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Salaried taxpayers primarily earn their income from salary. The salaried are normally offered a salary package or CTC (cost to company). The taxability of the salary income is determined by the employer. The employer also deducts a tax (TDS) on the salary paid to them. Thus, the monthly salary receipts would be credited after the tax deduction.
The salary package consists of various components. Many employers offer the option to structure the salary components to their employees. While certain components are fixed, employees can claim tax benefits on other components included in the salary package. Salaried employees can claim the benefit of the components by submitting proofs to their employer.
Union Budget 2021 Outcome:
Budget 2021 amended to bring the maturity proceeds of ULIPs with an annual premium of more than Rs 2.5 lakh, to be taxable on par with equity-linked mutual fund schemes. this will be applicable to new ULIP policies availed on or after Feb. 1, 2021.
Recently, the LTC cash voucher scheme is notified by the government through a notification dated 5th May 2021. Also, its benefits are now extended to all sectors including private-sector employees.
The government initially launched a circular in Oct 2020 introducing the LTA cash voucher scheme specifically for the central government employees.
Typically, a salary package would look like:
The basic salary of every employee is fixed and credited to the account of the employee subject to a tax deduction. Meal coupons are provided by the employer on an amount calculated for two meals per working day. The annual allowance for meal coupons works out to be Rs 26,400 and is tax-exempt in the hands of the employee.
With respect to the other components, the employee has to submit proof of incurring the corresponding expense to the employer. Upon submission of the proof, the employer calculates the tax exemption on the allowance. The balance of the component (non-exempt portion) is taxed along with the basic salary of the employee.
Let us have a look at the various proofs to be submitted to claim the tax-exemptions:
|Salary component||Expense reimbursed||Proof submitted|
|House rent allowance||Rent paid for residential accommodation||Rent receipts including PAN of employer (PAN is compulsory for rental payment above Rs 1 lakh annually)|
|Leave travel allowance||Travelling cost to any place in India e.g. air-fare, rail fare||Air tickets, train tickets, bus or taxi bills|
|Telephone reimbursement||Landline including broadband and mobile phone||Telephone bill or broadband bill|
|Books and periodicals||Cost of books and periodicals purchased||Bills or invoices for the books and periodicals|
There are certain other tax benefits or tax deductions that you can claim beyond the salary package:
The proofs that can be submitted for claiming the tax benefits or tax deductions are:
|Investment or payment||Allowed as deduction||Proof submitted|
|Allowed as a deduction under section 80C against aggregate income (gross total income)|
|a. LIC premium||Deduction under section 80C against aggregate income (gross total income)||LIC premium paid receipts|
|b. Children's tuition fee||Deduction under section 80C against aggregate income (gross total income)||Tuition fee receipts|
|c. Housing loan repayments||Deduction under section 80C against aggregate income (gross total income)||Interest or EMI schedule from bank or financial institution|
|d. PPF||Deduction under section 80C against aggregate income (gross total income)||PPF passbook or statement|
|e. NSC||Deduction under section 80C against aggregate income (gross total income)||NSC photocopies|
|f. Mutual fund ELSS||Deduction under section 80C against aggregate income (gross total income)||Mutual fund statement|
|g. Tax saver fixed deposits||Deduction under section 80C against aggregate income (gross total income)||Fixed deposit receipts|
|h. National Pension Scheme (NPS)||Deduction under section 80C and 80CCD(2) against aggregate income (gross total income)||NPS account statement|
|i. Sukanya Samriddhi Yojana||Deduction under section 80C against aggregate income (gross total income)||SSY account statement|
|j. Contribution to Employee Provident Fund (EPF)||Deduction under section 80C against aggregate income (gross total income)||No proof is required to be submitted. The employer makes a contribution on behalf of the employee.|
|Interest on home loan||Taken under income from house property and reduced from aggregate salary||Interest or EMI schedule from bank or financial institution|
|Medical insurance premium||Deduction under section 80D against aggregate income (gross total income)||Medical insurance premium receipt|
|Donations||Deduction under section 80G against aggregate income (gross total income)||Donation receipts|
|Interest on loan taken for higher studies||Deduction under section 80E against aggregate income (gross total income)||Interest schedule from bank or financial institution|
Standard deduction and staff benefits from employer: Apart from the above tax exemptions and deductions claimed by an employee, the employer also allows a standard deduction to every employee. The standard deduction is Rs 50,000 for the financial year 2019-20 (AY 2020-21). Separately, employers can gift to their employees or provide them with gift vouchers. Such gifts are tax-exempt up to Rs 5,000 annually. In respect of gifts and any other staff welfare payments made by the employer, the employee is not required to submit any proof to the employer.
Income-tax exemptions claimed in specific cases: The employer calculates the tax exemption on the retirement and resignation benefits mentioned below. The balance of the component (non-exempt portion) is taxed along with the basic salary of the employee.
|Income component||Criteria for exemption||Exemption allowed|
|Gratuity||Allowed on retirement or resignation or death or disablement|| Least of the following: |
-Last salary (basic + dearness allowance)* number of years of employment* 15/26;
-Rs 20 lakh (which has been hiked from Rs 10 lakh as per the amendment);
-Gratuity actually received
|Pension||Commuted value of the pension allowed at the time of retirement||– If the employee receives gratuity, then one-third of the amount of pension |
-If only pension received, one-half of the pension
|Leave encashment||Allowed at the time of retirement or resignation|| Least of the following: |
-Average salary drawn for the last 10 months;
-Salary per day* unutilised leave (considering maximum 30 days leave per year) for every year of completed service
-Leave encashment received
(i) Leave encashment received by Central or State government employee at the time of retirement or resignation is fully exempt;
(ii) Leave encashment received by legal heirs of deceased employees is fully exempt
No documents are required to be submitted to claim standard deduction. Standard deduction Rs.50000 (from Ay 2020-21) is allowed for all salaried employees from their salary income.
If you were not able to produce the documents to your employer, you can claim the deduction for the same when filing an Income tax return.