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.

 

 

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    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

    AdvantagesDisadvantages
    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.

     

     

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      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. 

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        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:

        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.

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          NPS Tax Deduction

          Most of us dream of retirement - with leisure travel, more time with family and friends and a certain peace of mind that is a welcome change from our regular hectic lives. However, rising inflation, higher life expectancy owing to better medical facilities, and minimal government support means that if one doesn’t have a big retirement corpus, you may be forced to work even during retirement. To avoid this you need to not just invest but invest smartly. And one smart investment option is the National Pension System (NPS),

          The government of India launched NPS in 2004 for government employees and opened it for the general public in 2009. NPS is a voluntary contribution scheme that not only helps you get you financially ready for the future but also offers tons of tax-benefits as well. However, most people get confused about how much and under which section they can save tax when investing in NPS.

          We have explained the tax benefits of NPS in 4 simple points below:

           

          ● Tax Benefits under Section 80C

          NPS is one of the eligible options to save tax under Section 80C. The maximum deduction limit for this section is ₹1.5 lakh, and you can invest the entire amount in NPS and claim a deduction for that amount.

           

          ● Tax Benefits under Section 80CCD (1B)

          This is an additional tax benefit for NPS investments. Here, you can claim deductions up to ₹50,000 above the Section 80C limit.

          So, you can claim tax deduction up to Rs 2 lakh simply by investing in NPS – Rs 1.5 lakh under Section 80C and another Rs 50,000 under Section 80CCD (1B). This means if you fall under the income tax bracket of 30 percent, you can save as much as Rs 62,400 in taxes.

           

          ● Tax Benefits under Section 80CCD (2)

          Applicable for only salaried employees, this benefit comes into effect when an employer contributes towards NPS of an employee. Deductions of up to 10% of salary (Basic pay + Dearness allowance) for the corporate sector and 14% for the government sector can be claimed by an employee

          For example, a corporate employee earns Rs 6 lakh as the basic salary and another Rs 3 lakh as Dearness Allowance. In case his employer contributes to his NPS, he can claim Rs 90,000 (10 percent of Basic + DA) on his employer’s contribution. Besides, if he adds the deductions under Section 80C and Section 80CCD (1B), he can claim deductions up to Rs 2 lakh.

           

          ● Tax benefits on returns of and maturity amount

          Tax benefits of NPS don’t just end at the amount you invest. With NPS, you don’t have to pay any tax on the returns or the maturity amount as well. This triple-tax benefit (called Exempt-Exempt-Exempt) is available only on select products in India.

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            TAX DEDUCTION ON PRE-CONSTRUCTION INTEREST

            In some cases money  may be borrowed (home loan) prior to the acquisition or construction of the property. In such a case, what is the tax treatment of interest paid/payable before the final completion of construction or acquisition of the property(pre-construction period) under Income Tax Act/Rules.

            What is the Tax treatment of Pre-construction period Interest ?

            The interest paid can be claimed as deduction only after the property is ready for possession. Any interest paid before possession is tax deductible in five instalments and allowed for five successive financial years starting with the year in which the acquisition or construction is completed. This deduction is not allowed if the loan is utilised for repairs, renewal or reconstruction. It is also subject to a cap of Rs 2 lakh if the property is self-occupied. Hence, if you get the possession by the end of March 2022, you can claim deduction for interest from the current financial year. Additionally, a deduction of Rs 1.5 lakh is also available u/s 80 EEA for interest paid on loan for purchase of a house that has stamp duty value not exceeding Rs 45 lakh and the loan is availed during 2020-21. The benefit is available only on first residential property. You cannot claim any of the deductions if you opt for the new regime of taxation u/s 115 BAC of the IT Act.

             

            Frequently Asked Questions

            How do I claim pre-construction interest?

            The income tax act allows one to claim the pre-construction interest from the date of borrowing of loan till the 31st March before the end of the financial year in which the construction gets completed.

             

            Under which section can you claim pre-construction interest?

            Pre-construction interest is allowed to be claimed for under construction residential property under the section 24 of the Income tax act

             

            Is pre-EMI fully taxable?

            Income tax act allows to claim pre-construction interest only after the construction is completed in 5 equal installments. Also only interest component can be claimed as deduction on completion of construction.

             

             

             

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              INCOME TAX DEDUCTIONS

              Income tax deductions are a specified amount of certain expenses incurred by the taxpayer during the financial year that can be subtracted from their gross income to calculate the tax liability. Income tax deductions are specified under Section 80C to 80U of the Income Tax Act. After following these deductions, the total income of the assessee has arrived & tax is charged on it at prescribed rates.

