Understanding the Key Allowances for Salaried Employees

Under the Income Tax Act, the term ‘salary’ is broader than generally understood. Salary is the first category of income for tax purposes. Your taxable salary is calculated on the basis of whether it is due to you or when you receive it, whichever comes first. Taxable Salary includes allowances, benefits like company perks, retirement funds, and any profit in place of salary. Certain deductions can be made from this income to reduce the taxable amount.

Types of Allowances

Allowance is the extra money given by the companies to employees on top of their salary to help cover specific expenses like rent, travel, medical needs, etc. Allowances are taxable. According to the Income Tax Act, allowances are taxed on a due basis, meaning they are taxed when they are owed, not when they are paid. However, there are some exemptions available under the law that can reduce the amount of tax on certain allowances.

1. Fully Taxable Allowances:

Dearness Allowance (DA): It is a cost of living adjustment that the Government gives to public sector employees and pensioners.

Entertainment Allowance: This allowance is provided by the company to their employees for expenses like meals, drinks, hotel stays, movies, etc.

Overtime Allowance: It is compensation an employer provides to an employee for working more than their daily working hours.

City Compensatory Allowance: City Compensatory Allowance is extra money paid by employers to employees to help cover the high cost of living in metro cities.

Transport Allowance to employees other than blind/ deaf and dumb/ orthopedically handicapped employees: Transport allowance given to an employee for travelling between their home and workplace is fully taxable. However, for employees who are blind, deaf and mute, or orthopedically handicapped, there is a tax exemption of up to Rs. 3,200 per month.

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

2. Partly Taxable Allowances:

House Rent Allowance (HRA): House Rent Allowance (HRA) is money given by employers to employees to help cover the cost of renting a house.

Exemption: Actual HRA received from the employer. Rent paid minus 10% of salary (Basic+DA) 50% of salary (if the residence is in metro cities), otherwise 40% of salary. (If employees living in non-metro cities).

Children’s Education Allowance: Provided to cover the tuition fees of a maximum of two children.

Exemption: Up to Rs. 100 per month per child for a maximum of 2 children.

Hotel Allowance: Provided to cover the Hostel expenditure of a maximum of two children.

Exemption: Up to Rs. 300 per month per child for a maximum of 2 children.

Office Duty Allowances: These include Travelling allowance, Conveyance allowance, Daily allowance, Helper allowance, Research allowance, Uniform allowance.

Exemption: These allowances are tax-exempt up to the lower of the following two amounts, the actual allowance received and the actual amount spent on duties.

Special Compensatory Allowance (Hilly Areas) (Subject to certain conditions and locations).

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

Border Area Allowance, Remote Locality Allowance, Disturbed Area Allowance, or Difficult Area Allowance (Subject to certain
conditions and locations).

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

Tribal Area or Special Compensatory or Scheduled Area or Agency Area Allowance
(Subject to certain locations).

Exemption: Up to Rs. 200 per month.

Compensatory Field Area Allowance. (Subject to certain conditions and locations).

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

Compensatory Modified Field Area Allowance. (Subject to certain conditions and locations).

Excemption: Up to Rs. 1,000 per month.

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

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

Underground Allowance is provided to employees working in uncongenial, unnatural climates in underground mines.

Exemption: Up to Rs. 800 per month.

High Altitude Allowance is provided to the armed forces operating 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 an altitude above 15,000 feet).

Special Compensatory Highly Active Field Area Allowance provided to members of the armed forces.

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

Island Duty Allowance granted to members of the armed forces in Andaman and Nicobar and Lakshadweep group of Island.

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

House Rent Allowance

House Rent Allowance (HRA) exemption is available only if the employee lives in a rented house and pays the rent. If the employee owns the house or does not pay rent, no HRA exemption can be claimed.

For HRA purposes, “salary” includes the basic salary, dearness allowance (if it counts for retirement benefits), and any commission paid to the employee.

The exemption applies only for the time when the employee lives in the occupied rented house and not for any period before or after that. Additionally, if the rent paid is less than 10% of the employee’s salary, no HRA exemption will be given.