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Exemption of Amounts Specified in the Income Tax Rules in Calculating 'Salary' Income

1.6.      IN CASE OF FOLLOWING.. AMOUNT OF EXEMPTION IS AMOUNT SPECIFIED IN THE INCOME TAX RULES

1.6.1.   Children Education Allowance and Hostel Allowance allowed to the children of employee :

 

Children Education Allowance

Hostel Allowance

Monthly Exemption

Upto Rs. 100 p.m. / child
Max 2 child is exempt

Upto Rs.300 p.m. /child
Max 2 child is exempt

Lump sum Exemption

Rs. 1,200 per child is exempt
Max Rs.2,400 ex exempt

Rs.3,600 per child is exempt. Rs.7,200 is exempt.

1.6.2.   Leave Travel Concession (LTC)

Leave Travel Concession is a non-taxable perquisites available for salaried class. An Employee with his dependent family members can avail of this facility to travel anywhere in India / native place.   Exemption is limited to the amount actually spent. The amount   exempt  is the value of any travel concession or assistance received or due to the assesses.

  1. Journey by Air :  Economy Class Airfare of India Airlines by the shortest route or the actual amount spent, whichever is lower.

  2. Journey by Rail :  A/C 1st Class rail fare by the shortest route or actual amount spent, whichever is lower.

  3. Where the place of destination is connected by Rail :  Air-conditioned first class Rail fare by the shortest route or the actual amount spent for the journey  performed by road whichever is lower.

  4. Where the place of destination is NOT connected by Rail :

Where...
1.  Recognized public transport exists : First Class or Deluxe Class fare by the shortest  route or the actual amount spent whichever is lower.

2.  No recognized public transport exists : Air-conditioned first Class Rail fare by the shortest route or the actual amount spent whichever is lower.

These exemption is available only for 2 journeys performed in a block of 4 calendar years.

1.6.3.   Leave Encashment

For an employee of State or Central Government , any amount received as cash equivalent of Leave Salary at the time of super annuation / retirement is exempt from tax to the extent of 3 Lakhs. For other than the Government Employees least of the following is applicable :

(1)  The earned leave entitlement con not exceed 30 days for   every year of actual service or

(2)  10 months average salary or

(3)  Actual leave encashment received at the time of retirement, or exempted amount specified by the Government (3 lakhs)

1.6.4.   Arrears of Salary

Salary in arrears / advance, received in lump sum, is liable to tax in the year of receipt. Relief can be obtained for salary arrears u/s 89(1) of the Income Tax Act.

Method of Calculation to obtain relief

a)         Calculate the tax on total income of the previous year in which additional salary was received.

b)  Calculate the Tax on total income as reduced by additional salary of the previous year.

c)  From the amount arrived at...

(a) deduct the amount arrived at

(b) to arrive at tax on additional salary received.

d)  Ascertain the previous years to which the additional salary relates. Add the amount of additional salary to the total income of such years.

e)  Calculate the Tax on total income as increased by the relevant additional salary in respect of each of such previous years.

f)  Calculate the tax on the total income without the additional salary of each of the said previous years.

g)  From amount obtained at ...

(a) deduct the amount arrived at

(b) to calculate aggregate tax on additional salary.

h)  The relief is the difference of (c) and (g)

1.6.5.   Pension

Pension is a periodical payment received by an Employee after his retirement and is taxed as salary.

The basis of charging commuted or un-commuted  pension is as follows :

>>  Uncommuted pension is taxable as salary for both Government and Non-government employees.

>>  Any Commuted pension received by an employee of the Central Government, Local Authority or Statutory Corporation is wholly exempted from tax under section 10(10A)(i).

>>  Judges of Supreme Court and High Courts are entitled to exemption of commuted pension. Govt. Employees absorbed in a public sector undertaking are entitled to exemption in respect of lump sum        received on commutation of pension.

>>  Payment in commutation of pension received by any other Employee is exempt from tax:


(i)    In case where the Employee receives Gratuity, the commuted value of 1/3 rd of the pension which he is normally entitled to receive.

(ii)    In any other case, the commuted value will be half  (1/2) of such pension.

>> If payment on commutation of pension receive by the Employee exceeds the above limits, such excess  is liable to tax.