              1. Deductions are not permitted on the following incomes:

              • Long term capital gains
              • Short-term capital gains on transfer of equity shares and units of the equity-oriented fund through a recognized stock exchange.
              • Winning from lotteries & races.

              2. The deduction cannot exceed Gross total Income

              3. No deduction shall be allowed if the deduction is not claimed in the return of income.

              Various Types of Tax Deductions in India

              You can reduce your taxable income by increasing your deductions. There are many investment options and forms of expenditure which can help you get reductions on your taxable income. The Indian Income Tax Act provides many provisions for this. Mentioned below are several different tax deduction options.

               

              1. Section 80C

              ForPayment of LIC, PF, NSC, etc
              Eligible AssesseeIndividual or HUF
              ConditionsDeposit or investment in any one or more of the listed items during the previous year
              Amount of deductionThe amount deposited/invested or RS 1,50,000 whichever is less
              Eligible deposits
              1. Life Insurance Premium paid on the life of the individual, spouse, any child, or any member of HUF
              2. Public Provident Fund (PPF)
              3. Unit Linked Insurance Plan (ULIP) of UTI or LIC
              4. Payment to a notified annuity plan of LIC
              5. Recognized Provident Fund
              6. Tuition fees paid (max 2 children) 
              7. Repayment of House Loan (excluding interest on the loan)
              8. Superannuation fund
              9. Sukanya Samriddhi Account Scheme
              10. National Saving Certificates (VIII issue)
              11. UTI or Mutual Fund
              12. Notified pension fund of Mutual Fund
              13. Notified deposit scheme or pension fund of housing finance companies or housing boards
              14. Notified deposit scheme of housing finance companies or housing boards
              15. Equity shares, debentures, units, etc of Infrastructure undertakings
              16. Fixed deposit of 5 years more with a scheduled bank
              17. Fixed deposit of 5 years more with a post office
              18. Notified Bonds of NABARD
              19. Deposit in an account under Senior Citizen Saving Scheme

               

              2. Section 80CCC

              ForA contribution made to annuity plans of LIC & other insurers
              Eligible AssesseeIndividual
              ConditionsDeposit during the previous year a sum under an annuity plan of LIC for receiving a pension from the fund
              Amount of deductionThe amount deposited/invested or Rs 1,50,000 whichever is less

               

              3. Section 80CCD

              For Contribution toward approved pension scheme
              Eligible AssesseeCentral Government employee or any other individual assessee
              ConditionsEmployer & Employee contribution to approved pension scheme of the central government & any amount deposited by any other individual assessee to such scheme
              Amount of deductionIn case of salaried employee:

              Employers contribution: Amount paid in assessee’s account or 10%of salary, whichever is lower;

              Employee’s Contribution: Amount paid or 10% of salary, whichever is lower;

              In case of any other individual assessee:

              The amount deposited in an approved pension scheme or 20% of gross total income in the previous year, whichever is lower

              Additional deductionUp to Rs 50,000 in respect of contribution to NPS of the central government.

               

              Section 80C + Section 80CCC+ Section 80CCD ≤ Rs 1,50,000 

               

              4. Section 80D

              Eligible Assessee: Individual or HUF

              In respect of Payment of Medical Insurance Premia Section 80CCC

              ParticularsIndividualHUF
              For the benefit of - Family ParentsAny member
              Medical Insurance Premium
              Payment of Preventive Health Checkup
              Contribution to CGHS/ Notified Scheme
              Maximum Deduction- 

              • General Deduction
              • Additional deduction (Policy taken on the life of senior citizen)
               

              Rs 25,000

              Rs 25,000

               

              Rs 25,000

              Rs 25,000

               

              Rs 25,000

              Rs 25,000

               

              5. Section 80DD

              ForMedical treatment of disabled dependent
              Eligible AssesseeResident Individual or HUF
              Conditions
              1. Expenditure incurred for medical treatment, training, and rehabilitation of a dependent being a person with a disability
              2. The amount deposited under any scheme of LIC, UTI, or any other insurer for maintenance of a dependent, being a person with a disability
              Amount of deductionFixed deduction of Rs 75,000 (Rs 1,25,000 in case a dependent is a person with a severe disability)
              Disability CertificateTo furnish along with the return of income

               

