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Allowances in Salary : Different types of allowances are given to employees by their employers. Generally allowances are given to employees to meet some particular requirements like house rent, expenses on uniform, conveyance etc. Under the Income-tax Act, 1961, allowance is taxable on due or receipt basis, whichever is earlier.
Normally, there are 3 types of allowances :-
- Fully Exempt
- Fully Taxable
- Partly Taxable
In this article we will discuss allowances which are partly taxable and partly exempt.
House rent allowance [Section 10(13A)]
HRA is a special allowance specifically granted to an employee by his employer towards payment of rent for residence of the employee. HRA granted to an employee is exempt to the extent of least of the following:
| Metro Cities | Other Cities |
|---|---|
| 1) HRA actually received for the relevant period | 1) HRA actually received for the relevant period |
| 2) Rent paid (-) 10% of salary for the relevant period | 2) Rent paid (-) 10% of salary for the relevant period |
| 3) 50% of salary for the relevant period | 3) 40% of salary for the relevant period |
Notes
- Exemption is not available to an assessee who lives in his own house, or in a house for which he has not incurred the expenditure of rent.
- Relevant period means the period during which the said accommodation was occupied by the assessee during the previous year.
- Salary for this purpose means basic salary, dearness allowance, if provided in terms of employment and commission as a fixed percentage of turnover.
Special allowances to meet expenses relating to duties or personal expenses [Section 10(14)]
This clause provides for exemption (as per Rule 2BB) in respect of the following:
(i) Special allowances or benefit, not being in the nature of a perquisite, specifically granted to meet expenses incurred wholly, necessarily and exclusively in the performance of the duties of an office or employment of profit [Section 10(14)(i)]
For the allowances under this category, there is no limit on the amount which the employee can receive from the employer, but whatever amount is received should be fully utilized for the purpose for which it was given to him.
The following allowances have been prescribed in Rule 2BB:
A. Allowances prescribed for the purposes of section 10(14)(i)
- any allowance granted to meet the cost of travel on tour or on transfer (Travelling Allowance); Explanation – “allowance granted to meet the cost of travel on transfer” includes any sum paid in connection with the transfer, packing and transportation of personal effects on such transfer.
- any allowance, whether granted on tour or for the period of journey in connection with transfer, to meet the ordinary daily charges incurred by an employee on account of absence from his normal place of duty (Daily allowance);
- any allowance granted to meet the expenditure incurred on conveyance in performance of duties of an office or employment of profit (Conveyance Allowance);
- any allowance granted to meet the expenditure incurred on a helper where such helper is engaged in the performance of the duties of an office or employment of profit (Helper Allowance);
- any allowance granted for encouraging the academic, research and training pursuits in educational and research institutions (Research allowance);
- any allowance granted to meet the expenditure on the purchase or maintenance of uniform for wear during the performance of the duties of an office or employment of profit (Uniform Allowance).
Note
An employee, being an assessee, who opts for the provisions of section 115BAC would be entitled for exemption only in respect of travelling allowance, daily allowance and conveyance allowance mentioned in (a) to (c) above.
B. Allowances prescribed for the purposes of section 10(14)(ii)
| S. No. | Name of Allowance | Extent to which allowance is exempt |
|---|---|---|
| 1 | Any Special Compensatory Allowance in the nature of Special Compensatory (Hilly Areas) Allowance or High Altitude Allowance or Uncongenial Climate Allowance or Snow Bound Area Allowance or Avalanche Allowance | Rs. 800 or Rs. 300 per month depending upon the specified locations Rs. 7,000 per month in Siachen area of Jammu and Kashmir |
| 2 | Any Special Compensatory Allowance in the nature of border area allowance or remote locality allowance or difficult area allowance or disturbed area allowance | Rs. 1,300 or Rs. 1,100 or Rs. 1,050 or Rs. 750 or Rs. 300 or Rs. 200 per month depending upon the specified locations |
| 3 | Special Compensatory (Tribal Areas/Schedule Areas/Agency Areas) Allowance [Specified States] | Rs. 200 per month |
| 4 | Any allowance granted to an employee working in any transport system to meet his personal expenditure during his duty performed in the course of running such transport from one place to another, provided that such employee is not in receipt of daily allowance | 70% of such allowance upto a maximum of Rs. 10,000 per month |
| 5 | Children Education Allowance | Rs. 100 per month per child upto a maximum of two children |
| 6 | Any allowance granted to an employee to meet the hostel expenditure on his child | Rs. 300 per month per child upto a maximum of two children |
| 7 | Compensatory Field Area Allowance [Specified areas in Specified States] | Rs. 2,600 per month |
| 8 | Compensatory Modified Field Area Allowance [Specified areas in Specified States] | Rs. 1,000 per month |
| 9 | Any special allowance in the nature of counter insurgency allowance granted to the members of the armed forces operating in areas away from their permanent locations. | Rs. 3,900 per month |
| 10 | Any transport allowance granted to an employee who is blind or deaf and dumb or orthopedically handicapped with disability of the lower extremities of the body, to meet his expenditure for commuting between his residence and place of duty | Rs. 3,200 per month |
| 11 | Underground Allowance granted to an employee who is working in uncongenial, unnatural climate in underground mines. | Rs. 800 per month |
| 12 | Any special allowance in the nature of high Altitude allowance granted to the member of the armed forces operating in high altitude areas |
a. For altitude of 9,000 to 15,000 feet = Rs. 1,060 per month b. For above 15,000 feet = 1,600 per month |
| 13 | Any special allowance in the nature of special compensatory highly active field area allowance granted to the member of the armed forces | Rs. 4,200 per month |
| 14 | Any special allowance in the nature of Island (duty) allowance granted to the member of the armed forces in Andaman & Nicobar and Lakshadweep Group of Islands | Rs. 3,250 per month |
Notes
- Any assessee claiming exemption in respect of allowances mentioned at serial numbers 7 & 8 and 9 shall not be entitled to exemption in respect of the allowance and disturbed area allowance referred at serial number 2, respectively.
- An employee, being an assessee, who opts for the provisions of section 115BAC would be entitled for exemption only in respect of transport allowance granted to an employee who is blind or deaf and dumb or orthopedically handicapped with disability of the lower extremities of the body to the extent of ` 3,200 p.m.
Frequently Asked Questions (FAQ)?
As per the Income Tax Act, allowances are the employer’s financial benefits to the employee in addition to the basic salary for meeting various expenditures.
In terms of taxability, there are 3 types of allowances;
In Income Tax Act, 1961 there are different provision of each type of allowance given by employer. These provisions are explained in the aforementioned paragraphs.
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