An allowance is the financial benefit given to the employee by the employer over and above the regular salary. These benefits are provided to cover expenses which may be incurred to facilitate the discharge of service. Allowances are taxable under the head “salaries”. Some of them are fully taxable, few of them are partly-taxable while others are fully exempt from taxes.
Following allowances are fully taxable:
- Dearness Allowance: Dearness Allowance (DA) is an allowance paid to employees as a cost of living adjustment allowance paid to the employees to cope with inflation. DA paid to employees is fully taxable with salary. The IT Act mandates that tax liability for DA along with salary must be declared in the filed return.
- Entertainment Allowance: This is an allowance provided to employees to reimburse the expenses incurred on the hospitality of customers. It is fully `taxable for non-government employees. For government employees least of the following amount is exempt from tax:
- 1/5th of salary (excluding any allowance, benefits or other prerequisites)
- Actual entertainment allowance received
- Overtime Allowance: Employers may provide an overtime allowance to employees working over and above the regular work hours. This is called overtime and any allowance received for this is fully taxable.
- City Compensatory Allowance: City Compensatory Allowance is paid to employees in an urban centre which may be highly expensive and to cope with the inflated living costs in the cities. This allowance is fully taxable.
- Fixed Medical Allowance: This is an allowance paid by the employer when the employee or any of his family members fall sick for the cost incurred on their treatment, the same is fully taxable.
- Interim Allowance: When an employer gives any Interim Allowance in lieu of final allowance, this becomes fully taxable.
- Project Allowance: When an employer provides an allowance to employees to meet project expenses, this is also fully taxable.
- Tiffin/Meals Allowance: Sometimes employers may provide Tiffin/Meals Allowance to the employees. This is fully taxable.
- Cash Allowance: When the employer provides a cash allowance like marriage allowance, bereavement allowance or holiday allowance, it becomes fully taxable.
- Servant Allowance: When an employer pays an employee to engage services of a servant, such an allowance is taxable.
Following Allowances are partly taxable:
- House Rent Allowance: When an employer pays an allowance for the employees’ accommodation it is called House Rent Allowance. It is exempt up to least of the following:
- HRA actually received by the employee
- Rent paid in excess of 10% of Salary
- In Metros i.e. Delhi, Mumbai, Chennai or Kolkata, as much as 50% of basic salary or else 40% of it, if the accommodation is in a non-metro.
Here, Salary means, Basic salary+ DA (if part of retirement benefit) + Turnover based Commission
House Rent Allowance is fully taxable if it is received by an employee who is living in his own house or if he does not pay any rent.
- Children Education Allowance: It is the allowance provided by the employer to meet the education expenditures of the children of the employee. It is exempt up to ₹100 per month per child up to a maximum of 2 children.
- Hostel Expenditure Allowance: It is the allowance provided by the employer for meeting hostel expenditures of the children of the employee. It is exempt up to ₹300 per month per child up to a maximum of 2 children.
- Transport Allowance: It is the allowance granted to an employee to meet expenditure on commuting between place of residence and place of duty. It is exempt up to ₹1,600 per month (₹3,200 per month for blind, deaf, dumb and handicapped employees).
- Conveyance Allowance: It is the allowance granted to an employee to meet the expenditure on conveyance in performance of duties of an office. It is exempt to the extent of expenditure incurred for official purposes.
- Travel Allowance: It is the allowance provided to an employee to meet the cost of travel on tour or on transfer. It is also exempt to the extent of expenditure incurred for official purposes.
- Daily Allowance: It is provided to meet the ordinary daily charges incurred by an employee on account of absence from his normal place of duty. It is also exempt to the extent of expenditure incurred for official purposes.
- Helper/Assistant Allowance: It is the allowance provided to the employee to meet the expenditures of a helper/assistant. It is also exempt to the extent of expenditure incurred for official purposes.
- Uniform Allowance: It is the allowance provided for maintaining any uniform provided by the employer. It is exempt up to actual expenditure incurred over the same.
- Research Allowance: It is the allowance granted for encouraging the academic research and other professional pursuits. It is exempt up to actual expenditure incurred.
- Other Special Allowances: Apart from the above-mentioned allowances, there are some other allowances granted for special purposes. They are:
|Special Compensatory Allowance for hilly areas or high-altitude allowance||₹800 for various areas of North East, Hilly areas of UP, HP. & J&K and ₹7000 per month for Siachen area of J&K and ₹300 for all places at a height of 1000 meters or more other than the above places.|
|Border area allowance or remote area allowance or a difficult area allowance or disturbed area allowance.||Various amounts ranging from ₹200 per month to ₹1300 per month are exempt.|
|Tribal area/Schedule area/Agency area allowance available in MP, Assam, UP., Karnataka, West Bengal, Bihar, Orissa, Tamil Nadu, Tripura||₹200 per month.|
|Any allowance granted to an employee working in any transport system to meet his personal expenditure during duty performed in the course of running of such transport from one place to another place.||70% of such allowance up to a maximum of ₹6000 per month.|
Following allowances are fully tax-free:
- Allowances paid to Govt. servants abroad: When servants of Government of India are paid an allowance while serving abroad, such income is fully exempt from taxes.
- Sumptuary allowances: Sumptuary allowances paid to judges of High Court and Supreme Court are not taxed.
- Allowance paid by UNO: Allowances received by employees of UNO are fully exempt from tax.
- Compensatory allowance paid to judges: When a judge receives compensatory allowance, it is not taxable.