Taxability of Salary Allowances and Deductions

If any individual opts for new slab rates following deductions/exemptions has to be surrendered (as specifically mentioned in Section-115BAC):

• Exemption for Leave Travel Allowance under section 10(5).
• Exemption for House Rent Allowance under section 10(13A).
• Exemption from any other Allowance under section 10(14).
• Exemption from allowance to MPs or MLAs under section 10(17).
• Exemption of 1,500 in case of clubbing of minor child income under section 10(32).
• Standard Deduction of ₹ 50,000.
• Entertainment Allowance of ₹ 5,000.
• Professional Tax under section 16.
• Interest under section 24 in respect of self-occupied or vacant property referred to in sub-section (2) of section 23.
• Deduction from family pension income, equal to 33 1/3 per cent of such income or Rs. 15,000, whichever is less under section 57(IIA).
• Any deduction under chapter VI-A (like section 80C, 80CCC, 80CCD, 80D, 80DD, 80DDB, 80E, 80EE, 80EEA, 80EEB, 80G, 80GG, 80GGA, 80GGC, 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA, etc).

Deduction: under sub-section (2) of section 80CCD (employer contribution on account of the employee in notified pension scheme) and section 80JJAA (for new employment) can be claimed under New Tax Regime as well.

• Transport Allowance granted to a specially-abled employee to meet the expenditure for the purpose of commuting between place of residence and place of
• Conveyance Allowance granted to meet the expenditure on conveyance in performance of duties of an office.
• Any Allowance granted to meet the cost of travel on tour or on
• Daily Allowance to meet the ordinary daily charges incurred by an employee on account of absence from his normal place of

We have further summarized the various other Exemptions/ Deduction allowed or dis-allowed under New & Old Tax Regime as following:

Note: Taxpayer is advised to structure their salary to get the maximum benefit of the above-allowed allowance subject to the statutory limit given in the prescribed provision.

• The option shall be exercised for every previous year where the individual or the HUF has no business income, and in other cases, the option once exercised for a previous year shall be valid for that previous year and all subsequent
  So for taxpayer who does not have any income from PGBP they have an option available with them every Financial Year to opt between both the tax regimes.
• The option shall become invalid for a previous year or previous years, as the case may be, if the Individual or HUF fails to satisfy the conditions and other provisions of the Act shall
• Timing of selection of the Regime
  • The selection should be made at the time of filing the tax return in case the individual or HUF has no business income. However, most salaried individuals will need to make this decision much sooner, and convey such decision to their employer who will be required to deduct TDS, in order to avoid cash flow
  • In case, taxes are deducted from their salaries at a lower rate, they may have to pay additional interest at the end of the year for delay/ default in payment of advance tax as per stipulated due dates or suffer a fairly high TDS Whereas, in case taxes are deducted from their salaries at the higher rate, they may have to claim huge refunds from the tax department, which is seldom an easy task.
  • Therefore, tax planning before the end of the financial year will be essential to avoid distress at the time of return filing. Further, employers will insist on deducting tax on salaries at higher rates if such selection is not made by the Whether, employees will be able to change their selection during the year will also depend on the flexibility provided by their employer in this regard and may not be possible in all cases.
• Set off loss of the following shall not be allowed in case person opts for taxation under New Tax Regime:
  • Carried forward of loses and deprecation of previous years only which had been attributed due to any of the deductions mentioned in above clause
  • Loss from house property from any other head of income (including PGBP)
• Further, NO DEDUCTION SHALL BE AVAILABLE FOR donation u/s 80G under New Tax

Following illustration has been made to make you understand the application of the tax regime and it application:

Mr A also invested in tax saving mutual fund (ELSS) amounting to INR 1,50,000 and pay medical insurance premium amounting to INR 25,000. Interest income from saving bank account amounting to INR 10,000. House Rent Allowance give to employee amounting to INR 3,50,000. Rent paid by employee amounting to INR 4,00,000.

Calculate taxable income and tax.

