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Tax exemption limits for allowances, reimbursements paid to employees

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November 14, 2018
While calculating your income tax as per the income tax slab rates under which you are liable to be taxed, it s important to note the various reimbursements and allowances which may be taxable or alternately tax-exempt to a certain level. Tax exemption is subject to certain terms and conditions and there are exemption limits on the allowances and reimbursements that you get.

Below mentioned is a list of these allowances and reimbursements which form the components of your salary and may be fully taxable, partially tax exempt and fully tax exempt:

  1. House Rent Allowance (HRA): If you are paying house rent for your residential accommodation and are getting HRA as a component of your salary, then you can claim this HRA as exempt from tax, subject to limits and restrictions. These limits are as follow:
    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 salary.

It must be noted that salary means the basic dearness allowance along with the commission received (if any).

If however, no rent is paid by you, the entire HRA is subject to tax.

  1. Dearness Allowance (DA): Although primarily a component of salary for government employees, the DA is fully taxable for every employee (government as well as non-government employee).
  2. Transport Allowance (TA): If you receive TA as a component of your salary, you can claim tax exemption up to Rs.1600 per month or Rs. 19,200 per annum. In case of visually challenged, hearing impaired or specially-abled employees, this exemption is allowed up to Rs. 3200 per month. TA can only be provided by the employer of there is no concession of free travel.
  3. Leave Travel Allowance (LTA): Meant as a salary constituent for Indian/foreign nationals, LTA comes under exemption. However, this exemption is available only for two journeys in block of 4 years. Besides, LTA exemption is allowed only for travel within the boundaries of Indian territory and the amount is lower of the actual amount spent to reach the destination via the shortest route or the amount received by the employee from the employer.
  4. Medical Reimbursement: Coming with an upper capping of Rs 15,000 per annum, any medical reimbursement for the employee or her/his family can be claimed as tax exempt. This, however, is subject to the submission of due medical bills to the employer. The medical insurance policy premiums paid by the employee are also tax exempt under the same limit (Rs.15,000 annually).

It must be noted that from the fiscal year 2018-19, a standard deduction of Rs 40,000 has been introduced against the joint reimbursements for TA and medical costs.

  1. Medical Allowance (fixed): Different from medical reimbursement, medical allowance is fully taxable. Submission of medical bills is required for seeking medical allowance.
  2. Children’s Education allowance: In case allowance for children’s education is a component of your salary, you are eligible for tax exemption up to Rs.300 per month (Rs.3600 per annum).
  3. Special Allowance: Any allowances that are not among the ones mentioned come under this purview and are fully taxable.

SAVE TAX CALCULATOR

HDFC Life offers online tax calculator which is meant for your ease of calculation. Simply fill in the required parameters and calculate the tax on income that you are required to pay.

Plan income tax

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal Vishal Subharwal

Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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