Allowances In Salary: Taxable & Non-Taxable Salary Allowances
Updated: Dec 19, 2023
If you believe that your complete salary is subject to taxation, you are mistaken. You can find several types of allowances on salary slips depending on your work and compensation structure. These allowances vary from person to person and are based on the designation of an employee. It is critical to understand that not all allowances are taxable.
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As an employee, you must understand which allowances on your pay slip are taxable or non-taxable.
In this article, we are going to discuss the types of allowances in salary slips. Let's get started by understanding the definition of allowances in salary.
What are Allowances in Salary?
Salary Allowances are any monetary benefits provided to employees to meet expenses other than the basic salary.
Allowances are specialized in character and are offered to employees to satisfy their specific needs. According to the Income Tax Act 1961, allowances are added to an individual's pay and are taxed under the heading Income from Salaries.
How Can We Calculate Allowances in Salary?
We should ideally adopt a reversed computation approach where a portion of the income and CTC is deducted. Typically, the basic pay is 40% of gross income or 50% of CTC. Basic pay is calculated as gross pay minus all allowances (such as transportation, HRA, and medical insurance).
[Basic Salary = Gross Pay- Total Allowances]
Types Of Allowances in Salary Slip
Income tax laws have made some fully taxable allowances in salary, some partly taxable, and some tax-free. This is because some allowances are exempt and some are partially taxed, the more allowances you claim, the lower your tax bill.
The more tax-free allowances you receive, the more taxes you will be able to save. According to the Income Tax Act 1961, such allowances are broadly classified as follows:
Taxable Allowances
According to the Income Tax Act, taxable allowance is part of an employee's compensation that is taxable. An allowance is a predetermined sum of money that a salaried employee receives from his employer to cover a particular category of out-of-pocket costs. These pay stipends are not exempted from taxation under any section of the Income Tax Act.
Here are a few examples of well-known taxable allowances:
Dearness Allowance
Employees receive a Dearness Allowance in addition to their regular pay. This is done to control inflation and reduce living expenses. The Income Tax Act makes it quite clear that tax obligations for Dearness Allowances are calculated along with salaries. Therefore, it needs to be disclosed when submitting income tax forms.
Entertainment Allowance
Employees receive this money to help defray the price of providing hospitality services and welcoming guests. The Act only permits government employees to deduct their entertainment expenses. The entire entertainment allowance is fully taxable for non-government employees.
The entertainment allowance is a pay benefit that is completely taxable. It must be added to the salary before being subtracted from the gross pay.
Medical Allowances
This amount of money is paid for the employee's medical expenditures. This benefit is entirely taxed.
Overtime Allowance
Employees who work over their usual shifts might get paid for their efforts. This is known as overtime, and any payment received is completely taxable.
City Compensatory Allowances
These types of allowances in salary slips are paid to employees who work in expensive metropolitan areas. It is to assist them with the high cost of living there. It is taxable for executing certain obligations in a specific location or under unique circumstances.
Interim Allowance
Any intermediate allowance provided by an employer instead of a final allowance is fully taxed.
Allowance for Project Expenses
When an employer pays an employee's project-related expenses with an allowance, such income is fully taxed.
Tiffin/Meals Allowance
When an employer pays for an employee's tiffin/meals, it is completely taxed.
Cash Allowance
A cash allowance, such as one for a wedding, burial, or holiday, is completely taxable when given by an employer.
Non-Practising Allowances
These types of fully taxable allowances in salary are offered to doctors. The doctors who present their employer with proof of engaging in self-practice. This allowance is typically 20% of the basic wage plus the dearness allowance.
Warden Allowance
A stipend paid by an employer to a worker acting as a Warden, or Keeper, at a school is fully taxed.
Servant Allowance
If an employer pays an employee to use the services of a servant, the allowance is taxable income.
Other taxable allowance in salary includes telephone allowances, vacation pay, and so on.
Partially Taxable Allowances
These allowances are tax-free up to a particular maximum specified in the Income Tax Act. Here are a few examples of well-known partially taxable allowances:
House Rent Allowance (HRA)
It is a special allowance given to an employee by his employer. It is to help with the payment of rent for his or her residence under Section 10 (13A).
