Fully Exempted Allowances

An Allowance is a financial advantage given to employees on top of the regular salary. Allowances are considered to be part of the salary structure in Indian Payroll. Based on the tax behaviors, allowances are divided into three categories; Taxable, Non-taxable, and Partially Taxable allowances.

The allowances given to an employee which form a part of their salary but are fully exempted from tax are called non-taxable allowance.

The following allowances are fully exempted for all employees:

1. Uniform allowance

An allowance that has been provided for the purchase or maintenance of a uniform that is to be used during duty in the office is called a uniform allowance. This allowance could be availed only for the specific uniform stated by the organization. Generally, it is not significant to embellish details of such expenses incurred unless the expense is not commensurate with the salary. In most cases, it is not required to keep proof of documents as a simple declaration meets the requirement.

2. Academic and Research Allowance

Allowance endowed for the reason of promoting academic and research-related training, education, or professional duties is known as academic or research allowance.

3. Travelling Allowance

Any allowance provided to meet the charges of travel on tour or the transfer of duty is called travelling allowances. Allowances about the cost of travel on transfer include any amount paid to transfer, packaging, and transportation of such transfer.

4. Helper Allowance

In certain peculiar cases, the employer might allow the employee to recruit a helper for performing his official duties. In such cases, a helper allowance is granted.

5. Daily Allowance

Daily allowance is provided to employees to meet the daily expenses incurred when on tour or for the period of a transfer in the job. This type of allowance is bestowed when the employee is not in the usual place of duty.

6 . Conveyance Allowance

Allowance for conveyance is provided to employees to compensate them for the cost incurred while travelling for official duties. However, the employer doesn’t get paid for the commute from home to work as it is not considered an official duty. The allowance for travel from home to work is treated under another section of allowance termed as ‘Transport allowance’, which isn’t exempt from tax.

The following allowances are fully exempted for certain employees only

1. Allowances Paid to Government Employees Abroad

When servants of the Indian Government travel abroad for assignments they receive an allowance to carry out their expenditure in another country. These allowances are exempted from tax liability.

2. Allowances Paid to UNO Employees

The allowances received by UNO employees are free from tax liability.

3. Allowances Paid to Judges of HC & SC

Judges of the High court and Supreme Court get allowances that are exempt from tax. These allowances are known as sumptuary allowances.

4. Compensatory Allowances

The compensatory allowances received by Judges of the High Court and Supreme court are also exempted from tax as per the Income Tax Act.

To know more about Benefits available to government employees - Read here

Note: These non-taxable allowances can become taxable if the amount is received but not spent by the employee.

Tax - 12/29/2021

Understanding Variable Pay

Not long ago, the concept of Variable Salary hardly existed in India. Today employees, especially at managerial levels, find a part of their compensation depending on the sector, listed as variable pay .Variable pay, also known as performance pay, is used to recognize and reward employee contribution above and beyond their normal job requirements.

What is Variable Pay?

Variable pay is often based on two main factors: your own performance and your company's performance. So, most schemes evolved by companies have a target-setting and actual payout based on that combination. Variable pay is one of the five main components of total rewards in any organization, and is usually a percentage of fixed pay.

Difference between Fixed Pay and Variable Pay in salary structure?

Fixed Pay is what is defined as fixed and you will get the same salary as was mentioned in the offer letter.

Your package= Fixed Pay (X% of total package) + Variable Pay (100-X% of total package).

So variable pay is part of your salary package. You will get your fixed pay at the end of every month but you will get your variable pay once in a quarter/half-year/year (may differ from company to company).

Let us understand this with the help of an example.

Let’s assume that a company is paying variable pay each quarter. Suppose your total monthly salary is Rs. 30,000. Out of which you are getting Rs. 25,000 as fixed pay and Rs. 5,000 as variable pay. So you will always get Rs. 25,000 at the end of each month.

Now let’s suppose that your company announces the percentage of variable pay to be 80%, so you will get 80% of your variable pay which is = Rs. 4,000.

Hence at the end of the quarter you will get: Rs. 4,000 X 3= Rs. 12,000.

Advantages and Disadvantages of Variable Pay

Advantages	Disadvantages
One of the primary advantages of variable pay is employee retention.	Most of the companies fail to establish an equalizer in their variable pay. It results in a seemingly high pay package, which turns out very less paid in reality.
Variable Pay helps the organization to balance out and equalize the salaries of their employees.	If the criteria for variable pay are not defined accurately, it can result in the improper implementation of the pay structure.
Performance-based variable pay helps to reward hard-working employees, thereby motivating them.	An increase in variable pay adds to the cost of the organization.
Variable pay allows organizations to tie compensation to revenue and financial performance.	Variable Pay isn’t factored into an employee’s annual compensation, although the amount may be based on the employee’s salary.

