Tax-Free Incomes For Salaried Persons To Fund Their Home Purchase

Do you often not rue the fact that if only you did not have to let go of a great deal of your money in taxes, you will soon enough be able to save enough money to make the down payment for your home purchase? Truth is, depending on the bracket they fall in, all salaried employees have to pay a certain percentage of their income as income tax. While those earning up to Rs 2.5 lakh are exempt, those earning an income between Rs 2.5 lakh and Rs 5 lakh have to pay five per cent tax on their taxable income. For instance, if you are earning Rs 3 lakh as your annual income, Rs 50,000 is your taxable income. Additionally, three per cent of the income tax amount has to be paid towards education cess.  While annual income of between Rs 5-10 lakh is taxed at the rate of 20 per cent, plus education cess, annual income over Rs 10 lakh is taxed at 30 per cent, apart from the standard education cess. Because your employer diligently deducts the tax at source, you may be well aware of your liabilities to the income tax department. However, you may not be aware what your tax liabilities are in certain special cases. Let us look at certain circumstances in which your income tax liability is waived, and how you could use this tax-free income to fund your property purchase.

Do you have to pay taxes on your pension money?

Typically, a government employee receives a lump sum amount as the time of his retirement. This part of your pension is known as commuted pension. Apart from this amount, he also receives a monthly pension, known as un-commuted pension. Now, under Section 10(10A) of the Income Tax (I-T) this commuted pension is fully exempt from tax. However, exemption is not available for your monthly pension.

Those employed in the private sector also enjoys certain benefits. Under the same Section, one-third of the full value of the commuted pension will be exempt if an employee receives a gratuity. If the employee does not receive a gratuity, one-half of full value of commuted pension will be exempt from tax.

Also read: Property Tax Benefits You Can Avail Of This Year

What about leave encashment?

Government and private employees both are entitled to avail of a certain number of paid leaves, known as PLs. In case you do not take any PLs, you could get the leaves will en-cashed. Under Section 10(10AA) of the Act, leave encashment by a government employee at the time of retirement is exempt from tax.

In case of a private employee, the exemption will be the least of the following:

• The period of earned leave standing to the credit in the employee's account at the time of retirement

• Average monthly salary

• Maximum amount as specified by the Government (Rs 3 lakh).

• Leave encashment actually received at the time of retirement.

Do note here that leave credit to the account of the employee at the time of retirement is restricted to 30 days per year of service if leave entitlement as per service rules exceeds 30 days per year of actual service. The salary for the above purpose means average salary drawn in the past 10 months preceding the retirement.

What are the tax implications on taking voluntary retirement?

What would be the tax implications of opting for the voluntary retirement scheme (VRS)? According to Section 10(10C), the compensation received at that time is exempt from tax if the following conditions are satisfied:

• Compensation is received at the time of voluntary retirement or termination.

• Compensation is received by an employee of following entities:

1. Public sector unit

2. Any other company

3. An authority established under a Central, State or Provincial Act

4. A local authority

5. A co-operative society

6. A university recognised by the University Grants Commission Act

7. An Indian Institute of Technology

8. Any state government

9. The Central government

10. Notified institutes having importance throughout India

11. Notified institute of management

Do note that you can avail of the exemption only for one assessment year, and the maximum amount of exemption is Rs 5 lakh.

What about the compensation one receives at the time of sacking?

If owing to an unfortunate play of fate your employer decided to let you go, the compensation you receive at that time is exempt from tax.  Under the Industrial Dispute Act, an employee is entitled to retrenchment compensation equal to 15 days' average pay for each completed year of continuous service, or any part in excess of six months. According to Section 10(10B) of the I-T Act, compensation received at the time of retrenchment is exempt from tax to the extent of lower of the following:

• An amount calculated in accordance with the provisions of Section 25F (b) of the Industrial Dispute Act, 1947, or

• The maximum amount specified by the government (Rs 5lakh), or

• The actual amount received

• Any exceeding income is taxable as salary. Do note that the above-mentioned limits are not applicable in cases where compensation is paid under any scheme approved by the government.

How do these provisions help homebuyers?

They have to save money for several years before homebuyers — well, at least a large part of them — are able to save enough money to make the down-payment for a property. The “un-taxed” money that you receive as commuted pension or leave encashment or part of the VRS package could solve that problem for a homebuyer. In case you already own a property and repaying a home loan, the money thus received could be used to prepay your home loan.  In case of job loss, this little extra money could help you run your household successfully till you can find a new job. 

Also read: Know Your Tax Benefits As A Homebuyer