[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)]:
(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.