              6. Section 80DDB

              ForMedical treatment of specified disease
              Eligible AssesseeResident Individual or HUF
              ConditionsExpenditure incurred on medical treatment of prescribed disease in respect of an individual, his spouse, children, parents, brothers, and sisters dependent on him and any member of HUF dependent on HUF
              Amount of deductionThe actual amount paid or Rs 40,000 (Rs 1,00,000 in case of senior citizen), whichever is lower
              PrescriptionShould obtain a medical prescription from a doctor

               

              7. Section 80E

              ForRepayment of interest on Education Loan
              Eligible AssesseeIndividual
              ConditionsInterest on loan taken from a financial or charitable institution 
              Amount of deduction100% of the amount of interest on a loan
              Period of deduction8 assessment years(including initial assessment year)

               

              8. Section 80EE

              ForInterest on loan taken for residential house property
              Eligible AssesseeIndividual
              Conditions
              • The value of the house should be Rs 50 lakhs or less
              • The loan taken for the house must be Rs 35 lakhs or less
              • The loan must be sanctioned by a Financial Institution or a Housing Finance Company
              • The loan must be sanctioned between 01.04.2016 to 31.03.2017
              • As on the date of the sanction of the loan, no other house property must be owned by you.
              Amount of deductionInterest payable or Rs 50,000, whichever is lower
              No double deductionThe deduction is not allowed if interest is already allowed

               

              9. Section 80G

              ForDonation to certain funds, charitable institutions, etc
              Eligible AssesseeAll assessee
              Conditions
              • Donation in kind not eligible
              • No deduction if the amount exceeds Rs 2,000/- unless the amount is paid by any mode other than cash.
              Amount of deductionAs given below

              Donations eligible for Full Deduction

              • National Defence Fund set by the Central Govt.
              • Prime Minister’s National Relief Fund
              • Prime Minister’s Armenia Earthquake Relief Fund
              • National Foundation for Communal Harmony
              • University/ Education Institution of National eminence approved by the prescribed authority
              • Maharashtra Chief Minister’s Earthquake Relief Fund
              • Any Fund set-up by the State Govt of Gujarat, exclusively for providing relief to the victims of the earthquake of Gujarat
              • Zila Saksharta Samiti constituted in any district
              • National Blood Transfusion Council or any State Blood Transfusion Council
              • Any fund set up by the state Govt to provide Medical Relief to the poor
              • Army Central Welfare Fund or Indian Naval Benevolent Fund or the Air Force Central Welfare Fund
              • National Illness Assistance Fund
              • Andhra Pradesh Chief Minister’s Cyclone Relief Fund
              • Chief Minister Relief Fund or the Lieutenant Governor’s Relief Fund in respect of any State or Territory
              • National Sports Fund set up by the Central Govt
              • National Cultural Fund set up by the Central Govt
              • Fund for Technology Development and Application, set up by the Central Govt
              • National Trust for Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation, and Multiple Disabilities.

              Donations eligible for 50% Deduction

              • Jawaharlal Nehru Memorial Fund
              • Prime Minister’s Drought Relief Fund
              • National Children’s Fund
              • Indira Gandhi Memorial Fund
              • Rajiv Gandhi Foundation

              Deductions with a max limit of 10% of Adjusted Gross Total Income*

              • Government or any local authority, institution, or association for promoting family planning
              • Indian Olympic association
              • Renovation or repair of the temple, mosque, gurudwara, church, or other places notified by the CG 
              • Corporation for promoting the interest of minority community

              *Adjusted Gross total income= Gross total income - Long-term capital gains, Short-term capital gains subject to STT, and all deductions available u/s 80 except section 80G

               

              10. Section 80GG

              ForRent paid
              Eligible AssesseeIndividual
              Conditions
              • Must not be receipt of rent allowance
              • Any residential accommodation must not be owned by the assessee or his spouse or minor child at the place where he originally resides or performs duties of his office or employment or carries on his business profession
              Amount of deductionLeast of the following:

              • Rs.5,000 per month
              • 25% of the adjusted total Income
              • Rent paid - 10% of adjusted total Income

               

              11. Section 80TTA

              ForInterest on saving deposit
              Eligible AssesseeIndividual or HUF
              ConditionsInterest on saving deposit maintained with bank or post office
              Amount of deduction100% of interest income or Rs 10,000 whichever lower

               

              12. Section 80 TTB

              ForInterest on all kinds of deposits
              Eligible AssesseeResident senior citizen
              ConditionsInterest on deposits maintained with bank or post office
              Amount of deduction100% of interest income or Rs 10,000 whichever lower

               

              Note: Apart from all the sections discussed above under chapter VI-A, there are many other sections that have not been covered, keeping in mind the importance and relevance of the sections to the mass.

