Personal Finance

Exemptions and deductions allowed under new tax regime

Keerthi Sanagasetti BL Research Bureau | Updated on July 01, 2020 Published on July 01, 2020

For the salaried class, opting for the lower tax regime could result in a whole gamut of exemptions and deductions on various allowances being out of bounds

Budget 2020 introduced the option for individual taxpayers to pay taxes at lower rates beginning FY21 if they forego certain exemptions and deductions. The government has sweetened the deal recently, with the Central Board of Direct Taxes (CBDT) notifying certain allowances that can continue to be claimed as deduction, even after opting for the lower tax regime. Not only this, there are a few other exemptions and deductions that are still available. Here’s more on what you can and cannot avail:

Some allowances permitted

For the salaried class, opting for the lower tax regime could result in a whole gamut of exemptions and deductions on various allowances being out of bounds. For instance, the standard deduction of ₹50,000, deduction on professional tax paid, leave travel allowance (LTA) and house rent allowance (HRA) cannot be availed.

The recent CBDT notification, however, provides some relief. Per the notification, the exemption on conveyance allowance (in cases where the employer does not provide free conveyance) can be availed while opting for the lower tax rates.

Besides, employees can continue to avail deduction on account of travel allowance on official tours and transfers, even after opting for the lower tax rate. Similarly, other allowances granted on tour or for journey in connection with the transfer (to meet the ordinary daily charges incurred by an employee on account of absence from his normal place of duty) shall also continue to be exempt.

Employees with disabilities, such as those who are blind or deaf and dumb or orthopaedically handicapped with disability of lower extremities, are often granted transport allowances for their commute to office. While computing the taxable income, such allowances are exempt up to a limit of ₹3,200 per month. This exemption can also continue to be availed under the new lower tax regime.

But the good news ends here. Other allowances related to transport or transfer are not permitted.

For instance, certain employees are compensated for their transfers to hilly areas, or uncongenial climate, or border area, or remote, difficult, disturbed areas or tribal areas, by way of special allowances. Each of these allowances is exempt up to a certain limit if tax is paid at normal rates. These concessions cannot be availed under the new regime.

The CBDT notification has also clarified that no exemption will be available in respect of free food and non-alcoholic beverages provided by the employer through paid vouchers. The value of free food and non-alcoholic beverages provided by the employer through paid vouchers is treated as taxable income for employees. Such income is however, exempt in the old regime if the value of the meal does not exceed ₹50 per meal. Now, individuals opting for the lower tax rate cannot avail this exemption.

Exceptions under house property

Opting for the lower tax regime means that the deduction available for interest paid on home loan taken for your self-occupied property (under Section 24(b)) cannot be claimed. However, there are two things to cheer about. One, the standard deduction of 30 per cent on net rental income will continue in the new regime. Also, deduction on account of interest paid on home loan can continue to be claimed as a deduction against rental income on let out properties.

Receipts still exempt

It is well-known that tax benefit for certain investments and expenses falling under Chapter VI A such as PPF /NPS contribution or payment of medical and life insurance premiums cannot be availed by those opting for the new concessional regime. However, under the lower tax regime, you can continue to claim a deduction on any contributions made by your employer to the National Pension Scheme, or any other notified pension schemes (Section 80CCD (2)). A deduction of up to 10 per cent of salary (14 per cent in case of Central Government employees) is allowed on such contributions.

That apart, exemptions (subject to certain limits and conditions) available under Section 10 of the Income Tax Act, such as exemptions on receipt of pension, gratuity, leave encashment or any sum received on voluntary retirement, can be availed even after opting for the lower tax regime. Take, for instance, the exemption on leave encashment. If received upon resignation or retirement, leave encashment is fully exempt for government employees. For others, the exemption is limited to the least of the following: a) amount actually received as leave encashment, b) amount prescribed by the government — ₹3 lakh, c) 10 months average salary based on Basic and Dearness Allowance in the 10 months before leaving the job, and d) cash equivalent of the employee’s leave balance, subject to a maximum of 30 days for each completed year of service.

Even the receipts from insurance companies (subject to certain conditions), interest on PPF, Sukanya Samriddhi Scheme and the EPF are also exempt under the new regime.

What’s allowed

-- Conveyance allowance

-- Employer’s contribution to NPS

-- Gratuity, pension, and leave encashment receipts

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Published on July 01, 2020
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