As per Wikipedia, An Allowance is an amount of money allotted or given usually at regular intervals for a specific purpose. Allowance is given in addition to salary to meet specific requirements of salaried employee. In India, Income Tax Planning is very myopic. It is only restricted to investment, investment and investment. As i highlighted in my post, 7 Financial Mistakes You should Avoid that “FREE ADVICE” is responsible for this myopic approach towards tax planning. A tax planner should look beyond “Investments”. He should provide 360 degree guide to tax payer on how to SAVE TAX. Allowances and Perquisites are 2 such tax saving buckets / instruments. An Allowance and Reimbursement can be used interchangeable. An allowance paid against actual bills is referred as Reimbursement which is fully exempted from income tax. In this post, we will cover 11 least known allowances which can help you to save tax. In next post, i will discuss perquisites.
To emphasis on the importance of allowances, let me share recent example of one of my client Ms. Roshni Juneja from Mumbai. Three Months back she changed her job and got salary hike of 30%. She was quite excited about her new job. When she received her first salary, it was a shocker. Increase in her monthly take home salary was just 8%. Reason being, Salary structure of old employer was tax friendly i.e. loaded with allowances and perquisites whereas new employer’s salary structure is flat. Though her salary increased by 30% but only on papers. Net take home salary increased by just 8%. Being a novice she was not aware of taxability of allowances and her income tax planner also never informed her.
Another misconception is that allowances are over and above salary. Technically it is correct and as i shared in definition also that these are given in addition to salary. Please note that currently all private sector employees have CTC (Cost to Company) structure. The total CTC remains same. It include basic, variable, perquisites, allowances etc. Employee can select various tax friendly components to reduce tax outflow. It is advisable to keep basic salary minimum and opt for max tax friendly components like Allowances, Reimbursements and Perquisites. It will help to reduce your tax outflow considerably.
As a salaried employee we are aware of some of the most popular allowances like House Rent Allowance, Leave Travel Allowance, Medical Allowance and Travelling/Transport Allowance. Travelling allowance is increased from Rs 800/month to Rs 1600/month from FY 2015-16. There are whole lot of not so popular allowances which help you to save tax. Most of these allowances are exempted u/s 10(14) and are detailed in Rule 2BB of income tax rules. Under this rule, the allowance is allowed irrespective of the name assigned by the organization. For example uniform reimbursement is also referred as wardrobe reimbursement by some companies. Only pre-condition is that nature of the same should be as defined under Income Tax Act. Please note that these allowances are available only for individual salaried employees. I do agree that employer design the salary which is standard for all employees. Some of the tax friendly allowances may or may not be part of salary structure. An employee can always request for inclusion of the same to reduce tax outflow. Employee can also negotiate at the time of accepting job offer.
11 Least Known Allowances to Save Tax
1. Uniform Allowance: One of my favorite as there is no max limit to it. It is fully exempted from income tax on actuals. Employee has to produce bills to claim the same. This allowance is given to meet the expenditure on the purchase and maintenance of office uniform for wear while performing office duties. In this case, uniform does not necessarily mean like school uniform or uniform of workers in factory. Generally all offices have dress code i.e. employee should be smartly dressed in formals. In this case, according to dress code of the office, an employee can claim uniform reimbursement for formal clothes purchased for office wear.
2. Mobile / Telephone Reimbursement: If your office duty require mobile / telephone / internet connection. You can claim 100% exemption against billed amount by producing actual bills. For example IT Professionals, employees in sales function, HR, Middle Management etc can claim exemption. Some employers take declaration from employees i.e. segregation of personal and official calls whereas others are liberal. In few cases, i observed that there is monthly cap normally of Rs 2000 per month. Please note that reimbursement can be claimed only for Postpaid Connections.
3. Children Education Allowance: Under this head, you can claim exemption of max Rs 100 per month per child for a maximum of 2 children. Payment Receipts are not required to claim exemption therefore it is not a reimbursement. Though amount is small but if you have 2 school going children then you can claim Rs 2400 p.a. This allowance is paid to meet the education expenses of a child.
4. Children Hostel Allowance: If your child / children are staying in hostel then you can claim max exemption of up to Rs 300 per month per child for a max of 2 children. Payment receipts are required by the employer to claim income tax exemption. You can claim max Rs 7,200 p.a. for 2 children.
5. Soft Furnishing Allowance:In this head, employee is allowed to buy some household items or pay for soft furnishing of the house. Original bills are required for reimbursement. Normally there is a max cap depending on the hierarchy of the organization. Max reimbursement is limited to justify the same. For Mid-Managers, Soft Furnishing Reimbursement is restricted upto Rs 50,000 depending on the salary of person. The reason for soft furnishing reimbursement is that employee need to entertain guests at his residence for official purpose and expense incurred to protect office furniture at residence.
6. Newspaper, Books and Periodicals: Some professions demand an employee to keep abreast with latest happenings relating to profession e.g. medical, finance, legal etc. Therefore employee can purchase newspapers, books, periodicals etc and submit actual bills for reimbursement. It is fully exempted from income tax on actuals. Some organizations cap the max limit to Rs 1000 per month.
7. Reimbursement of Conveyance Expenses: If the job require lot of Local travelling like front end staff, sales employees, collection agents etc. An employer can reimburse actual expense incurred by the employee at actuals. Amount received is fully exempted from income tax. Only 2 conditions should be fulfilled (a) Employee is not receiving transport allowance and (b) Employee should maintain log book with respect to travelling and corresponding expense. Exemption is available only against actual bills, reimbursement without bills is taxable. Conveyance expenses should be incurred only for performance of official duty.
8. Daily Allowance: If your normal place of duty is not fixed and you have to travel to different places. Your employer can include Daily Allowance to meet ordinary daily charges incurred, if you are absent from normal place of duty. Reimbursement received is fully exempted from income tax against actual bills. It can be granted either on tour or period of journey in connection with transfer.
9. Research Allowance: Any amount spent & reimbursement claimed by employee for academic research or other professional pursuits including training, short term / online course etc. is fully exempted from income tax on production of actual bills.
10. Tour Allowance: Though there is no formal name for this but any allowance granted to meet the cost of travel on tour or being transferred from one place to another. Reimbursement is fully exempted from income tax against actual expenditure incurred. It also include cost towards movers and packers.
11. Helper Allowance: You can hire or engage helper who can help you in performance of official duties. Any expenditure incurred is fully exempted from income tax on actual value.
Through intelligent tax planning, you can save tax outside “Investments” also. Depending on your job profile and nature of job, you can discuss with your employer to include above mentioned allowances in your salary structure. It can help to reduce your tax outflow.
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