Transportation allowance tip: Exemptions under the new tax regime decoded
A penny saved is a penny earned. For this, tax planning is your weapon to dodge the tax bullets and boost your bank balance. Photo: Shutterstock
Choosing the right tax regime in India can have a significant impact on your ultimate tax liability. With the introduction of the new tax regime in 2020, taxpayers now have two options: the traditional old regime with its plethora of deductions and exemptions, and the new regime with its simplified structure and lower tax rates. Understanding the exemptions and benefits offered under each regime is critical to making an informed decision.
The old regime allows taxpayers to claim deductions for various investments and expenses such as housing allowance (HRA), deductions under Section 80C, deductions under Section 80D and other deductions such as interest on home loans (Section 24), interest on education loans ( Article 80E). and donations to charities (section 80G).
The new tax regime, introduced to simplify the tax filing process, offers lower tax rates compared to the old regime. However, there is an important trade-off: most exemptions and deductions that were available under the old regime are not permitted under the new regime. Here’s an overview of what the new regime has to offer:
- Standard deduction: A flat deduction of Rs 50,000 is available to all taxpayers, irrespective of their income level. This replaces a number of deductions that were claimed under the old regime.
- Increased basic exemption limit: The new regime offers a higher basic exemption limit compared to thethan, currently at Rs 3 lakh.
- Tax returns: A tax credit is available for income up to a certain limit, effectively reducing tax liability to zero for some taxpayers.
Pallav Pradyumn Narang, Partner, CNK explains some of these exemptions with the following examples:
Receive a tip from employer
Exemption: Tax-free up to a certain limit as per income tax rules.
Example: Maya retires after 30 years of service and receives a gratuity of Rs 20,00,000. The gratuity exemption limit for her is Rs 20,00,000, making the entire amount tax-free.
Term of the life insurance policy
Exemption: The amount received at maturity of life insurance policies is tax-free if the premium paid does not exceed 10% of the sum assured.
Example: Rohan’s life insurance policy matures and yields Rs 5,00,000. His annual premium was Rs 25,000 and the sum assured was Rs 3,00,000. Since the premium is less than 10% of the sum assured, the maturity amount is exempt from tax.
Proceeds from voluntary pension scheme (VRS).
Exemption: Amounts received under VRS are tax free up to Rs 5,00,000.
Example: Priya chooses VRS and receives Rs 4,50,000. Because this is below the exemption limit, the entire amount is tax-free.
Transportation Allowances for Specially Disabled Taxpayers
Exemption: Specially disabled taxpayers can claim transportation allowances up to a certain limit.
Example: Aman, who has a disability, receives a transportation allowance of Rs 3,200 per month. He can claim this entire amount, Rs 38,400 per year, as tax deduction.
Transportation costs
Exemption: Maximum Rs 1,600 per month for expenses incurred for transportation while performing duties.
Example: Neha receives a monthly transportation allowance of Rs 1,600 for commuting. Her annual exemption is INR 19,200, fully tax exempt.
Costs of travel during a tour or transfer
Exemption: Reimbursements for travel expenses during an official tour or transfer are exempt.
Example: Vikram is transferred to another city and incurs INR 15,000 in travel expenses, which are reimbursed by his employer. This compensation is not taxable.
Per diem allowances
Exemption: Reimbursements for daily expenses outside the regular place of employment are exempt.
Example: While on a business trip, Sana receives a daily allowance of Rs 800 for 5 days, which totals Rs 4,000. This compensation is tax exempt as it covers costs incurred outside her normal place of employment.
To remind:
The new regime does not allow exemptions or deductions for popular tax-saving options such as PPF, ULIPs, ELSS or health insurance premiums (section 80C and 80D).
Allowances such as House Rent Allowance (HRA) and Leave Travel Allowance (LTA) also do not apply under the new regime.
It is crucial to compare your potential tax liability under both regimes before making a choice. Consider your income level, investment habits and expenses to see which regime offers a lower tax burden.
First print: March 20, 2024 | 9:05 am IST