>>  For Central Government Employees joined on or after 1-1-2004, 10% of Salary is compulsory deducted towards Pension with a matching contribution from the Govt. and is Non-Taxable u/s 80CCD. Only       Terminal Benefit is charged to tax.


Now 80CCD is applicable to Non-Govt. Employees also.

>>  In respect of Family Pension deduction is allowed to the extent of 1/3 rd of pension or Rs. 15,000 whichever is less.

ILLUSTRATION
An employees retires from service on 1-6-2007 and his pension was fixed at Rs.1,200 per month. He commuted Rs.800 out of his pension, and received Rs.98,000 as commuted value of pension.
The exemption admissible will be worked out as follows :

  1. If the employee has received any Gratuity, only commuted value equivalent to one-third of pension (Rs.400) will be exempt. This will work out to :

98,000 X 400/800 = Rs. 49,000

  1. If the employee had not received any Gratuity, only commuted value equivalent to one-half (1/2) of pension (Rs.600) will be exempt. This will work out to :

98,000 X  600/800 = Rs.73,500

1.6.6.   Gratuity

If you are a Govt. Employee :  Any death cum retirement Gratuity received by an employee of the Central / State Govt. or local authority is wholly exempt from tax.

>> If the employee is covered by the Gratuity Act, any gratuity received under Gratuity Act 1972 is exempted to the extent of whichever is less of the following :

(1)  Salary for 15 days based on the salary last drawn for every completed year of service or part there of in excess of 6 months.

(2)  Rs. 3,50,000 or Actual Gratuity received.

>>  Gratuity received in excess of these limits is taxable (salary includes D.A. but NOT  Bonus, Commission, HRA, Overtime Wages or any other allowance).

For other than Government Employees Gratuity received on retirement , death, termination and resignation or on his becoming incapacitated prior to retirement is exempt from tax to the extent of least of the following :

(1)  Rs. 3,50,000/-

(2)  Half Month’s Salary for each completed year of service

(3)  Actual Gratuity received.

Relief of Salary arrears/advance, Gratuity, Pension, Family Pension etc.
Relief is available in respect of arrears / advance received in lump sum, Gratuity for past services of not less than five years, leave encashment , compensation on termination of service, payment in commutation of pension, family pension etc, under rule 21A. The relief can be claimed even if the assesses was not liable to tax and has not been taxed in the relevant previous years to which the salary arrears pertain.

ILLUSTRATION

An employee whose monthly wage was Rs.7,800 retired on 30-04-2006, after putting in a service of 36 years, 7 months, and received a Gratuity of Rs.1,50,000.

The exemption is to be computed as follows :

Completed years of service (rounded off)                     - 37 years
15 days’ wages - 15/26 X 7800                                    -Rs. 4,500
Amount calculated at 15 days wages - 4500X37            -Rs. 1,66,500(A)
Gratuity actually received                                           -Rs.1,50,000(B)
Maximum limit                                                           -Rs.3,50,000(C)

Exemption allowable (least of A, B & C)     -Rs.1,50,000

 

1.6.7.   Retrenchment Compensation

Exempt form tax to the extent of least of the following :

a.         Amount calculated under section 25F(b) of the Industrial Dispute Act ; or
b.         an amount specified by the Government ( i.e. Rs.5,00,000)

1.6.8.   Entertainment Allowance

In the case of Government employee, Least of the following is exempt from Tax :

a.         Rs. 5,000
b.         20% of Salary ; or
c.         Actual Entertainment Allowance

1.6.9.   Rent-FREE House

Rent-FREE House

Unfurnished (1)

 Furniture (2)

Furnished House (3)

a.  In the case of Government employee

Amount payable as per Government Rules

 

10% per annum of Cost of Furniture or Rent Payable

(1) plus (2)

b.  In the case of Non-Government :

  • If house is owned by the employer

 

15% or 10% or 7.5% of Salary

 

 

10% per annum of Cost of Furniture or Rent Payable

 

 

(1) plus (2)

 

  • If house is not owned by the employer

15% of Salary or Lease Rent, whichever is lower.

 

10% per annum of Cost of Furniture or Rent Payable

(1) plus (2)

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