Now Mr. A has to check his tax liability under both the tax regimes and opt for the best in his tax planning:

Least of the following is exempt:

• Actual HRA received
• Rent (-) 10% of Basic salary and Dearness Allowance for the relevant period
• 50% of Basic Salary plus Dearness Allowance for the relevant period in case of Delhi, Mumbai, Chennai & Kolkata and 40% in other cases 

Additional Points:

• HRA fully taxable in the hands of the employee where no rent expenditure has been incurred by the
• Also to claim the deduction of the HRA employee is required to provide the PAN of the landlord to his/ her employer where the annual rent paid is more than Rs 1,00,000 per annum

Exemption available shall be lower of the amount received from the employer and the following limits:

• Children Education Allowance: Rs 100 m. per child (maximum 2 children) 
• Hostel Expenditure Allowance: Rs 300 p.m. per child (maximum 2 children)
• Tribal Area Allowance: Rs 200 p.m.
• Underground Allowances: Rs 800 p.m

Exemption available shall be lower of the amount received from the employer and the amount spent by the employee. If any amount is saved by the employee, such saving would be taxable.

• Daily Allowance (for meeting the cost of boarding and lodging when the employee is on official tour)
• Uniform Allowance (for meeting the expenditure incurred on purchase/maintenance of office uniform)
• Conveyance Allowance (for meeting the expenditure incurred on conveyance in connection with official duties)
• Helper Allowance (for meeting the expenditure incurred on a helper hired in connection with official duties)
• Academic Allowance (for encouraging academic, research and training pursuits)
• Travelling Allowance (for meeting the cost of travel on tour or on transfer of duty)

• Government Employees: Fully exempt u/s 10(10)
• a)   Non-Government Employees:
  • Employees Covered by the Payment of Gratuity Act, 1972: Least of the following is exempt:
    • Rs 20 lacs
    • Gratuity actually received
  • 15/26 (x) last drawn salary (x) number of completed years or part of year in excess of six months
    • Employees Not Covered by the Payment of Gratuity Act, 1972: Least of the following is exempt:
      • Rs 20 lacs
      • Gratuity actually received
  • 1/2 (x) average salary of last 10 months immediately preceding the month of retirement (x)number of completed years of service (fraction to be ignored)
• Additional Points:
  • Gratuity received during the continuity of service fully taxable in case of govt as well as non- govt
  • A non-government employee can claim a total exemption of Rs 20L u/s 10(10) during his entire lifetime.

Government Employees: Fully exempt u/s 10(10A) Non-Government Employees:

• Employee in receipt of gratuity: 1/3rd of commuted pension is exempt
• Employee not in receipt of gratuity: 50% of commuted pension is exempt

• Government Employees: Fully exempt u/s 10(10AA)
  Non-GovernmentEmployees:
  Least of the following is exempt:
  • Leave salary actually received
  • Rs 3,00,000
    • 10 times (x) average salary p.m.
    • Leave at the credit of the employee (x) average salary m.

Meaning  of  ‘average  salary’: Average of salary* of last 10 months immediately preceding the date of retirement

*Salary for this purpose includes basic salary, dearness allowance and commission based on fixed percentage of turnover secured by employee

Meaning of ‘leave at the credit’:  Leave entitlement (max 30 days leave per completed year) (-) Leave availed/encashed

Additional Points

• Leave salary received during the continuity of service fully taxable in case of govt as well as non-govt
• Non-government employee can claim a total exemption of Rs 3,00,000 u/s 10(10AA) during his entire

Conditions for claiming the exemption

• Actual journey is a must to claim the
• Only domestic travel is considered for exemptions i.e., travel anywhere in India not restricted to travel to home No international travel is covered under LTA.
• The exemption is available only on the actual travel costs incurred e., the air, rail or bus fare incurred by the employee.
• No expenses such as local conveyance, sightseeing, hotel accommodation, food, , are eligible for this exemption.
• The exemption is also limited to LTA provided by the

Eligible LTA Exemption

The exemption is available only on the actual travel costs i.e., the air, rail or bus fare incurred by the employee and does not include any expenses incurred for local conveyance, sightseeing, hotel accommodation, food, etc. The exemption is also limited to LTA provided by the employer. Further LTA exemption is available only for two journeys performed in a block of four calendar years.

