What are the Income tax exemptions for salaried employees

What are the Income tax exemptions for salaried employees

Income tax exemptions for salaried employees

Income tax act specifically allowed various income tax exemptions for employees which are useful in saving taxes. Every Employee has to intimate the amount of income and amount of exemptions he is claiming which are available for salaried individuals to employer while declaring their income during starting of financial year. Employer would calculate the amount of tax payable after giving the allowable deduction in salaried income and deduct TDS over a period.

The following are the some of important income tax exemptions for salaried employees

1. HRA (House Rent Allowance)

Employers give house rent allowance to employee for staying on a rented premises. Some amount of house rent allowance is allowed as exemption I.e., it is not taxable. Amount of HRA allowed as exemption depends on amount of rent payable. HRA is most easily claimed deduction and amount of exemption is also large. Least of the following amount is allowed as deduction

Amount of HRA received

Excess rent paid over 10% of salary

50% (in case of house is situated in metro city) of salary or 40% ((in case of house is situated in other than metro city) of salary

2. Leave Travel Allowance

Employers give some amount to employees to go on vacation with their respective families.The total amount given by employer to employee for travel is fully allowed as deduction and will not be taxable. However this will be exempted only if employee goes on actual vacation and bills have been submitted.

3. Leave salary Encashment

Employers give all their employees a certain number of days as a paid leaves. However if an employee does not claim the leaves given to him he can encash the same with the employer. Hence employer would be paying the amount for not taking leaves which are eligible to be claimed by the employee

However the amount of leave salary received by central or state government employees at the time of retirement or superannuation is fully exempt from tax. In case of non government employees leave salary is exempt to the following extent

Cash equivalent of the leave salary in respect of the period of earned leave to the credit of employee at the time of retirement

10 months Average salary

Leave encashment actually received

Maximum amount not taxable as specified by government

4. Pension income for salaried employees

On retirement of employees employers are used to pay pension. It may be paid from employers own pocket or it may be paid from an organisation from whom annuity is purchased by the employer

Pension may be two types commuted pension and uncommuted pension. Uncommuted pension is fully taxable as salary. Whereas commuted pension is exempted in following manner

If he is receiving gratuity then 1/3rd of pension

In any other case 1/2nd of pension is exempt

5. Gratuity Received by employees

Gratuity is like gift given by the employer to employee for the past services provided by employee during the employment. It may be received at the time of retirement or by legal heir of employee at the time of death of employee

For claiming exemption the employees can be divided into three categories. The exemption of gratuity is allowed depending on the category they are into.

Government employees - Amount of gratuity received by central or state government employees is fully exempt from tax

Employee covered under Gratuity act - Minimum of the following allowed as exemption

I. Amount gratuity received

II. 1000000

III. 15 days salary based on amount of salary last drawn for every completed year of service

Employee Not covered under Gratuity act - Minimum of the following allowed as exemption

IV. Amount gratuity received

V. 1000000

Half month salary for each completed year service

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