Allowance

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.

(A) Allowances which are fully taxable:

Dearness Allowance: Dearness Allowance (DA) is an allowance paid to employees as a cost of living adjustment allowance paid to the employees to cope with inflation. DA paid to employees is fully taxable with salary.
Overtime Allowance: Employers may provide an overtime allowance to employees working over and above the regular work hours.
City Compensatory Allowance: City Compensatory Allowance is paid to employees in an urban center which may be highly expensive and to cope with the inflated living costs in the cities. This allowance is fully taxable.
Interim Allowance: It is an allowance provided by employer in place of final allowance.
Project Allowance: It is an allowance provided by employer to employees to meet project expenses.
Tiffin/Meals Allowance: Sometimes employers may provide Tiffin/Meals Allowance to the employees, is fully taxable.
Cash Allowance: The employer provides a cash allowance like marriage allowance, bereavement allowance or holiday allowance.
Non-Practicing Allowance: When physicians are attached to Clinical Centers of the various Laboratories/Institutes, any non-practicing allowance paid to them become fully taxable.
Warden Allowance: When an employer pays an allowance to an employee working as a Warden i.e. Keeper in an educational Institute, the allowance received is fully taxable.
Servant Allowance: When an employer pays an employee to engage services of a servant, such an allowance is taxable.
Transport Allowance: Provided to an employee other than blind/ deaf and dumb/ orthopedically handicapped employee.
Entertainment Allowance : Please refer https://blog.taxsmile.com/deductions-exemptions/

(B) Allowances which are partially taxable

1.House Rent Allowance (HRA) – Section 10(13A):

HRA is a special allowance specifically 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:

Metro Cities (i.e. Delhi, Kolkata, Mumbai, Chennai)	Other Cities
1. HRA actually received for the relevant period	1. HRA actually received for the relevant period
2. Rent paid (-) 10% of salary for the relevant period	2. Rent paid (-) 10% of salary for the relevant period
3. 50% of salary for the relevant period	3. 40% of salary for the relevant period

Notes:

Salary includes basic salary, dearness allowance (if it enters into retirement benefits) and fixed percentage commission on turnover achieved by the employee.
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.
Relevant period means the period during the said accommodation was occupied by assesse during the previous year.

Let’s take an example.

Suppose that you’re residing in Mumbai and paying a rent of Rs 35,000 p.m. and that your salary package comprises the following:

Basic – Rs. 50,000 p.m.
DA – Nil
HRA – Rs. 28,000 p.m.

Now, the exempted amount of HRA will be least of the following three figures:

HRA received i.e., Rs. 28,000
Actual rent paid less 10% of salary Rs. 30,000 [35,000 – (10% of 50,000)]
50% of salary (50,000+0) i.e., Rs. 25000

The least of the three is Rs 25,000; therefore, in this particular case you’re entitled for HRA tax exemption of Rs. 25,000 p.m.

2.Special Allowance – Section 10(14):

Allowances prescribed for the purposes of section 10(14) (i) : Allowances that are exempt to the extent of actual allowance received or actual amount spent whichever is lower.
- Travelling Allowance: Any allowance granted to meet the cost of travel on tour or on transfer.
  - Explanation – “allowance granted to meet the cost of travel on transfer” includes any sum paid in connection with the transfer, packing and transportation of personal effects on such transfer.
- Daily Allowance: Any allowance, whether granted on tour or for the period of journey in connection with transfer, to meet the ordinary daily charges incurred by an employee on account of absence from his normal place of duty.
- Conveyance Allowance: Any allowance granted to meet the expenditure incurred on conveyance in performance of duties of an office or employment of profit.
- Helper Allowance: Any allowance granted to meet the expenditure incurred on a helper where such helper is engaged in the performance of the duties of an office or employment of profit.
- Academic Allowance: Any allowance granted for encouraging the academic, research and training pursuits in educational and research institutions;
- Uniform Allowance: Any allowance granted to meet the expenditure on the purchase or maintenance of uniform for wear during the performance of the duties of an office or employment of profit.
Allowances prescribed for the purposes of section 10(14) (ii) :
Allowances that are exempt to the extent of the amount received or the limit specified whichever is lower.

Sl No.	Name of Allowance	Extent to which allowance is exempt
1.	Any Special Compensatory Allowance in the nature of Special Compensatory (Hilly Areas) Allowance or High Altitude Allowance or Uncongenial Climate Allowance or Snow Bound Area Allowance or Avalanche Allowance	800 or 300 per month depending upon the specified locations 7,000 per month in Siachen area of Jammu and Kashmir
2.	Any Special Compensatory Allowance in the nature of border area allowance or remote locality allowance or difficult area allowance or disturbed area allowance	1,300 or 1,100 or 1,050 or 750 or 300 or 200 per month depending upon the specified locations
3.	Special Compensatory (Tribal Areas / Schedule Areas / Agency Areas) Allowance [Specified States]	200 per month
4.	Any allowance granted to an employee working in any transport system to meet his personal expenditure during his duty performed in the course of running such transport from one place to another, provided that such employee is not in receipt of daily allowance	70% of such allowance upto a maximum of 10,000 per month
5.	Children Education Allowance	100 per month per child upto a maximum of two children
6.	Any allowance granted to an employee to meet the hostel expenditure on his child	300 per month per child upto a maximum of two children
7.	Compensatory Field Area Allowance [Specified areas in Specified States]	2,600 per month
8.	Compensatory Modified Field Area Allowance [Specified areas in Specified States]	1,000 per month
9.	Any special allowance in the nature of counter insurgency allowance granted to the members of the armed forces operating in areas away from their permanent locations.	3,900 per month
10.	Any transport allowance granted to an employee who is blind or deaf and dumb or orthopedically handicapped with disability of the lower extremities of the body, to meet his expenditure for commuting between his residence and place of duty	3,200 per month.
11.	Underground Allowance granted to an employee who is working in uncongenial, unnatural climate in underground mines.	800 per month
12.	Any special allowance in the nature of high Altitude allowance granted to the member of the armed forces operating in high altitude areas For altitude of 9,000 to 15,000 feet For above 15,000 feet	1,060 per month 1,600 per month
13.	Any special allowance in the nature of special compensatory highly active field area allowance granted to the member of the armed forces	4,200 per month
14.	Any special allowance in the nature of Island (duty) allowance granted to the member of the armed forces in Andaman & Nicobar and Lakshadweep Group of Islands	3,250 per month

Let’s take an example.

Mr. X has two children residing in Karnataka. He is in receipt of children education allowance of 150 p.m. for his son and 70 p.m. for his daughter. He also receives the following allowances:

Transport allowance : 1,800 p.m.
Tribal area allowance : 500 p.m.

Compute his taxable allowances.

Solution:

Taxable allowance in the hands of Mr. X is computed as under –

Children Education Allowance: [(Actual allowance received – Exempted allowance i.e., Rs 100) * No. of months* No. of children]
- Elder son [(150 – 100) p.m. × 12 months] = 600
- Younger son [(70 – 70) p.m. × 12 months] = Nil
Transport allowance (1,800 p.m. × 12 months) = 21,600
Tribal area allowance : [(Actual allowance received – Exempted allowance i.e., 200) * No. of months]
- [(500 – 200) p.m. × 12 months] = 3,600

Taxable allowances [600+0+21,600+3,600] = 25,800. Here transport allowance is taxed and no deduction provided, as it will be taken care in section 16 (ia)[standard deduction]