               

               

               

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                Article Headers (6)

                Benefits available to government employees

                Have you ever wondered why people in our country still crave to get into a government job despite the swanky workplaces as well as the high-end lifestyle offered by the private sector?

                Well, the answer lies in the numerous benefits which a government employee is eligible to avail. A government employee not only enjoys high prestige in the society but also other benefits such as job security, fixed working hours, paid holidays, retirement benefits, and most important of all various tax benefits on his salary as compared to a non-government employee.

                Let me take you through the prominent differences in the tax implications on the Salary Income of a private sector employee as compared to a Government Employee. It includes the treatment of various incentives, retirement benefits, or deductions received by employees of both sectors. We will discuss all these benefits one by one in detail. Let’s begin.

                Firstly, we will start with the salary benefits available to Government employees :

                SALARY BENEFITS

                Dearness Allowance (DA):

                Dearness Allowance (DA) is an allowance paid to government employees as a cost of living adjustment to cope with inflation. It has hiked from the existing 17% to 28% percent of the basic pay for central government employees and autonomous bodies from July 2021.

                DA paid to employees is fully taxable with salary. The Income Tax Act mandates that tax liability for DA along with salary must be declared in the filed return.

                DEDUCTION FROM SALARY

                Entertainment Allowance:

                The deduction on this allowance is allowed only to a Government Employee. That means the non-government employees shall not be eligible for deduction if an entertainment allowance is received by them.

                The deduction from the gross salary of the government employees shall be a minimum of the below three limits :

                1. Actual entertainment allowance received
                2. 1/5th of salary exclusive of any allowance, benefit, or perquisite.
                3. Rs. 5000

                Foreign allowances :

                Foreign Allowances or perquisites paid or allowed only to Government Employees posted outside India are fully exempt from tax.

                Allowances to members of UPSC :

                The serving Chairman or Member of UPSC is given the following tax-free allowances and perquisites:

                1. Value of rent-free official residence
                2. Value of conveyance facilities including transport allowance
                3. Sumptuary allowance (This allowance is provided to the members of honorary posts for daily expenditures.)
                4. Leave travel concession

                Further, if allowances are provided to Retired Chairman/Members of UPSC then the tax exemption shall be up to Rs.14,000 per month for offering services on a contract basis.

                Allowances by UNO :

                Allowances paid by the UNO to its employees are also exempt.

                Allowances to Judges :

                Allowances paid to Judges of the High Court or Supreme Court are exempt from tax. Eg - The compensatory Allowance is exempt.

                Allowances to SAARC member states:

                Salary, as well as allowances received by the professors from SAARC member states, are also exempt.

                RETIREMENT BENEFITS

                Gratuity

                It is a part of salary which you receive as an appreciation from your employer for the services offered to the company. You are eligible to receive gratuity only if you have rendered services for 5 continuous years or more to the organisation.

                The amount of Gratuity received is fully exempt from tax

                Pension 

                With time, only you retire but your tax does not!! Tax will always be levied till the time a person earns Income irrespective of age. A pension is a payment made by the employer at the time of retirement as a reward for a past service. There can be two types of pension. The brief description is as under:

                1. Uncommuted Pension: If the Pension is received periodically i.e. on monthly basis then it is fully taxable in the hands of both government as well as non-government employees.
                2. Commuted Pension: It refers to a lump-sum pension payment received in place of periodic pension. The taxability has been defined under the income tax act:
                  The amount received is fully exempt from tax

                Leave Encashment

                Every organisation grants certain leaves to its employees and these leaves, if unused, can either be carried forward or are lapsed at the end of the year. You can encash the unused accumulated leaves, depending upon the policy of the company either during the time of employment or at the time of retirement.

                Tax Treatment of Leaves encashment :

                Received during employment: Where the leaves are encashed during the period of employment, it is fully taxable for the government as well as non-government employees.

                Received at the time of retirement: The amount shall be fully exempt for government employees.

                The numerous tax benefits enjoyed by the government employee could be one of the reasons which give them an edge over the non-government employee. However, the job content and job satisfaction should be equally evaluated before deciding upon the organisation you wish to work for.

