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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.

Typically, a salary package would look like:

1. Basic salary
2. House rent allowance (HRA)
3. Leave travel allowance (LTA)
4. Telephone reimbursement
5. Books and periodicals
6. Meal coupons

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

b) There are certain other tax benefits or tax deductions that you can claim beyond the salary package:

  • Life insurance premium (LIC premium), children’s tuition fee, housing loan repayments.
  • Investments in Public Provident Fund (PPF), National Savings Certificate (NSC), mutual fund Equity-Linked Savings Scheme (ELSS), tax saver fixed deposits.
  • Contributions made to National Pension Scheme (NPS), Sukanya Samriddhi Yojana (SSY).
  • Interest on home loans.
  • Medical insurance premium.
  • Donations.
  • Interest on loan taken for higher studies.

  • 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

    c. 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.

    d. 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