Allowances are the financial benefits that are provided to the employees by the employers over their regular salary. While some allowances are taxable under the head salaries, some are partly taxable or fully non-taxable.
In India, tax rules are different for individuals earning income from salary and individuals having other types of income. E-Filing Income Tax is a boon to them. However, they still have to declare their salary income in a form online or offline to file their returns and knowledge of allowances that are paid by employers to meet various costs can come in handy while filing their return.
What is an Allowance?
An allowance is a financial benefit given to the employee by the employer over and above the regular salary. These benefits are provided to cover expenses that may be incurred to facilitate the discharge of service for example Conveyance Allowance is paid to foot expenses incurred for commuting to the workplace. Some of these allowances are taxable under the head Salaries. A few of them again could be partly taxable and few others are non-taxable or fully exempt from taxes.
Here's a glance at allowances that are either taxable, partly taxable or non-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. The Income Tax Act mandates that tax liability for DA along with salary must be declared in the filed return.
- Entertainment Allowance: Employees are allowed the lowest of the declared amount one-fifth of basic salary, actual amount received as allowance or Rs. 5,000. This is an allowance provided to employees to reimburse the expenses incurred on the hospitality of customers. However, Government employees can claim exemption in the manner provided in section 16 (ii). All other employees have to pay tax on it.
- Overtime Allowance: Employers may provide an overtime allowance to employees working over and above the regular work hours. This is called overtime and any allowance received for this is fully taxable.
- City Compensatory Allowance: City Compensatory Allowance is paid to employees in an urban centre which may be highly expensive and to cope with the inflated living costs in the cities. This allowance is fully taxable.
- Interim Allowance: When an employer gives any Interim Allowance in lieu of final allowance, this becomes fully taxable.
- Project Allowance: When an employer provides an allowance to employees to meet project expenses, this is also fully taxable.
- Tiffin/Meals Allowance: Sometimes employers may provide Tiffin/Meals Allowance to the employees. This is fully taxable.
- Cash Allowance: When the employer provides a cash allowance like marriage allowance, bereavement allowance or holiday allowance, it becomes fully taxable.
- 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.
Partly Taxable Allowances
House Rent Allowance (HRA): When an employer pays an allowance for the employees accommodation it is called House Rent Allowance. Tax exemption under section 10 (13A) can be claimed on whichever amount is lower of the three:
HRA as per actuals received by the employee
- Rent paid as per actuals less 10% of Basic Salary
In Metros i.e Delhi, Mumbai, Chennai or Kolkata, as much as 50% of basic salary or else 40% of it if the accommodation is in a non-metro.
Any amount of House Rent Allowance received after claiming such deduction is taxable.
- Fixed Medical Allowance: This is an allowance paid by the employer when the employee or any of his family members fall sick for the cost incurred on their treatment. If any such reimbursement exceeds Rs.15,000 per year; the same is taxable.
- Special Allowance: A special allowance paid to employees is covered under section 14(i) and does not fall within the purview of a perquisite. It is essentially for performance of a duty is partly taxable.
Some of the allowances, usually paid to Government servants, judges and employees of UNO are not taxable. These are:
- 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.
- Sumptuary allowances: Sumptuary allowances paid to judges of HC and SC are not taxed.
- Allowance paid by UNO: Allowances received by employees of UNO are fully exempt from tax.
- Compensatory allowance paid to judges: When a judge receives compensatory allowance, it is not taxable.
Tabular - Taxable, Non-Taxable and Partially Taxable Allowances AY 2021-22
For the purpose of easy comparison, we can put the allowances and their taxability in the following table:
|Taxable allowances||Partly-taxable allowances||Tax-exempt allowances|
FAQs on Allowances
1. What are the different types of allowances?
The types of allowances are Taxable, Non-Taxable and Partially Taxable Allowances.
2. What are Non-Taxable allowances?
The Allowances paid to Govt servants abroad, Sumptuary allowances, Allowance paid by UNO and Compensatory allowance paid to judges are non-taxable allowances.
3. What are Partly Taxable allowances?
House Rent Allowance, Fixed Medical Allowance and Special Allowance are Partly Taxable allowances.