Allowance is a fixed monetary amount paid by the employer to the employee over and above basic salary for meeting certain expenses, whether personal or for the performance of his duties.
As a rule, all allowances are taxable and included in gross salary unless specific exemption is provided in respect of such allowance.
Accordingly, the allowances are of three types: categories –
1. Fully taxable,
2. Partially exempt and
3. Fully exempt cash allowances.
Moreover, some allowances are unconditionally exempted but in other cases such as HRA, exemption is subject to fulfillment of some conditions. Then In some cases like Transport Allowance, exemption is allowed in respect of a prescribed sum only on ad hoc basis..
Some of these allowances are dealt with in the paras to follow.
5.1. Allowances Fully Taxable :
a. Dearness Allowance , a compensatory allowance paid to meet high prices and increased cost of living, - S 15 & 17
b. City Compensatory Allowance also a compensatory allowance paid to employees posted in big cities like Delhi, Mumbai to compensate the high cost of living in such cities c. Non- practicing Allowance normally paid to compensate
professionals in government service like doctors, chartered accountants, engineers, scientists etc , who are prohibited from doing private practice,
d. Warden or Proctor Allowance paid in educational institutions for working as a Warden of the hostel or as a Proctor in the institution,
e. Deputation Allowance paid to an employee sent from his permanent place of service to some place or institute on deputation for a temporary period,
f. Overtime Allowance paid as extra wages paid to an employee putting in extra working hours over and above his normal hours of duty,.
g. Servant Allowance, if paid in cash even if servants may have been employed by the employee.
h. Other Allowances by whatever name called such as family allowance, project allowance, Marriage allowance, education allowance, and holiday allowance as these allowances are not specifically exempt.
5.2. Wholly and unconditionally exempt Allowances
a. Allowances to Judges of the High Courts and the Supreme Court,
b. Allowances by the Unites Nations organization to its employees.
c. Foreign allowance paid by the government to its employees being Indian citizen posted out of India for rendering services abroad
d. Pension to Gallantry award winners like Paramvir Chakra, Mahavir Chakra , Vir Chakra etc - S. 10(18)
5.3. Wholly or partly tax-free Allowances:
Following allowance are wholly or partly tax -free. Some of the exemptions are conditional. Most of the conditions and monetary limits, though prescribed in rules are incorporated in brief to make the subject comprehensive. Brief description of these allowances is as follows
a. Entertainment Allowance- S.16 (ii)
Entertainment Allowance to the employee for entertaining the business relations and clientele of the employer is fully taxable by the private sector employees even if the entire amount may have been spent by them.
Government employees are entitled to a deduction/s16 (ii) upto 20 per cent of Basic Salary subject to a maximum of Rs 5,000 per annum, whichever is lower. Full amount is first included in the salary and then the exempted amount is reduced.
b. Fixed Medical Allowances
Fixed Medical Expenses are taxable but reimbursement of medical expenses is however exempt upto Rs 15,000
c. Tiffin / Lunch Allowance
Tiffin / Lunch Allowance paid in cash is fully taxable but Cost of Lunch provided to employees on their work place or even lunch coupons redeemable with restaurants is a tax-free perquisite subject to fulfillment of certain conditions prescribed by the CBDT.
d. Transport Allowance- S 10(14)
Any allowance or benefit given to meet the expense wholly and necessarily in the course of employment is fully exempt u/10(14) subject to the assessee presenting the proof in this regard.
Under Rule 2BB ,Transport or conveyance allowance paid to meet conveyance expenses of the employee from place of residence to place of work and back is exempt upto Rs 800 per month ( Rs 1,600 in case of a handicapped employee) .
For example, If A is in receipt transport allowance @ Rs 1,000 per month, Rs 200 per month (Rs 1000-Rs 800 ) will be included in total income of A
e. Other allowances for official purposes-S 10(14) ;
If any allowances ( other conveyance between residence and office ) are given for official purposes, deduction of amount actually spent from those allowances by the employee in meeting the official expenses will be allowed at a deduction u/s 10(14) from the total amount of allowances received.
For instance, An employee receives Uniform allowance of Rs 5000 but spends only Rs 4000, towards the uniform , then Rs1000 will be taxable in the hands of the employee. Some other examples of these allowances paid for meeting official expenditure incurred exclusively in performance of official duties are travelling allowance, daily allowance, conveyance allowance, helper allowance, research allowance.
f. Education Allowance:
Education Allowance given to meet the education expenses of the employee’s is taxable in hands of employee.
However, under rule 2BB a sum of Rs100 per month per child subject to maximum of 2 children is allowed as exemption from total education allowance received by the employee in a given year. If the children of the employee are residing in a hostel, an additional exemption of Rs 300 per month per child subject to maximum of 2 children is made available to the employee. Therefore if the employee has 2 children and who are residing in a hostel and the employee is giving total education allowance of Rs 1000 per month, the taxable amount will be (1000-800) i.e. Rs 200 per month only.
g. Out of station allowance
An allowance granted to an employee working in a transport system to meet his personal expenses in performance of his duty in the course of running of such transport from one place to another is exempt upto 70% of such allowance or Rs.6000 per month, whichever is less.