Allowances – Tax treatment for Computing Salary Income

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Allowance is a fixed monetary amount paid by the employer to the employee for meeting some particular expenses, whether personal or for the performance of his duties. These allowances are generally taxable and are to be included in the gross salary unless a specific exemption has been provided in respect of any such allowance. Specific exemptions in respect of allowances are provided under the following sections:

(i) House Rent Allowance — Section 10(13A)

(ii) Prescribed Special Allowances — Section 10(14)

The above allowances shall be exempt either in full or upto a certain limit and the balance, if any, shall be taxable and thus included in gross salary.

The Tax treatment of some of the allowances is as under for computing Salary income:

Allowance - Tax treatment for computing Salary income
Allowance – Tax treatment for computing Salary income

1. House Rent Allowance-HRA [Section 10(13A) and Rule 2A]

Quantum of Exemption:

Minimum of following three limits:

 Mumbai / Kolkata / Delhi / ChennaiOther Cities
(i)Allowance actually ReceivedAllowance actually Received
(ii)Rent Paid in excess of 10% of SalaryRent Paid in excess of 10% of Salary
(iii)50% of Salary40% of Salary
Exemption of House Rent Allowance (HRA) Section 10(13A)

Note :
The exemption in respect of HRA is based upon the following factors:

(1) Salary
(2) Place of residence
(3) Rent paid
(4) HRA received.Since there is a possibility of change in any of the above factors during the previous year, exemption for HRA should not always be calculated on annual basis. As long as there is no change in any of the above factors it can be calculated together for that period. Whenever there is a change in any of the above factors, it should be separately calculated till the next change.

2. Prescribed Special Allowances which are Exempt to a certain extent – Section 10(14)

(i) Special Allowances for performance of official duties:

These allowances will be exempt the extent such expenses are actually incurred for that purpose. [Section 10(14)(i)].

These allowances are not in the nature of a perquisite within the meaning of section 17(2) and are specifically granted to meet expenses wholly, necessarily and exclusively incurred in the performance of duties of an office or employment of profit.

Nature of Benefit / Allowance / Perquisites :

These allowances are:

  1. Travelling allowance:
  2. Daily allowance:
  3. Conveyance allowance:
  4. Helper allowance:
  5. Academic allowance:
  6. Uniform allowance:Any allowance, by whatever name called, granted to meet the expenditure incurred on the purchase or maintenance of uniform for wear during the performance of the duties of an office or employment of profit.

Amount of Exemption :

The above allowances shall be exempt to the extent of minimum of the following:

  1. Actual allowance received.
  2. Actual amount spent for the purposes of duties of office or employment.

(ii) Allowances to meet Personal Expenses

These allowances can be of the following two types:

1. Allowances which are exempt to the extent of amount received or the limit specified, whichever is less:

  1. Children Education Allowance: Rs.1,000 p.m. per child for a maximum of 2 children.
  2. Hostel expenditure allowance: Rs.300 p.m. per child for a maximum of 2 children.
  3. Tribal area, Scheduled Area/Agency area allowance: Rs. 200 p.m.
  4. Special compensatory hilly area allowance or high altitude allowance etc.: Exemption varies from Rs. 300 p.m. to Rs. 7,000 p.m.
  5. Border area, remote area allowance, disturbed area allowance, etc.: (as per given later): Exemption varies from Rs. 200 p.m. to Rs. 1,300 p.m.
  6. Compensatory field area allowance: Rs. 2,600 p.m.
  7. Compensatory, modified field area allowance: Rs. 1,000 p.m.
  8. Counter insurgency allowance granted to members of armed forces: Rs. 3,900 p.m.
  9. Transport allowance: Nil, w.e.f. 2019-20, but for handicapped employee Rs. 3,200 p.m.
  10. Allowance to Transport Employees : 70% of the Allowance, maximum Rs.10,000 p.m.
  11. Underground allowance: Rs. 800 p.m.
  12. High altitude (uncongenial climate) allowance: Given to the member of the armed forces for altitude of  9000 ft to 15000 ft ₹1,060 p.m. and for altitude above 15000 ft ₹1,600 p.m. 
  13. Special compensatory highly active field area allowance granted to members of armed forces: Exempt  to the extent of ₹4,200 p.m. 
  14. Island (duty) allowance: Given to the member of the armed forces in the Andaman & Nicobar and  Lakshadweep Group of Islands exempt to the extent of ₹3,250 p.m.

2. Allowance which is exempt to the extent of certain percentage of amount received

Allowance allowed to transport employees working in any transport system:

If any fixed allowance is given by the employer to the employee who is working in any transport system, to meet his personal expenditure during his duty performed in the course of running of such transport from one place to another,

  • the amount of exemption shall be 70% of such allowance or
  • ₹10,000 p.m.,
    • whichever is less.

Note : Exemption will be allowed to the transport employees only when they are not in receipt of daily allowance.

3. Treatment of Entertainment Allowance

This deduction is allowed only to a Government employee. Non-Government employees shall not be eligible for any deduction on account of any entertainment allowance received by them.

