completing five years of services of a Non-Govt. Employee (Not covered under Payment of Gratuity Act), the exemption is lower of the following:
   1. The half-month average salary for every completed year of service
   2. Rs. 20 lakhs
   3. Gratuity received

7. Employee’s Provident Fund (EPF): 

Contributions made by the employee to the EPF are eligible for tax exemption under Section 80C of the Income Tax Act, subject to specified limits.  Employer’s contributions beyond 7.5 lakhs in a year will become taxable income.

By, CA ABRAHAM P JOSEPH, Partner, JAKS Alappuzha Branch.