Remember, not all tax-saving allowances are created equal. Some more than others can provide substantial tax benefits, significantly impacting your take-home salary and tax outgo. According to chartered accountant Vijaykumar Puri, partner at VPRP & Co. Llp, the first critical step is understanding your salary structure. “The key is ensuring all allowances are properly structured in your salary,” he advised.
Mint helps you understand exactly what documents are needed for each allowance.
On house rents and home loans
“The conditions to claim house rent allowance (HRA) exemption are detailed under Section 10(13A) of the Income Tax Act and can indeed be complex,” said Puri. “The amount eligible for tax exemption is the least of the following three components: actual HRA received; 50% of the salary if the taxpayer resides in a metro city (or 40% for non-metro cities); and the amount by which the rent paid annually exceeds 10% of the basic salary and dearness allowance.”
This information must be correctly updated in the Investment Declaration along with your landlord’s details.
Chirag Wadhwa, founder of Wadhwa Chirag & Associates, Chartered Accountants, clarified that “one of the key conditions to claim HRA is that the employee should not own a residential property in the same city where they are residing. However, if the individual owns a flat in a different city and it is rented out, they can still claim HRA exemption without any issues”.
To claim a deduction on home loan interest under Section 24(b) of the Income Tax Act, salaried individuals need to maintain certain key documents. These include the loan sanction letter and an interest certificate from the lender, which detail the amount of interest paid during the financial year.
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Car allowances
Car-related allowances can be a complex aspect. Employees typically receive a capped allowance of ₹1,800 per month, translating to about ₹21,600 annually. To claim this, you will need to maintain a meticulous record of your expenses, including original fuel bills and maintenance service receipts.
“Car allowance exemptions depend on usage, ownership and documentation. For a car owned by the employee and used partly for official duties, exemption up to ₹1,800 per month (plus ₹900 for a driver) is allowed, provided it is supported by proper logs. In contrast, if the car is owned by the employer and used wholly for official purposes, the entire reimbursement is exempt from tax,” Puri explained.
Car allowance exemptions depend on usage, ownership and documentation. For a car owned by an employee and used partly for official duties, exemption up to ₹1,800 per month (plus ₹900 for driver) is allowed.
When it comes to car driver wages, the complexity increases. These expenses require comprehensive documentation, including the driver’s salary receipts, and may require employment agreement, and proof of payment.
You may have to also submit a copy of the vehicle’s RC book and/or the driver’s license every financial year. These documents must be provided along with the supporting bills at the time of your first claim submission during the applicable financial year.
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Leased cars
As for leased cars, two primary scenarios emerge. In the first, the company takes a car on lease and provides it to the employee for official and potentially personal use. “When the company leases the car, the lease amount gets added to the employee’s CTC as a perquisite,” Puri said. This means the lease value becomes part of the taxable income, offering no direct tax advantage.
Employees have to pay a fixed perquisite tax if they use the car for personal use as well. The monthly perquisite tax ranges from ₹1,800 to ₹2,400 depending on the engine capacity of the car leased. If the employee is also claiming reimbursement on the driver’s salary, an additional ₹900 is to be paid.
The alternative scenario involves employees personally leasing vehicles and seeking reimbursement. Here again, meticulous documentation is crucial. Employees must submit comprehensive lease agreements, original bills, and payment proofs. “The key is ensuring these expenses are part of the formal salary structure,” Puri emphasized.
There’s, however, no standardized cap on car lease allowances. While fuel expenses are typically limited to ₹1,800 monthly, the lease amount varies widely based on individual company policies. “Each organization approaches this differently,” Puri said.
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The tax implications are equally intricate. Unlike standard deductions, car lease doesn’t offer a straightforward tax-saving mechanism. Employees must navigate a labyrinth of company-specific guidelines, employment contracts, and tax regulations.
The takeaway: Car lease allowances are less about tax optimization and more about understanding the nuanced relationship between employer, employee, and tax regulations. Transparency, documentation, and a keen understanding of one’s employment contract are key to navigating this complex terrain.
Puri cautioned that employer-provided car leases may not always be the most cost-effective choice. “A lot of times, employees find that the corporate car lease option is more expensive—even after factoring in the tax benefit—compared to buying or leasing the car independently. Not to mention, if the employee leaves the organization before the lease tenure ends, the benefits recovered by the employer can be significant,” he said.
At the end of the lease tenure, the employee can choose to surrender the car or buy it by paying the residual value of the car, which can range from 50-10% of the car’s value.
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Communications perks
Telephone and internet expenses can also be claimed with post-paid invoices. The National Pension System (NPS) presents an interesting tax-saving avenue, especially for those in higher tax brackets.
“The employer’s contribution to the National Pension System (NPS) is exempt under both tax regimes, but the limits differ. For Central Government employees, contributions up to 14% of basic salary and dearness allowance (DA) are exempt even under the new tax regime,” Puri said.
For other employees, the cap is 10% of basic plus DA under the old regime, and 14% under the new regime.
Old vs new tax regimes
When selecting tax regimes, consider your specific circumstances.
Let’s take the case of Mr. A, who earns ₹25 lakh annually. Over the course of a year, he invests ₹1,50,000 in tax-saving instruments like ELSS, PPF, or tax-saving fixed deposits under Section 80C. He also contributes ₹50,000 to the National Pension System (NPS), qualifying for an additional deduction under Section 80CCD(1B).
On top of that, he claims ₹2,00,000 as home loan interest deduction under Section 24(b). His medical insurance premium of ₹25,000 for self and family gives him further tax relief under Section 80D. As part of his salary structure Mr. A also avails a car lease component through his employer, enabling him to claim tax-saving benefits worth ₹3,00,000.
Additionally, he donates ₹150,000 to a registered charitable trust, which qualifies for deduction under Section 80G. Donations to charitable trusts approved under Section 80G typically qualify for a 50% deduction, while contributions to registered political parties under Section 80GGC are eligible for a 100% deduction, both subject to applicable conditions and limits.
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Together, all these deductions add up to ₹8,00,000—right at the breakeven point where the tax payable under the old and new regimes is nearly the same. If Mr. A manages to push his deductions even slightly beyond this point, whether through additional eligible investments or expenses, the old regime will be more tax-efficient. That’s because it will further reduce his taxable income and move him into a lower tax bracket, or at least reduce the tax on part of his income.
Also, high rent payers or those with home loans might find the old tax regime more beneficial. However, for most employees, the new tax regime offers more straightforward taxation with fewer complications.
The new tax regime makes sense when your total deductions and exemptions are less than the breakeven point for your income level. It’s ideal for those with a simpler salary structure, fewer investments, or who prefer hassle-free, low-documentation tax filing.
According to Puri, the goal is not just to save tax but also to ensure that these deductions are aligned with your financial goals.
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