Income from Salaries, Income Tax, Individuals

IncomeTax/Individuals/Allowances

This section covers the different allowances received by employees from their employers and tax implications of such allowances:

Meaning of allowance

Allowance is generally a fixed amount given on a regular basis to meet some particular requirement. From taxation point of view, allowance can be classified as taxable allowance and exempt allowance.

Exempt allowance can be further classified as follows :

  • Allowances for which exemption is based on specific method of computation.

  • Allowances for which exemption is based on lower of amount of allowance or amount spent for the purpose of allowance.

  • Allowances for which exemption is based on lower of amount of allowance or prescribed amount.

Allowances for which exemption is based on lower of amount of allowance or amount spent for the purpose of allowance.

As per section 10(14), in case of following allowances (by whatever name called), exemption is lower of:

(a) The amount of allowance, or

(b) The amount spent for the purpose for which allowance is granted:

Traveling allowance/Transfer allowance (only for physically challenged employee) and employees of a Transport business from AY 19-20 i.e year ended 31 March 2019

Any allowance granted to meet the cost of travel on tour or transfer (including any sum paid in connection with transfer, packing and transportation of personal effects on transfer) is exempt under section10(14).

Research allowance

Any allowance granted  to meet the expenditure on academic research and other professional pursuits, is exempt from tax under section10 (14).

Example

Mr. Kapoor is working in Essem Educational Academy. The company is paying him Rs. 840 per month as research allowance to meet the expenditure on academic research. In the month of April, he had actually incurred no expenditure on academic research. In this case, the amount of exemption will be Nil, being lower of amount of allowance or the amount spent for the purpose of allowance.

Uniform allowance

Any allowance granted to meet the expenditure on purchase or maintenance of uniform (for wearing during performance of official duty), is exempt from tax under section10 (14).

Example

Mr. Kapoor is working in Essem Ltd. The company is paying him Rs. 2,520 per month as uniform allowance to meet the expenditure on maintenance of official uniform. In the month of April, he had actually spent Rs. 3,000 on account of expenditure on maintenance of uniform. In this case the amount of exemption will be Rs. 2,520, being lower of amount of allowance or the amount spent for the purpose of allowance.

Allowances for which exemption is based on lower of amount of allowance or prescribed amount

In case of following allowances, exemption will be lower of the amount of allowance or amount prescribed under rule 2BB.

This category includes following important allowances :

  • Children’s education allowance. Exemption in this case will be Rs. 100 per month per child up to a maximum of two children.

  • Any allowance granted to an employee to meet the hostel expenditure on his child. Exemption in this case will be Rs. 300 per month per child up to a maximum of two children.

  • Transport allowance granted to an employee to meet his expenditure for the purpose of commuting between the place of his residence and the place of his duty –  Exemption will be Rs. 3,200 per month in case of an employee, who is blind or orthopaedically handicapped with disability of lower extremities.

Apart from above allowances, this category includes following allowances also:

  • Hill area allowance or high altitude allowance or uncongenial climate allowance or snow bound area allowance or avalanche allowance or Tribal area allowance. Exemption in this case depends on the area of deputation. Amount exempt from tax varies from Rs. 300 per month to Rs. 7,000 per month.

  • Special compensatory allowance in the nature of border area allowance, remote locality allowance or difficult area allowance or disturbed area allowance. Exemption in this case depends on the area of deputation. Amount exempt from tax varies from Rs. 200 per month to Rs. 1,300 per month.

  • Allowance granted to an employee 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 place, provided that such employee is not in receipt of daily allowance. Exemption in this case will be 70% of such allowance up to a maximum of Rs. 10,000 per month.

  • Compensatory field area allowance (for certain specified area). Exemption is Rs. 2,600 per month.

  • Compensatory modified field area allowance (for certain specified area). Exemption is Rs. 1,000 per month.

  • Any special allowance in the nature of counter-insurgency allowance granted to the members of armed forces operating in areas away from their permanent locations. Exemption will be Rs. 3,900 per month.

  • Underground allowance granted to an employee who is working in uncongenial, unnatural climate in underground mines. Exemption will be Rs. 800 per month.

  • Any special allowance in the nature of high altitude (uncongenial climate) allowance granted to the members of the armed forces operating in high altitude areas. Exemption will be Rs. 1,060 per month for altitude of 9,000 to 15,000 feet and Rs. 1,600 per month above 15,000feet.

  • Any special allowance granted to the members of the armed forces in the nature of special compensatory highly active field area allowance. Exemption will be Rs. 4,200 per month.

  • Any special allowance granted to the members of the armed forces in the nature of Island (duty) allowance. Exemption will be Rs. 3,250 per month.

It should be noted that an employee claiming exemption in respect of compensatory field area allowance and compensatory modified field area allowance cannot claim exemption in respect of special compensatory allowance in the nature of border area allowance, remote locality allowance or difficult area allowance or disturbed area allowance.

Allowances for which exemption is based on specific method of computation

Under this category following allowances are covered:

  • Entertainment allowance

  • House rent allowance

Detailed discussion on both of the above is given below:

(a)     Entertainment allowance: (only for Government employees)

Exemption in case of entertainment allowance is available only to an employee of Central Government or State Government. Entertainment allowance is first included in the salary and then a deduction is allowed of lower of

  • 20% of salary (i.e., basic salary only), or

  • Rs.5,000,or

  • Actual amount of allowance for the year. This deduction is available only to Central Government or State Government employees.

Entire amount of entertainment allowance is taxable in the hands of non-Government employees.

Example

Mr. Suraj is employed in Essem Ltd. He is receiving entertainment allowance of Rs. 10,000 per month. His basic salary is Rs. 50,000 per month. In this case, entire amount of entertainment allowance will be charged to tax in the hands of Mr. Suraj, since he is a non-Government employee.

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