Children's Education Allowance
This allowance is granted to assist with the costs of a child's education. It is granted up to Rs. 100 per month and a maximum of two children are excluded from this. If the child is differently abled then the allowance is double the amount.
Expenditure Allowance for Hostels
The purpose of this allowance is to help employees pay for the hostel expenses for their children. It is given up to Rs. 300 per month and a maximum of two children are excluded from this.
Allowance on transport
A disabled employee receiving a monthly travel allowance of up to Rs 3200 who has a physical impairment affecting their lower extremities is excused from payment.
Allowance paid to a transportation industry employee
Allowance paid to a transportation industry employee to cover private expenses while carrying out tasks connected with the operation of such transport from one place to another, if the employee does not receive a daily allowance.
Special Allowance
A Special Allowance is a type of allowance in a salary slip given to employees to cover certain expenses. The expenses must be incurred for the employee to get the allowance.
Leave Travel Allowance
If someone is going on vacation, they can claim an LTA exemption subject to the exemption limit stated in the Income Tax Act of 1961. This exemption applies to employees who travel by train, plane, or bus.
Others
Salary allowances that are partially taxed include conveyance allowances, underground allowances, medical allowances, car maintenance allowances, and others.
Tax-Free Allowances
These types of allowances in salary slips are part of the salary, but they are free from tax, thus they are deducted from the salary when calculating taxes. Here are a few well-known tax-free salary allowances:
Uniform Allowance
Any allowance issued to pay the expense of purchasing or maintaining a uniform for use while performing the tasks of an office or job is exempt from the actual amount spent on the expenditures.
Allowances Given to Government Employees Overseas
These Tax-free allowances include any allowances or perks that the government grants to an Indian citizen for services performed outside India.
Allowances granted to UNO personnel
Under Section 2 of the United Nations (Privileges and Immunities) Act, allowances granted to UNO personnel are not taxable.
Allowances For Judges (High court & Supreme Court)
Any allowance paid to a High Court or Supreme Court Judge is not taxable.
Conveyance Allowances
It is one of the types of allowances in salary slips which are also known as transport allowance that is paid to firm employees to pay for the employee's journey from home to and from work.
Daily Allowances
According to the Income Tax Act, a daily allowance paid to an employee is not considered taxable if it is a particular sum of money given solely for carrying out duties or is given while the person is on tour or is not received at the employee's usual place of employment.
Other tax-free allowances
Include academic/research allowances, compensatory allowances, assistant allowances, and more.
Here, we have shown an example of the structure of salary which can help you better understand the taxable and non-taxable income:
Conclusion
The above-mentioned content is to assist employees in saving money by providing tax-free methods of payment. Make the most of them by structuring your compensation in a way that allows you to plan your taxation. Sections 80C and 80D of the Internal Revenue Code might help you save even greater amounts on taxes. Moreover, being updated with the Union Budget can help you be ahead. Lastly, Understanding and being aware of taxes is crucial for you as well as your nation. In case of complexity or before investing, you should always consult tax experts!
FAQs
Q1. What exactly are monthly allowances?
Ans. It is a monetary incentive given to employees for meeting set monthly expenses such as power bills, broadband, and so on.
Q2. What exactly is a prerequisite?
Ans. A prerequisite is defined in the Income Tax Act as a benefit that an employee receives or is entitled to as a result of his or her job or position in the firm.
Q3. How is taxable income calculated?
Ans. The taxable income is calculated by aggregating all of the money generated by a person throughout the fiscal year. Then subtract the relevant exemptions and deductions from the gross total income.
Q4. How can I calculate salary allowances?
Ans. Basic pay is calculated as gross pay minus all allowances (such as transportation, HRA, and medical insurance).
Q5. Are allowances included in CTC?
Ans. Allowance is a defined sum granted by the employer as part of CTC to pay a specific type of expenditure incurred by the employee.
Q6. What documents are required to claim the standard deduction?
Ans. There is no need to provide any documentation to assert the standard deduction. All salaried personnel are eligible for an automatic standard deduction of Rs. 50,000 from their pay income, starting with the Assessment Year 2020-21.
Q7: I couldn't provide my LIC investment details to my employer. How can I claim the deduction now?
Ans. If an individual cannot provide the necessary documentation to their employer, they still have the option to claim the deduction when completing their income tax return.
