Allowance is generally defined as a fixed quantity of money or other substance given regularly in addition to salary for the purpose

of meeting some particular requirement by employee.

Under income-tax act, allowance is taxable on due or receipt basis, whichever is earlier.

FULLY EXEMPT ALLOWANCES

Allowance given to a citizen of India, who is a government employee, for rendering services outside India Allowances given to Judges of High Courts Allowance given Judges of Supreme Court Allowances received by an employee of UNO (united nations organizations)

1)

2)

3) 4)

As is clear by its name, this allowance is paid to compensate the employee against the rise in price level in the economy. Although it is a compensatory allowance against high prices, the whole of it is taxable. City Compensatory Allowance: This allowance is paid to employees who are posted in big cities. The purpose is to compensate the high cost of living in cities like Delhi, Mumbai etc. However, it is fully taxable. Tiffin / Lunch Allowance: It is fully taxable. It is given to employees for lunch as coupons or added as part of salary. Overtime Allowance : When an employee works for extra hours over and above his normal hours of duty, he is given overtime allowance as extra wages. It is fully taxable.

Dearness Allowance:

5) Fixed Medical Allowance: Medical allowance is

fully taxable even if some expenditure has actually been incurred for medical treatment of employee or family. 6) Servant Allowance: It is fully taxable whether or not servants have been employed by the employee. 7) Other allowances: There may be several other allowances like family allowance, project allowance, marriage allowance and holiday allowance etc. which are not covered under specifically exempt category, so are fully taxable.

1) House Rent Allowance (H.R.A.): An allowance granted to a person by his employer to meet expenditure incurred on payment of rent in respect of residential accommodation occupied by him is exempt from tax

H.R.A.

If employee is not paying rent

If Employee is paying Rent

H.R.A. is exempt MIN. of following 1.Actual H.R.A. Received 2.Rent paid-10% of salary H.R.A. is fully taxable 3.50% OF salary, if house is situated in Metro cities or otherwise 40% of salary

Note: salary=basic+D.A.(Ret.)+comm.(% of turn over)

2) Entertainment Allowance: This allowance is first included in gross salary under allowances and then deduction is given to only central and state government employees under Section 16(ii).

Entertainment Allowance

Government employee

Other employee

Deduction from gross salary shall be min of the following 1.Actual received 2.20% of the salary 3.5000 P.A. Deduction will not be allowed from A.Y. 2002-2003

Note: salary meanse only basic salary

3) Special Allowances for meeting official expenditure:

Allowances which are exempt to the extent of actual amount received or the amount spent for the specified purpose for which they were received, whichever is less The amount received OR The amount paid (whichever is less)

Travelling allowance Conveyance allowance Daily allowance Helper allowance Research allowance Uniform allowance For E.g. If an employee get Rs.10000 as uniform allowance and he actually spend Rs.9000 for the purpose the allowance is given. The tax would be charged on Rs.1000.

Allowances which are exempt to the extent of amount received or the limit specified, whichever is less Amount received OR Limit specified (which ever is less)

Special compensatory allowance: Amount varies from Rs 300 to Rs 700 per month Border area allowance: Amount varies from Rs 200 to Rs 1300 Per month Tribal area allowance: Rs 200 Per month Children education allowance: Rs 100 per month per child maximum of two children Example: Mr.` x receives 5400 as children education allowance for 3 children the taxable amt would be Actual received 5400 (150*12*3) Less: Exempt 2400 (100*12*2) Taxable 3000

Island duty allowance: Up to Rs3250 per month Underground allowance: Limited to Rs800 per month Transport allowance: Up to Rs800(Rs 1600 for blind or orthopedically handicapped) Hostel expenditure allowance: Rs 300 per month per child, up to maximum of two children.