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Different Types of Allowances

Allowance is a fixed quantity of money or other substance given regularly in


addition to salary for meeting specific requirements/expences of the employees.

1. Fully Exempted Allowances


Allowances received for performance of duties
The following allowances prescribed by the Central Board of Direct Taxes under Rule
2BB of the Income-tax rules are fully exempt to the extent actually incurred by the
employee and any saving out of such allowance will be fully taxable:
1.
2.
3.
4.
5.
6.
7.

Conveyance Allowance
Travelling Allowance
Daily Allowance
Research Allowance
Helper Allowance
Uniform Allowance
Allowances to Government Employee outside India (Foreign Allowance) - Any
allowance paid or allowed outside India by the Government to an Indian
Citizen, for rendering services outside India, is wholly exempt from tax.

Only Least of following 2 exempted


1. Amount Received
2. Amount actually spent for the performance of duty.
For eg. - If TA received /month is Rs. 1500 and actual amount spent was Rs. 2000,
then only Rs.1500 would be exempted because Rs. 1500 is lowest value than Rs.
2000.

2. Partially Exempted Allowances


This category includes allowances which are exempt upto certain limit specified in
Income Tax Rules. For certain allowances, exemption is dependent on amount of
allowance spent for the purpose for which it was received and for other allowances,
there is a fixed limit of exemption. They are as follows:

A.House Rent Allowance (H.R.A.)


An allowance granted to a person by his employer to meet expenditure incurred on
payment of rent in respect of residential accommodation occupied by him is exempt
from tax to the extent of least of the following three amounts:

Provided that expenditure on rent is actually incurred, exemption available shall be


the least of the following :
(i) HRA received.
(ii) Rent paid less 10% of salary.
(iii) 40% of Salary (50% in case of Mumbai, Chennai, Kolkata, Delhi) Salary here
means Basic + Dearness Allowance, if dearness allowance is provided by the terms
of employment.

If an employee is living in his own house and receiving HRA, it will be fully taxable.
B. Entertainment Allowance
This allowance is first included in gross salary under allowances and then deduction
of 1/5 of salary or Rs.5,000, whichever is less is given to only central and state
government employees under Section 16(ii).
C. Special Allowances to meet personal expenses
There are certain allowances given to the employees for specific personal purposes
and the amount of exemption is fixed i.e. not dependent on actual expenditure
incurred in this regard. These allowances include:
Allowance Name

Exemption limit

Children Education Allowance (maximum 2 children)

Rs. 100/- p.m. per


child

Children Hostel Allowance (maximum 2 children)

Rs. 300/- p.m. per


child

Transport Allowance

Rs. 1600/- p.m.

Any Allowance granted to an employee working in any


transport system

Rs. 10,000/- p.m.


Or
70% of allowance
(whichever is lower)

Tribal Area Allowance

Rs. 200/- p.m.

Underground Allowance

Rs. 800/- p.m.

Compensatory Field Area Allowance

Rs. 2,600/- p.m.

Compensatory Modified Field Area Allowance

Rs. 1,000/- p.m.

Counter-insurgency allowance to members of armed forces

Rs. 3,900/-p.m.

D.Leave Travel Allowance: The amount actually incurred on performance of


travel on leave to any place in India by the shortest route to that place is exempt.
This is subject to a maximum of the air economy fare or AC 1st Class fare (if journey
is performed by mode other than air) by such route, provided that the exemption
shall be available only in respect of two journeys performed in a block of 4 calendar
years.
E. Medical Allowance
Medical allowance is fully taxable even if some expenditure has actually been
incurred for medical treatment of employee or family. The Tax exemption Limit of
Medical Allowance is Rs.25000/year.

3. Fully Taxable Allowances


As a general rule the allowances not specifically covered under Fully Exempted &
Partially Exempted Allowances are taxable. The name of some of the allowances is
given below:
A.Dearness Allowance
as is clear by its name, this allowance is paid to compensate the employee against
the rise in price level in the economy. Although it is a compensatory allowance
against high prices, the whole of it is taxable.
B.City Compensatory Allowance
This allowance is paid to employees who are posted in big cities. The purpose is to
compensate the high cost of living in cities like Delhi, Mumbai etc. However, it is
fully taxable.
C.Tiffin / Lunch Allowance
It is fully taxable. It is given to employees for lunch as coupons or added as part of
salary.
D. Overtime Allowance
when an employee works for extra hours over and above his normal hours of duty,

he is given overtime allowance as extra wages. It is fully taxable.


E.Servant Allowance
it is fully taxable whether or not servants have been employed by the employee.
G.Other Allowances
There may be several other allowances like family allowance, project allowance,
marriage allowance, education allowance, and holiday allowance etc. which are not
covered under specifically exempt category, so are fully taxable.

4. Non-Taxable Allowances
Some of the allowances, usually paid to Government servants, judges
and employees of UNO are not taxable. These are:
1.

Allowances paid to Govt. servants abroad: When servants of


Government of India are paid an allowance while serving abroad, such income is
fully exempt from taxes.
2.
Sumptuary allowances: Sumptuary allowances paid to judges of HC and SC
are not taxed.
3.
Allowance paid by UNO: Allowances received by employees of UNO are
fully exempt from tax.
4.
Compensatory allowance paid to judges: When a judge receives
compensatory allowance, it is not taxable.

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