Types of Variable Pay

Commission: This is a portion of revenue given to the sales employee as part of an official compensation plan.
Profit-Sharing Plan: This plan gives employees a portion of the company’s quarterly or annual profit in addition to their base salary.
Bonus: This is an extra lump sum given to employees based on the company’s performance. It’s often an unspecified amount on an annual basis and will vary depending on the year’s results.
ESOP: This option is a type of employee benefit plan which is intended to encourage employees to acquire stocks or ownership in the company. They are sometimes offered as an alternative to cash compensation.
Gratuity: Gratuity is the monetary amount which is payable to the employee of an organization under the Payment of Gratuity Act 1972. This is mainly paid to the employee as a token of appreciation for his/her services towards the company.

Who does and doesn’t get Variable Pay?

When it comes to providing variable pay, many companies have diverse views. As incentives are also measured as a part of variable pay in some companies. For example, the sales and marketing departments get variable pay, Office and admin staff may not have a high component of variable pay. In the current market scenario, variable pay is a huge motivating factor and hence is generally a part of your CTC.

It is important to have a discussion with your employer beforehand to understand their expectations and set your goals right to make the most of the variable pay component.

Tax - 12/29/2021

What is Form 12BB? And Why is it important to submit the same?

Every employer seeks a tax declaration from their employees at the beginning of a financial year. This declaration is a list of all tax-saving investments that an employee commits to make in that particular year.

Declaring tax-saving investments is not all! Employees need to submit proof of expenses or investments during the year to support their declaration. If they fail to do so, the employer will have to recover the tax shortfall from the employee’s salary in the remaining months.

What is Form 12BB?

Form 12BB, with effect from 1st June 2016, is a statement of claims by an employee for the purpose of a tax deduction, claiming tax benefits, or a rebate on investments and expenses, which has to be submitted by the end of the financial year.

List of Things to mention in Form 12BB (Income Tax deduction)

Employers provide a cut-off date for submission of investment or expense proof. Generally, this date lies in January or February, so that shortfall of taxes is recovered in the remaining months of the financial year.

Here’s the checklist for employers for the most popular tax-saving investments.

Name and Address of Employer :- Fill the name of your company with Address

PAN Number of employee :- Your PAN Card Number

House Rent Allowance: – As per IT Act 10 (13A), House Rent Allowance gets exemption from Taxable Income. For claiming HRA tax exemption, you need to submit the following details to your employer -

Amount of Rent paid
Name of your landlord
Address of your landlord
PAN No of your landlord in case the total amount of rent paid during the year exceeds Rs.1 lakh.

In Addition, you also need to submit the proof for claiming HRA tax exemption.

1. Evidence/Proof for claiming House Rent Allowance tax exemption:
The proof for claiming HRA tax exemption are the monthly rent receipts.

2. Things to remember when claiming HRA tax exemption:

You can claim HRA tax exemption only when HRA is a part of your CTC.
In case, HRA is not a part of your CTC and you are living in a rented house you can claim tax benefit under section 80GG.
Rent receipt is required only when your monthly rent exceeds Rs. 3,000.
You can’t claim HRA if you are living in your own house.
If you are paying rent to your parents, then ask them to show it as their income at the time of filing their Income Tax Return.
Never submit fake rent receipts, this might land you in big trouble with the income tax authorities.

Leave Travel Allowance (LTA):-

This allowance is one and the only allowance that helps save tax only when you take a holiday.

1. Evidence/Proof for claiming LTA tax exemption: To claim LTA, employees need to submit travel bills like boarding passes, flight tickets, invoice of travel agent, boarding pass etc. to employer.

2. Amount of tax saving on LTA : This tax exemption is allowed only on actual travel cost to the extent specified in CTC.The fare is exempt as per the mentioned conditions.

You need to provide all proof of travel expenses you made from LTA money in 12BB form.

Deduction of Interest on Borrowing:

The information needs to be filled in the Form 12BB are:

Interest Payable/paid to the lender during the financial year
Name of the lender from whom loan is taken
Address of the lender
PAN of the lender: Financial Institutions/Employer/Others, from whoever the loan is taken

1. Evidence/Proof for claiming tax exemption for interest on borrowing:

Documents required to claim deduction u/s 24B on interest payment of home loan are:

Statement / Certificate stating total EMI paid along with Interest and Principal Components.
Possession/construction completion certificate
Self-declaration from the employee whether the house is self-occupied or let out.
Joint Owner if Property is the name of more than one owner.

2. Home Loan Interest :-

a. Tax benefits on payment of interest: If you have taken home loan , you can be exempt from interest paid for home loan under Section 24, Mention the amount you paid as an interest, your name and address and Pan card number.

Tip : Claiming deduction on interest payment shall result in a loss under head house property. This loss can be adjusted against income from other heads in the current year subject to the limit of Rs. 2 lakh

b. Tax benefits on repayment of Principal Amount: In both the cases whether there is self-occupied property or rented property, principal amount repayment is eligible to be claimed under Sec 80C of the income tax act. A maximum of Rs. 1.5 lakh can be claimed under Sec. 80C for the principal amount.(Max. the limit of claiming all deductions under 80c is 1.5 lakh.So, plan accordingly.)