In case of entertainment allowance, the ssesse is not entitled to any exemption but he is entitled to a deduction under section 16(ii) from gross salary. Therefore, the entire entertainment allowance received by any employee is added in computation of the gross salary. The Government employee is, then, entitled to deduction from gross salary under section 16(ii) on account of such entertainment allowance to the extent of minimum of the following 3 limits.

  1. Actual Entertainment Allowance received during the previous year.
  2. 20% (or 1/5th.) of his salary exclusive of any allowance, benefit or other perquisite.
  3. ₹5,000.
Note :
1. For purpose of deduction in respect of entertainment allowance, the actual amount spent towards entertainment expenses is irrelevant. Even if the Government employee spends the entire amount of entertainment allowance or even an amount greater than the entertainment allowance received is spent on entertainment for official purposes, the deduction shall be minimum of the above 3 limits.

2. Amount actually spent out of entertainment allowance is irrelevant for claiming deduction.

3. Sumptuary allowance has to be treated as an entertainment allowance.

4. Allowances which are Exempt in case of certain Persons

  1. Allowances to a citizen of India, who is a Government employee, rendering services outside India. [Section 10(7)]
  2. Allowances to High Court judges under section 22A(2) of the High Court Judges (Conditions of Service) Act, 1954.
  3. Sumptuary allowance given to High Court and the Supreme Court judges. Sumptuary allowance are in the nature of entertainment allowance.
  4. Allowance received by an employee of United Nations Organisation (UNO) from his employer.

5. Allowances which are Fully Taxable

All other allowances excepting those discussed in preceding paras, are fully taxable. Some of such allowances are enumerated as under:

  1. Dearness Allowance (DA)
  2. City Compensatory Allowance (CCA)
  3. Medical Allowance: Fully taxable, irrespective of whether any amount has been spent on medical treatment or not.
  4. Lunch Allowance/tiffin allowance
  5. Overtime Allowance
  6. Servant Allowance
  7. Warden Allowance
  8. Non-practising Allowance
  9. Family Allowance

6. List of Different ‘Allowances’ for Computation of ‘Salary’ Income

City compensatory allowanceFully taxable under section 15.
House rent allowanceExempt from tax to the extent of the least of the following:

i. 50% of salary in Delhi, Bombay, Calcutta, Madras; or
40% of salary in other cases;

ii. House Rent Allowance; or

iii. the excess of rent paid over 10% of salary.
Entertainment allowanceThis allowance is first included in salary and thereafter a deduction is allowed. In the case of Government employees, least of the following is exempt from tax:

i. Rs. 5,000;

ii. 20% of salary; or

iii. Entertainment Allowance.
Children education allowanceIt is exempt from tax to the extent it does not exceed Rs. 100 per month per child for a maximum of 2 children

(actual expenditure is not taken into consideration).
Hostel expenditure allowanceIt is exempt from tax to the extent it does not exceed Rs. 300 per month per child for a maximum of 2 children

(actual expenditure is not taken into consideration).

Exemption is in addition to the exemption available in the case of children education allowance.
Transport allowanceIt is given to an employee to meet his expenditure for the purpose of commuting between office and residence.

>> In the case of an employee who is blind or deaf and dumb or orthopedically handicapped, transport allowance is exempt up to Rs. 3,200 per month.

>> In the case of serving Chairman and members of UPSC, transport allowance is exempt from tax without any monetary ceiling.

>>In any other case, exemption is Not available w.e.f. A.Y. 2019-20.
Allowance For Transport EmployeesIt is given to employees of transport undertaking to meet their personal expenditure during duty performed in the course of running of such transport from one place to another place.

The amount is exempt to the extent it does not exceed …
i. 70 % of the allowance or

ii. Rs. 10,000 per month,

whichever is lower

(actual expenditure is not taken into consideration).
Tribal Area AllowanceExempt up to Rs. 200 per month in some cases
Travelling Allowance, Conveyance Allowance, Helper Allowance, Research Allowance,
Uniform Allowance
These allowances are given to meet specific expenditure in performance of duties of an office.

>> Exemption is available to the extent the amount is utilized for the specific purpose for which the allowance is given.
Transfer AllowanceIt is exempt from tax to the extent expenditure is incurred in connection with transfer, packing and transportation of personal effects on transfer from one place to another place.
Foreign AllowanceExempt from tax if paid outside India by the Government to an Indian citizen for rendering service outside India.
Tiffin AllowanceTaxable.
Fixed Medical AllowanceTaxable.
Allowance received by a Teacher/ Researcher from a
SAARC Member State
Not taxable up to 2 years.
Sumptuary allowance to serving Chairman/members of UPSCNot chargeable to tax.
Allowance to retired Chairman and retired members of UPSCAn allowance (subject to a maximum of Rs. 14,000 per month) for defraying the service of an orderly and for meeting expenses incurred towards secretarial assistance on contract basis, is not chargeable to tax.

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