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                  LTA related questions

                  As the name itself suggests, it is an exemption for allowance/assistance received by the employee from his employer for travelling on leave. Though it sounds simple, many factors need to be kept in mind before planning the trip to claim an LTA exemption. Income tax provision has laid down rules to claim exemption of LTA.

                  Frequently Asked Question

                  Q1. How much can I claim tax exemption in Leave Travel Allowance or LTA?

                  A. The amount of LTA exemption depends on the LTA component in your compensation package or CTC. You can furnish proof of travel within the block period and claim up to the amount prescribed in your CTC.

                  Q2. What is the latest block period to claim LTA exemption?

                  A. The latest block period of four years is from 1 January 2018 until 31 December 2021.

                  Q3. How many trips can I make in one year to claim the exemption?

                  A.You can claim LTA exemption only for one trip in one calendar year.

                  Q4. Can we carry forward unclaimed LTA?

                  A. Yes. An employee can carry forward one trip to the next block year. This means in 4 block years, he can claim one trip and one trip he can carry forward to the next block year. During the next block year, instead of 2 trips, they can undertake 3 trips and claim LTA benefits. However, this has to be communicated to an employer so that they can make provisions in their books.

                  Q5. Can I claim an LTA benefit for the travel costs of my family?

                  A. You can claim LTA benefit for the travel costs of yourself, your family consisting of your spouse, children, dependent parents, brothers, and sisters of the employee.

                  Q6. How many kids are eligible to travel to get an LTA benefit?

                  A. 2 kids are eligible to travel to get LTA benefits. In case there is a triplet kid, due to twins, such twins would be considered as one kid for this purpose.

                  Q7. If an employee does one trip but visits multiple places, is he eligible to claim LTA?

                  A. The income tax rule indicates that LTA can be claimed for the shortest distance between the starting point and farthest point. In between, if there are more places to visit, you can do that.

                  Q8. Can I claim LTA by travelling abroad?

                  A. LTA can be claimed for travel taken within India. You cannot claim foreign trip expenses for LTA benefits.

                  Q9. What mode of travel is eligible for claiming LTA?

                  A. In the case of air travel, economy class is eligible.

                  In the case of train travel, up to the first AC is eligible.

                  In the case of road transport, a rented vehicle/bus of any kind is eligible to claim LTA benefit.

                  Q10. If an employee travels at the end of the year and returns from a trip which falls beyond 31st Dec, how does it work?

                  A. In such cases, employees need to consider the starting date as a basis and claim for that calendar year.

                  Q11. If an employee travels at the end of the block year and returns from a trip after 31st Dec which falls in a different block year, how does it work?

                  A. Block year for the current LTA period is from 1-Jan-2018 to 31-Dec-2021. Assume that you want to claim your 2nd LTA amount and plan your trip from say 25th Dec 2021 to 5th Jan 2022. Since 1-Jan-2022 onwards is a different block period, you can still claim this trip under the 2018-2021 block period.

                  Q 12. I missed submitting my first LTA claim in a block year. Can I submit 2 LTA claims in a block year later?

                  A. As per IT Rules, an employee needs to claim 2 trips LTA in a block of 4 years. However, if you have missed a claim in the first 2 years, you need to indicate this to your employer, so that they can carry it forward to the subsequent 2 years of the same block year. You can later submit the bill of the first 2 years (bill date should indicate that) and claim it. However, you cannot claim 2 trips expenses in the subsequent 2 years of a block period (with bill dates of the 3rd and 4th year of a block period).

                  Q13. Do I need to submit a single bill for our trip or multiple bills would be accepted for LTA?

                  A. LTA benefit is given for a trip. This means, one family is travelling. Ideally, there would be one bill. However, there are cases where multiple bills would be received for a single trip (for airfare bills, where a family member agreed to join later and the booking was made later, but the travel date is the same for the remaining members). In such cases, these are agreed upon by employers. It would be better to check with your employer in such circumstances before proceeding further.

                  Q 14. How can we claim LTA even without travelling?

                  A. Due to the Covid-19 pandemic, many people are not in a position to travel with family, and, therefore, LTA can be claimed even without travelling. For claiming the LTA exemption,

                  Conditions to be fulfilled for claiming LTA exemption under the scheme

                  • 3 times the amount of LTA earned to be spent
                  • Goods and Services to be purchased from registered GST dealer
                  • Payments to be done only through digital modes
                  • All Invoices of the purchase has to submit to the employer

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                    Pay taxes on Mutual funds - Unrealized vs Realized Gains

                    Whether you are putting money away for a rainy day, retirement or anything in between, you are likely to be taxed. Investors do not think about tax expenses when making investment decisions, even though it is one of the crucial aspects of investing.

