Many employers in India provide a Flexible Compensation Structure (Flexi Pay), which allows employees to design part of their salary by choosing from different allowances and reimbursements. The objective is to optimize tax savings while meeting personal and professional needs.
However, not all Flexi Pay components are tax-free. Some are fully exempt, some are partly exempt subject to limits and proof, while others are fully taxable if not supported with bills or not eligible under the Income Tax Act, 1961.
1. Components exempt under the Income Tax Act if supported by proof.
Examples:
- LTA (Leave Travel Allowance) – exempt u/s 10(5) subject to conditions.
- Telephone / Internet Reimbursement – exempt to the extent of bills.
- Meal Coupons (Sodexo, Zeta etc.) – exempt up to ₹50 per meal.
- Fuel / Driver / Car maintenance – partly exempt if used for official purposes.
- Books & Periodicals – exempt if related to employment.
2. Components fully Taxable, if no specific exemption exists (e.g., special allowance, flexi cash not claimed against bills).
✅ So, “Reconciled Flexi Pay” (i.e., the part of flexi pay adjusted against bills/claims you submit) can be exempt to the extent allowed under relevant sections.
❌ The unreconciled portion (not claimed/without proof) is fully taxable as part of salary.
Let’s break down the common Flexi Pay components with their tax treatment under the Income Tax Act, 1961:
🔹 Component-wise Exemptions under Flexi Pay
| Flexi Component | Exemption Status | Exemption Limit / Condition |
|---|---|---|
| Leave Travel Allowance (LTA) | Exempt u/s 10(5) | Only domestic travel fare (economy air/train/bus). Allowed 2 journeys in a block of 4 years. |
| Telephone / Internet Reimbursement | Exempt | Actual bill reimbursement for official use. |
| Meal Coupons (Sodexo, Zeta, etc.) | Exempt | Up to ₹50 per meal, usually ₹2,200–2,500/month depending on working days. |
| Fuel Reimbursement (Car / Scooter) | Partly exempt | If owned by employee and used for official + personal: ₹2,700 p.m. (≤1600cc car), ₹3,300 p.m. (>1600cc car) + driver salary up to ₹2,400 p.m. |
| Driver Salary Reimbursement | Exempt (part) | Up to ₹2,400 p.m. if driver used for official duty with car reimbursement. |
| Books, Periodicals, Journals | Exempt | Actual expense, if related to employment/official use. |
| Uniform Allowance | Exempt | To the extent actually spent on official uniform. |
| Professional Development / Education Allowance | Exempt | If incurred for work-related training, skill development, or course fee (with proof). |
| Medical Reimbursement (old system) | ⚠️ Taxable now | Exemption of ₹15,000 withdrawn w.e.f. FY 2018–19. Covered under Sec. 80D (via insurance). |
| Special Allowance / Flexi Cash (unclaimed) | Fully Taxable | If not claimed against bills/proof, treated as salary. |
🔑 Key Points
- Only reconciled (claimed with bills/proof) components get exemption.
- Unreconciled (leftover) Flexi Pay is taxable as salary.
- Employer generally reflects the exempt portion separately in Form 16 Part B under “Exempt Allowances u/s 10”.
🔑 Usage Guide
- Always submit bills to employer → exempt portion will be shown in Form 16 Part B.
- If not claimed, the amount is added to taxable salary.
- For audit/ITR, keep bills for 6 years in case of scrutiny.