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Tax exemptions

Tax exemptions

Tax exemption refers to a monetary exemption which reduces taxable income. Tax exempt status can provide complete relief from taxes, reduced rates, or tax on only a portion of items. Examples include exemption of charitable organizations from property taxes and income taxes, veterans, and certain cross-border or multi-jurisdictional scenarios.

Tax exemption generally refers to a statutory exception to a general rule rather than the mere absence of taxation in particular circumstances, otherwise known as an exclusion. Tax exemption also refers to removal from taxation of a particular item rather than a deduction.

International duty free shopping may be termed “tax-free shopping”. In tax-free shopping, the goods are permanently taken outside the jurisdiction, thus paying taxes is not necessary. Tax-free shopping is also found in ships, airplanes and other vessels traveling between countries (or tax areas). Tax-free shopping is usually available in dedicated duty-free shops. However, any transaction may be duty-free, given that the goods are presented to the customs when exiting the country. In such a scenario, a sum equivalent to the tax is paid, but reimbursed on exit. More common in Europe, tax-free is less frequent in the United States, with the exception of Louisiana. However, current European Union rules prohibit most intra-EU tax-free trade, with the exception of certain special territories outside the tax area.

8 useful Income Tax Exemptions for Salaried Employees

1. HRA EXEMPTION FOR SALARIED EMPLOYEES

Many employers give House Rent Allowance (HRA) to their employees for them to reside at a good place. A portion of the House Rent Allowance given by an employer to an employee is exempted from the levy of the Income Tax and Income Tax is only levied on the remaining part.

HRA Exemption is one of the most useful income tax exemptions for Salaried Employees as it can be easily claimed and the amount of exemption allowed is also large.

 2. INCOME TAX EXEMPTION ON LEAVE TRAVEL ALLOWANCE

Many employers also give allowances to their employees to go on a vacation with their respective families. The amount given by the employer to an employee to go on a vacation is exempted from the levy of tax to a certain extent provided that the amount given was for a vacation in India only.

Leave Travel Allowance is also an effective income tax exemption for Salaried Employees. However, this amount can only be claimed if the employee actually goes on a vacation as bills for the same would be required to be furnished.

3. EXEMPTION ON ENCASHMENT OF LEAVES FOR SALARIED EMPLOYEES

Most employers give all their employees a certain no. of days which can be claimed as leaves. However, in case a person does not claim these leaves, many employers also give their employees the option for en-cashing these leaves i.e. the employers pays extra to the employees for the leaves which were allowed to be taken but were not taken.

This amount received as Leave Encashment is also allowed to be claimed as an exemption up to a certain extent.

4. TAX EXEMPTION FROM PENSION INCOME FOR SALARIED EMPLOYEES

On retirement of an employee, many employers pay a pension to their employees. Sometimes, the employer pays pension from his own pocket and in some cases, the employer purchases an annuity and then the pension is being paid by the organisation from whom the annuity has been purchased.

The Pension can be of 2 types i.e. Commuted and Uncommuted. In commuted pension, the whole amount of pension is received in lump-sum whereas in Uncommuted Pension, the amount is paid in instalments at regular intervals.

Irrespective of the type of Pension, Income Tax Exemption is given in both types of pensions up to a certain limit.

5. INCOME TAX EXEMPTION ON GRATUITY FOR SALARIED EMPLOYEES

Gratuity is a gift made by the employer to his employee in appreciation of the past services rendered by the employee. Gratuity can either be received by:-

  1. The employee himself at the time of his retirement
  2. The legal heir at the time of the death of the employee

For the purpose of computing Income Tax Exemptions for Salaried Employees who have received gratuity, the employees can be segregated into 3 parts and then the exemption is allowed depending on the category they are into:-

  1. Govt. Employees and employees of Local Authorities
  2. Employees covered under the Payment of Gratuity Act, 1972
  3. Employees not covered in any of the 2 above.

For income tax exemption on the amount received as Gratuity, kindly refer this link.

6. INCOME TAX EXEMPTION ON VRS RECEIVED

Many employees opt for Voluntary Retirement before the actual age of retirement (i.e. 60 years). In such cases, the employer sometimes gives some money to the employee on his voluntary retirement.

The amount received or receivable by the employee on voluntary retirement under the golden handshake scheme is exempted under Section 10(10C)

For computation and tax on amount received as VRS, kindly refer this link.

7. INCOME TAX EXEMPTION FOR PERQUISITES

Some employers also give their employees various perquisites/facilities like Car, Mobile phones, Rent Free accommodation.

Such perquisites are not fully tax free. A specific value of such facilities is allowed as an exemption and value of the balance facilities allowed is allowed as an exemption.

8. EXEMPTION OF VARIOUS ALLOWANCES

Various other allowances like Transport Allowance, Children Education Allowance are also allowed as Income Tax Exemptions to Salaried Employees but only up to a certain limit.

Income tax exemptions

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