Allowance and Its Types | Salary Income

[Meaning of Allowances, Types of Allowances, Fully Taxable Allowances, Partly Taxable Allowances, Fully Exempted Allowances, Allowances for Official Duties]

What is Allowances? What are its various types?

Meaning of Allowances in Income Tax [Section 17(3)]: 

An allowance is defined as a fixed amount of money given periodically in addition to the salary to meet some specific requirements connected with the service rendered by the employee or by way of compensation for some unusual conditions of employment. It is taxable on due/accrued basis whether it is paid in addition to the salary or in lieu thereof. The basic rule is that all such allowances are taxable as these are paid because of the direct relationship between an employer and employee. However, certain allowances have been exempted subject to certain conditions. These are divided into various categories based on their tax treatment. These are:

(i) Allowances for the performance of official duties.

(ii) Partly taxable allowance

(iii) Fully exempted allowance

(iv) Fully-taxable allowance

(i) Allowances for the performance of official duties.

(i) Allowances for the performance of official duties are exempt to the extent of actual amount received or the amount spent for the performance of the duties of an office or employment of profit, whichever is less. These allowances are:

a.       Conveyance allowance

b.      Helper allowance

c.       Academic research allowance

d.      Uniform allowance

e.      Travelling allowance

(ii) Partly taxable allowance: 

Partly taxable allowance includes the following: (A+B+C)

A) House Rent allowance [Sec.10 (13A)]: House rent allowance (HRA) received by an employee from his employer is an exempted income. If the actual house rent allowance received by the employee is in excess of the lowest limit as prescribed, the excess sum will be taxable salary. HRA is exempt from tax to the lower of the following.

(a) 50% of Salary in Mumbai, Kolkata, Chennai, Delhi; 40% of salary in other cases.

(b) Actual amount of house rent allowance received; or

(c) The excess of rent paid over 10% of salary.

If the employee is living in his own house or in a house where he is not paying any rent, HRA is fully taxable.

Salary for this purpose means basic salary and dearness allowance if the terms of employment so provide. It also includes any commission based on a fixed percentage of turnover achieved by the employee, as per the terms of the service contract. However, it excludes all other allowances and perquisites.

B) Entertainment Allowance: Entertainment allowance is fully taxable for non-government employees. But in case of a government employee’s a deduction is allowed u/s 16(ii) at the least of the following:

(a)    Statutory limit: 5000

(b)   1/5th of basic salary

(c)    Actual entertainment allowance

C) Some other allowances are:

Nature of benefit/allowance/perquisite

Amount of exemption

                (i) Children education allowance

Rs. 100 p.m. per child for a maximum of 2 children

                (ii) Hostel expenditure allowance

Rs. 300 p.m. per child for a maximum of 2 children

                (iii) Special compensatory (Tribal area/ Schedule area/Agency area) allowance

Rs. 200 p.m.

                (iv) Transport allowance

Only for handicapped employees Rs. 3200 p.m.

                (v)          Allowance to transport employees

70% of the allowance, the maximum Rs. 6000 p.m.

                (vi)         Underground allowance

Rs. 800 p.m.

(iii) Fully exempted allowance

a.      Allowances to a citizen of India, who is a Government employee, rendering services outside India. [Section 10(7)]

b.      Allowances to High Court judges

c.       Sumptuary allowance given to the High Court and the Supreme Court judges.

d.      Allowance received by an employee of UNO from his employer.

(iv) Fully-taxable allowance: 

All other allowances excepting those discussed above are fully taxable. Some of such allowances are enumerated as under:

a)      Dearness Allowance (DA): Dearness Allowance is the cost of living adjustment allowance which the government pays to the employees of the public sector as well as pensioners of the same.

Dearness Allowance can be understood as a component of salary which is some fixed percentage of the basic salary, aimed at hedging the impact of inflation. Since DA is directly related to the cost of living, the DA component is different for different employees based on their location. This means DA is different for employees in the urban sector, semi-urban sector or the rural sector. Dearness allowance and dearness pay is fully taxable

b)      City and Capital Compensatory Allowance (CCA)

c)       Medical Allowance: Fully taxable.

d)      Lunch Allowance/Tiffin allowance

e)      Deputation allowance

f)       Officiating allowance

g)      Cash Allowance

h)      Overtime Allowance

i)        Servant Allowance

j)        Warden Allowance

k)      Water and electricity allowance

l)        Conveyance allowance

m)    Holiday trip allowance

n)      Non-practicing Allowance

o)      Marriage and Family Allowance

p)      Entertainment allowance is fully taxable for non-government employees.