                    Do you check pre tax and post tax returns before you invest your money ? Do you know how fixed deposits and debt mutual funds investments can impact your tax differently? Let's discuss how the difference in taxability of Debt Mutual Funds versus Fixed deposits becomes one of the factors you must consider when you make an investment decision.

                    Difference between realized and unrealized gains in a mutual fund.

                    Realized gains are the returns you make after actually redeeming(selling) your mutual funds. Unrealized or notional gains or losses are the ones which you see based on everyday market movements but do not book it. Unrealized gains only exist on paper and results from an investment which has yet not been sold.

                    Taxation of gains

                    Where there are unrealized gains - no tax is payable as you have not booked any profits. Only in case of realized gains, do you have to pay taxes in case of a mutual fund. So once you sell your Mutual funds and the funds are credited to your bank account, you have to compute your tax liability and pay capital gains taxes on the same.

                    To know more about the taxability of mutual funds, check here - Taxation of Mutual Funds for FY 2021-22 (AY 2022-23).

                    It is not that every other asset class, you pay taxes on actual basis, in fact in a fixed deposit, you pay taxes on interest accrued to you, even where the same is not credited to your bank account each year. This way Fixed deposit income is taxed differently as compared to debt mutual funds (because the gains are taxed only on realisation) 

                    Let's take an example to help you explain how tax eats into your profits.

                    For the purpose of this example, we shall consider that the returns from fixed deposits and debt mutual funds are the same. They will be taxed as per the relevant tax laws and how that would impact the net returns you can make from the investment. 

                    Ria is the investor and she falls under the 20% tax bracket. She has made an investment of INR 10 lakhs in FD and debt mutual funds for 3 years, giving a return of 8% per annum.

                    https://financial.wealthcafe.in/blog/2021/06/cost-of-inflation-index-fy-2021-22-ay-2022-23-for-capital-gain/

                    In case of FD, interest will accrue to her every year, and she has to pay taxes on the same as per her slab rate every year, even where the same is not credited to her bank account. Infact, the interest after the taxes are paid will be reinvested.

                    FD = INR 10,00,000

                    Interest - INR 80,000

                    Tax - 16,000

                    Reinvestment of Interest in year 1 = 64,000

                    (same reinvestment would happen in year 2 and year 3 - after tax)

                    After 3 years: 

                    Total tax paid - INR 48,000

                    Net cash in hand = INR 12,04,288

                     

                    In case of debt mutual funds, she will have to pay taxes only on realization of profits. She decided to sell the same after 3 years and will have to pay long term capital gains on the same at 20% (with indexation benefits). So effectively, the tax she has to pay is less than what she had to pay for her fixed deposits. Also, the reinvestments would be of the entire earnings and not just post tax earnings in case of fixed deposits.

                    Amount invested - INR 10,00,000

                    Gains = INR 80,000

                    Tax - Nil (No sale)

                    Reinvestment of gains = INR 80,000*

                    After 3 years

                    Total Tax Paid - INR 32,565 (indexation benefit)

                    Net cash in hand - INR 12,27,147

                    *the returns are not assured in a debt mutual fund. We have considered this for explanation purposes here.

                     

                    From the above example, you can understand that the net cash in hand that ria would earn is 102% of the final amount from fixed deposits. Infact, if she was in the 30% tax bracket, she would make 104% more in the case of debt mutual funds than fixed deposits.

                    This is how realized and unrealized gains impact your tax in various asset classes and also become one of the factors that one must consider when they are investing their money.

                    You can also check our blog on -Why you should avoid investing all your money in a FIXED DEPOSIT?

                     

                    Wealth Café advice: 

                    Please note that tax is not the only but one of the criteria that one must look at when investing their money in debt funds and Fixed deposits. Fixed deposits are safer and provide assured returns as compared to debt mutual funds. Debt mutual funds have many types and each has a different risk parameter. You can look at the liquid funds, or ultra short duration debt funds for lower risk and comparable returns to Fixed deposits. Please note that returns in all debt mutual funds are volatile and invest in them only after considering all the possible risks.

                    Check our course- NM 104: Basics of Mutual Funds - to learn more about Mutual Funds in detail.

                     

                     

                    Disclaimer: - The articles are for information purposes only. Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. You must consult a financial advisor who understands your specific circumstances and situation before taking an investment decision.



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