Two things in life are inevitable – death & taxes. So the maxim goes. While the former is surely unavoidable, the latter can be managed, but only to an extent. Speaking of taxes, we all know that any income received in any form by an employee is subject to tax. It is now upto each employee to be prudent and avail of the various options provided by the government to reduce the taxable income or the tax liability itself.
Let us now discuss about some of the tax-free allowances that will help in reducing taxable income. Income tax rules specify that certain allowances that are paid by employer and attributed to business needs are exempt from income tax. These are popularly known as Flexible Benefit Allowances (or flexi allowances). For this, employees are required to plan & allocate necessary funds from their own CTC towards these flexi allowances and hence it is called Flexi Benefit Plan (or FBP). They need to submit their FBPs to their respective Payroll departments at the beginning of each financial year.
To illustrate further, let us suppose an employee has a taxable income of Rs.400,000 per annum. The tax rate applicable is 5% and hence the tax payable would be Rs.20,000. However, if the employee choses to allocate Rs.25,000 towards FBP, then the taxable income would be Rs.400,000 (-) Rs.25,000 = Rs.375,000. Applying the same tax rate of 5%, the tax would be Rs.18,750, thereby providing a cash savings of Rs.1,250 to the employee.
Now that we understand the fundamentals, let us look at the various types of flexi allowances. The most common ones are House Rent Allowance (HRA), Leave travel Allowance (LTA), Telephone Reimbursements, Uniform Allowance, Meal Allowance, etc. There are additional allowances when a car or house is provided to certain categories of employees of an organisation but these are not fully tax-free. Please note there are specific rules for each of the allowances under which to claim the exemption as well as maximum limits to the amounts under which one can allocate the funds. Limits on certain allowances such as HRA, meals and uniform allowances are determined by the Income tax department while the others are fixed by C&B teams, who in turn, go generally by market practice.
Post the FBP submission by the employee, Payroll team will park aside those funds from their taxable income & pay them as & when employees submit valid bills or receipts as supporting documents. These documents are subject to audit by either internal auditors or inspectors from the income tax department at any point in time and as far back as 10 years.
Hope this information would now help you to plan your taxes well for the new financial year 2018-19. Happy planning!!