Different types of allowances

19 Oct 2022

DIFFERENT TYPES OF ALLOWANCES:

     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, allowances are taxable on due or receipt basis, whichever is earlier. Following are the various types of allowances discussed.


 Allowances:


Fully Taxable:

  1. Entertainment Allowance

  2. Dearness Allowance

  3. Overtime Allowance

  4. Fixed Medical Allowance

  5. City Compensatory Allowance 

  6. Interim Allowance

  7. Servant Allowance

  8. Project Allowance

  9. Food Allowance

  10. Any Other Cash Allowance

  11. Warden Allowance

  12. Non Practicing Allowance

  13. Transport Allowance 


Partly Taxable:

  1. House Rent Allowance [u/s 10(13A)]

  2. Special Allowances [u/s10(14)]


Fully Exempt:

  1. Allowances to High Court Judges

  2. Allowances Paid by the United Nations Organization

  3. Compensatory allowance received by a judge

  4. Sumptuary allowance granted to High or Supreme Court judges

  5. Allowances granted to Government employees outside India.


Exemptions or Deductions on Fully Taxable Allowances:

  • Deduction towards Entertainment Allowance allowed only to Government employees.

  • Exemption on Transport Allowance allowed to blind/ deaf and dumb/ orthopedically handicapped employees up to Rs 3200 per month.


Exemptions or Deductions on Partly Taxable Allowances:

  1. House Rent Allowance (HRA) [u/s 10(13A)]: HRA is a special allowance specially 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:

  • HRA actually received for the relevant period.

  • Rent paid (-) 10% of Salary for the relevant period.

  • 50% of Salary if residence in metro cities or 40% of Salary if residence other than metro cities.


Notes:

  • Salary for this purpose means basic salary, dearness allowance, if provided in terms of employment and commission as a fixed percentage of turnover.

  • Metro Cities: Mumbai, Delhi, Kolkata, and Chennai.

  • 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.

Special Allowances u/s10(14): This clause provides for exemption ( as per rule 2BB) in respect of the following:

  1. Special allowances or benefits, not being in the nature of a perquisite, specially 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)]

There is no limit on the amount which the employee can receive from the employer, but whatever amount received should be fully utilized for the purpose for which it was given to him. Following allowances prescribed for the purpose of section 10(14)(i).

  1. Travelling Allowance

  2. Daily Allowance

  3. Conveyance Allowance

  4. Helper Allowance

  5. Research Allowance

  6. Uniform Allowance


  1. Special allowances granted to the employee either to meet his personal expenses at the place where the duties of his office or employment of profit are ordinarily performed by him or at the place where he ordinarily resides or to compensate him for the increased cost of living. [Section 10(14)(ii)]

There is a limit on the amount which the employee can receive from the employer. Excess amount received by the employee will be taxable in his hands as income from salary. It does not matter whether the amount which is received is actually spent or not by the employee. Following allowances prescribed for the purpose of section 10(14)(ii):




Note: Any employee claiming exemption in respect of allowances mentioned at serial numbers 7 & 8 and 9 shall not be entitled to exemption in respect of disturbed area allowance referred at serial number 2, respectively.


FAQs:

Q1) Can employees get benefits of HRA exemption if they reside in  their parent’s house?

An) Yes, if employees paid rent to their parents then they can avail exemption of HRA.

Q2) How much Entertainment Allowance exemption is allowed to Government employees?

An) One fifth of basic salary, actual amount received or Rs. 5000 whichever is lower.

Q3) Can we claim allowances exemption in the new tax regime?

An) Yes, but only on Daily Allowance, Travelling Allowance, Conveyance allowance and Transport Allowance (Transport Allowance Exemption Rs. 3200 per month is allowed to only differently abled persons).


Faizahmed Solkar