5 Major Tax-Free Allowances Provided By Govt To Salaried Individuals

1. House Rent Allowance

House Rent Allowance (HRA), provided under Section 10(13A) & Rule 2A of the Income Tax Act, is the amount the employer pays to the employees to compensate for rent paid by them.

This allowance is fully taxable if you don’t live in a rented accommodation.

“The deduction for house rent allowance under Section 10(13A) of the Income Tax Act depends on your salary, the HRA received, the actual rent you pay, and the place of your employment and residence,” says Tarun Modi, a chartered accountant and tax expert.

The exemption will be the lowest of the HRA your employer pays you and the actual rent paid for accommodation minus 10 per cent of the basic pay plus dearness allowance.

It is 50 per cent of the basic salary plus dearness allowance if you live in metro city or 40 per cent of the basic salary plus dearness allowance for a non-metro city.

The exemption is not available if you choose the new tax regime from FY2020-21 (AY 2021-22).

2. Transport Allowance

Under Section of 10(14) of the Income Tax Act, 1961, a transport allowance is granted to an employee to meet the expenses incurred while commuting to the workplace from home.

The exemption is effective since FY2018-2019. However, the income tax department has merged the transport and medical allowances by introducing a standard deduction.

“For the financial year 2018-2019, the standard deduction was Rs 40,000. From the financial year 2019-2020, the standard deduction has been increased to Rs 50,000,” says Modi.

3. Children’s Education Allowance

A specific amount spent on children’s education is tax-exempt under Section 10(14) of the Indian Income Tax Act. It allows nuclear families with up to two children to receive Rs 100 exemption per child, and an additional exemption of Rs 300 per kid, up to a maximum of 2 children, if the child attends a boarding school.

However, in 2008, additional allowances were provided, particularly to those who work in the public sector. These people qualify for specific reimbursements for expenses incurred on raising children.

4. Entertainment Allowance

Under section 16 (ii) of the Income Tax Act, an entertainment allowance is provided to the government employees (fully-taxable in case of other employees).

“The limit of allowance is 1/5 of the total basic salary; however, the maximum amount allowed is Rs 5,000,” says Archit Gupta, founder and CEO of Clear Tax, a taxation firm.

5. Helper/Assistant Allowance

If you are a salaried person and hired an assistant to fulfill the duties of your employment , you are eligible for an allowance for expenses incurred under Section 10 of the Income Tax Act.

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