Tax Exemption in India

Section 10 of the Income Tax Act, 1961, provides an extensive list of tax exemptions that can be claimed for reducing the tax burden. Some of them include House Rent Allowances, Hostel Allowance, Children Education Allowance, Leave Travel Allowances, Gratuity, etc.

Section 197 / 197A of the Income Tax Act, 1961, states the provisions of lower tax rate to be deducted at source or no tax to be deducted at source (TDS exemption).

While filing returns, if a taxpayer finds out that his or her tax liability is much below what has actually been paid, then the individual can claim refund of the excess TDS already paid during the financial year. However, should the taxpayer feel that the final tax liability is going to be nil or less than the TDS rate applicable on certain income, then he or she can apply for a lower rate of TDS or no TDS under Section 197 / 197A. The individual will have to submit an application to the assessing officer in form 13 (Application by a person for a certificate under section 197 and/or sub-section (9) of section 206C of the Income-tax Act, 1961, for no deduction of tax or deduction or collection of tax at a lower rate). It must be noted that TDS exemption or lower TDS is not applicable under Sections 194DA, 194E, 194B, 194BB and 194IA.

Leave Travel Allowance is a kind of allowance given to an employee from his or her employer to cover travel expenses when the individual is on leave from work. The amount that is paid in the form of Leave Travel Allowance is exempted from tax. Rules pertaining to LTA exemption can be found under Section 10(5) of the Income Tax Act, 1961.

LTA exemption is only allowed for travel of an employee alone or with his or her family. Here, the family would include the employee’s spouse, children and wholly dependent parents, sisters and brothers. The exemption will not be for more than two children of an employee born after October 1998. There is no such restriction in case of children born prior to October 1998.

An essential point to be noted is that the exemption available is only on the actual travel costs i.e. rail, air or bus fare borne by the employee. The individual cannot claim any exemption on other expenses such as hotel accommodation, local conveyance, sightseeing, etc. Additionally, the exemption that is allowed is limited to LTA provided by the employer. For example, Ms. Ankita was granted an LTA of Rs. 35,000 by her employer, however, her actual travel expense came to Rs. 30,000. Therefore, exemption available to her is only to the extent of Rs 30,000 and balance amount, which is Rs. 5,000, would be included in taxable salary income.