ITR Filing 2025: Know Allowances for Salaried Employees to reduce Tax Liability

What is Salary?

Salary is the first head of income. The income taxable under this head will be calculated on the due basis or the receipt basis, Whichever takes place first. Taxable salary will include taxable allowances, perquisites, retirement benefits, and profit instead of salary. From salary income, few deductions are also permitted.

Allowances and Their Tax Liability

Allowances are additional components of salary that are usually given to the employees to cover specific expenses. Allowances are generally fixed regardless of actual expenditure and are taxable. It is taxable under section 15 on a due or accrual basis, irrespective of whether it is paid in addition to or instead of salary. However, the Income Tax Act has permitted few exemptions.

Types of Allowances

An allowance is expected to be taxable under the head ‘Salary‘ unless it is particularly exempted from tax, fully or partly. The treatment of these allowances will be according to the below-mentioned followings:

Fully Taxable Allowances

• Dearness Allowance: It is given to an employee to reimburse for the effect of  increasing prices.
• Overtime Allowance: This allowance is only given to employees for working overtime.
• City Compensatory Allowance: This Allowance is Paid by employers to their employees to  reimburse them for the high cost of living in metro cities.
• Transport Allowance to an employee other than a blind/deaf and dumb/orthopedically handicapped employee: This Allowance is granted to an employee to cover his/her expenses for the objective of communicating between the place of his residence and the place of his/her duty and is fully taxable. But an exemption of up to Rs. 3,200 per month is provided in the case of blind/deaf and dumb/orthopedically handicapped employees.

Under Section 15 Medical, Tiffin and Servant Allowance are also taxable.

Partially Taxable Allowances

• House Rent Allowance: [Section 10(13A)] HRA is paid by the employers to the employees to cover the cost of a rented house taken by them. and Exemption of  HRA Received Actual house rent paid, reducing 10% of salary, and 50% of salary if the residence is in Delhi, Mumbai, Kolkata, or Chennai, or else 40% of salary.

• Transport Allowance: This Allowance is allowed to an employee working in any transport system to cover his/her personal expenses during the performance of his duties for going from one place to another, provided he/she does not receive the daily allowance. and 70% or Rs 10,000 per month of such transport allowance is exempted, whichever is lower.

• Children education Allowance: This Allowance is allowed to cover tuition fees of a maximum of two children. and Exempted Up to Rs 100 per month per child for a maximum of two children.

• Hostel Allowance: This Allowance is allowed to cover the Hostel expenses of a maximum of two children. Up to Rs. 300 per month is exempted per child for a maximum of two children.

Office Duty Allowances

There are several office duty Allowances including Travelling allowance, Conveyance allowance, Daily allowance, Research allowance, Helper allowance and uniform allowance. These above allowances are exempt to the extent of a minimum of the actual allowance received or the actual amount spent for the purpose of duties of employment.

Special Compensatory Allowance: Hilly Areas but certain conditions and locations.

• Exemption: differs from Rs. 300 per month to Rs. 7,000 per month.

Border Area Allowance, or Remote Locality and others: These are granted but with certain conditions and locations.

• Exemption: differs from Rs. 200 per month to Rs. 1,300 per month.

Tribal Area or Special Compensatory and others: These are granted but only to certain conditions and locations.

• Exemptions: Up to Rs. 200 per month.

Compensatory field Area Allowance: These Allowances are granted but subject to certain conditions and locations.

• Exemption: Up to Rs. 2,600 per month

Compensatory Modified Field Area Allowance: These allowances are allowed but subject to certain conditions and locations.

• Exemption: Up to Rs. 1,000 per month

Counter Insurgency Allowance: Allowed to the members of armed forces operating in areas far from their permanent locations.

• Exemption: Up to Rs. 3,900 per month

Underground Allowance: These Allowances are given to employees working in unnatural climates in underground mines.

• Exemption: Up to Rs. 800 per month.

High Altitude Allowance: These allowances are provided to the armed forces working in high-altitude areas.

• Exemption:

a) Up to Rs. 1,060 per month for an altitude of 9,000 to 15,000 feet

b) Up to Rs. 1,600 per month for altitudes above 15,000 feet

Special Compensatory Highly Active Field Area Allowance: These Allowances are granted to members of the armed forces.

• Exemption: Up to Rs. 4,200 per month.

Island Duty Allowance: These allowances are allowed to members of the armed forces in the Andaman and Nicobar and Lakshadweep groups of islands.

• Exemption: Up to Rs. 3,250 per month.