• As per Section 80CCE maximum amount of deduction cumulatively u/s 80C, 80CCC & 80CCD(1) is limited to Rs 1,50,000/-.
• Resident and Non-Resident both can claim the deduction u/s
• Following investments/payments are eligible for deduction u/s 80C:
• Life insurance premium {Premium paid for self, spouse & children (minor/major) is available as deduction subject to a maximum limit of 10%/15%/20% of sum assured, as the case may be}.
• NSC {in the name of self, spouse & minor children}. NSC in the name of major children, parents, brother, sister, any other relative cannot be claimed as deduction u/s
• PPF {in the name of self, spouse & children (minor/major)}. PPF in the name of parents, brother, sister, any other relative cannot be claimed as deduction u/s
• Fixed Deposit of 5 years or more with Banks/Post Office {in own name only} – Lock-in period of 5
• Principal repayment of housing loan taken from banks, notified financial institutions or specified employer for purchase/construction of a residential house to be used for residential purposes – Lock-in period of 5 years from the end of the year in which the house is purchased/constructed.
• Tuition fees of any two children paid to any educational institution in India for full-time education (excluding donation/development fees).
• Employee’s contribution to recognized provident fund/ statutory provident fund
• Contribution to Equity Linked Savings Scheme such as Unit Linked Insurance Plan (ULIP).

• Individual’s Own Contribution {80CCD(1) & 80CCD(1B)}:
  • 80CCD(1): Individual’s contribution to NPS eligible for deduction (Salaried – Max 10% of Salary; Self Employed – Max 20% of GTI)
  • 80CCD(1B): Additional deduction of maximum Rs 50,000 available u/s 80CCD(1B) if deduction not fully available u/s 80CCD(1) due to the following reasons:
    • Contribution to NPS exceeds 10% of Salary/20% of GTI; or
    • Contribution to NPS exceeds Rs 1,50,000; or 
    • Total investments eligible for deduction u/s 80C, 80CCC & 80CCD(1) exceeds Rs 1,50,000.
• Employer’s Contribution {80CCD(2)}:
  • Employer’s contribution to be first added to the gross salary of the employee.
  • ThereaGer, such contribution is allowed as deduction to the employee u/s 80CCD(2). Deduction u/s 80CCD(2) should not exceed 14% of Salary (if the employer is Central Government) and 10% of Salary (in case of any other employer). 
    Note: Salary for the purposes of Section 80CCD would mean retirement benefit salary.

• Individual can claim the deduction u/s 80D whether he is a resident or non-resident.
• Quantum of Deduction :
  • Block 1 (Self, Spouse & Dependent Children): Maximum Rs 25,000 (Rs 50,000 for senior citizens)
  • Block 2 (Parents – Dependent/Independent): Maximum Rs 25,000 (Rs 50,000 for senior citizens)
  • Note: Maximum deduction of Rs 5,000 is admissible in respect of preventive health check per assessee.
• Additional Points :
  • Medical insurance premium and contribution to CGHS should have been paid by any mode other than cash which includes net-baking, A/c Payee Cheque
  • Preventive health check-up can be paid by any mode including
  • Where no medical insurance policy has been taken for resident senior citizens, deduction available for actual medical expenses instead of medical insurance premium and maximum deduction can be claimed amounting to Rs. 50,000.

• Any person not having PGBP income can claim the deduction u/s 80GGA whether he is a resident or non-resident.
• No maximum limit on the amount of
• Donations exceeding Rs 2,000 should have been made by any mode other than

• Individuals other than senior citizens and HUF can claim this deduction whether he is a resident or non
• Savings account interest received is allowed as deduction, subject to a maximum limit of Rs 10,000 p.a.

• Resident individual who is a senior citizen can claim the deduction u/s
• Interest received from banks & post offices on savings deposits as well as time deposits is allowed as deduction, subject to a maximum limit of Rs 50,000 a.

• We can help you analysis and select the best and most appropriate Tax Regime according to your requirement
• We can provide assistance in analysis your Advance Tax Liability well in advance to avoid any future liabilities.
• We can help you plan your taxability receipt of Income or any exceptional income received during the
• We can assist you for making appropriate investment to reduce or minimise your tax
• We can also guide you with your arrears receipt or any other tax related purpose as may one required.