3. Things to remember when claiming Interest on Home Loan tax exemption :

In case, you have taken a home loan jointly then you can claim benefit of the interest deduction proportionately.
If you have taken home loan from a lender other than bank i.e. your friends, relatives or any money lender the interest payment can be claimed as a deduction under section 24.Provided you take a certificate of interest from the person to whom you had paid interest.
Where loan is taken from your friends, relatives or any money lender i.e. other than banks the repayment of principal is not eligible for deduction under section 80C. This part of the form may take more time to finish if you are claiming maximum tax benefits .If you do not have any deductions to make, you can then move on to the last section.

Investments:

Chapter VI-A covers income tax deduction under various sections as follows:

80C: Premium to be paid for life insurance and/or investments to be made in ELSS funds, PPF, NPS and/or school tuition fees for children, etc
80CCC: Premium to be paid for annuity plan
80CCD: Additional contributions made to NPS
80E: Interest to be paid on education loan
80G: Donations to be made to specified organisations
80TTA: Interest income earned from savings bank account
80D: Premium to be paid for medical insurance
To claim deduction, evidence of investment made or expenditure incurred is required.

– For Employers: – Central Board of Direct Taxes (CBDT) has clearly mentioned that Employers need to give proper evidence of the employee’s income and calculate the TDS according to that.

– For employees :- if your income is less than the income tax slab or if you have paid more income tax than your actual income at the end of the financial year, you can claim Income Tax Refund.

Employees can download the PDF format of ITR Form 12BB from this link.

Mode and time of submission

Employers should collate online Form 12BB, income disclosure information, and documentary proofs. The employees will upload these documents to the online portal, and the payroll team can verify the same. Alternatively, some employers manually collate the data or combine both.

The tax declarations and their proofs should be submitted by the cut-off date.

Tax - 12/29/2021

Documents Needed for Filing Income Tax Returns in India

The process of filing your Income Tax Returns in India takes some preparation. This is why the Government usually gives you four months’ window period to compile all documents like salary/income details, bank statements, previous tax statements, etc. The procedure varies as per the income earned per year and income source like salary, business profit, investment profit and so on.

Collating all your documents ready is just one aspect of it. In this article, we will discuss the documents needed for filing Income Tax Returns in India.

To know more about the new income tax portal for easy filing of the return for FY 21-22 - Click here

The various documents required for ITR filing:

1. The appropriate ITR Form

Depending on the type of income, the category the taxpayer falls under, and the income the taxpayer makes, the relevant form must be chosen.

ITR-1 or SAHAJ: For individuals with annual income below INR 50 lakh and not more that one house property
ITR-2: For individual with annual income above INR 50 lakhs
ITR3: Individuals or HUF carrying proprietary business or profession.
ITR-4 or SUGAM: Assess opted for Presumptive Income Scheme or Individual’s, HUF and partnership firms (except LLB’s)
ITR-5: For LLBs, AOPs, AJPs, BOIs, etc
ITR-6: Applicable for all companies except those who are claiming exemption under Section 11
ITR-7: For all assessees covered under Section 139(4A), or 139(4B) or 139(4C) or 139(4D), or 139(4E) or 139(4F)

2. Aadhaar linked with PAN

3. For Salaried Employees:

PAN
Form-16 (it is issued by the employer)
Monthly salary slips.

4. Interest Income related Documents required for ITR filing

Bank statement/passbook for interest on savings account.
Interest income statement for fixed deposits.
Tax Deducted at Source (TDS) Certificate (it is issued by banks).

5. Form 26AS

It is provided by the Income Tax Department- you can download it from the Income tax website.

6. Section 80C Investment Documents

Investment in PPF, NSC, ULIPS, ELSS and LIC comes in deduction under Section 80C. The maximum amount claimed under section 80C is Rs 1.5 lakhs.

For salaried individuals - the Form 12BB and Form 16 (which you would get from your employer is a must)

7. Other Expenses Deduction Documents

Contribution to the Provident Fund.
Children’s school tuition fees.
Life/Health Insurance premium pay.
Stamp-duty and Registration charges.
Principal repayment on home loan.
Mutual Funds investment.

8. Other Investment Documents required for ITR filing

Interest paid on the housing loan.
Education loan interest payments.
Stock trading statement.

Hence, the taxpayers have to maintain the record of certificates and receipts of their transactions made in the annual year for the filing of income tax return and need to attach these with it. Also if it has been asked for the clarification of transactions mentioned in the return then the taxpayers have to submit all the proofs to the AO (Assessing Officer).

Wealth Cafe Advise

As we always advise, do not plan for your ITR at the end of the year but start it from the beginning of the year and keep it a practice to have all documents stored in one place on a drive year wise so whenever required you could access the same easily.

Tax - 12/29/2021