Allowances

Allowance is generally defined as fixed

quantity of money or other substance given
regularly in addition to salary for the purpose
of meeting some particular requirement
connected with the services rendered by the
employee or as compensation for unusual
conditions of that service.
Fully Taxable Allowance
1) Dearness Allowance: 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.
2) 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.
3) Tiffin / Lunch Allowance: It is fully taxable. It is given to
employees for lunch as coupons or added as part of salary.
4) 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.
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, education
allowance, and holiday allowance etc. which
are not covered under specifically exempt
category, so are fully taxable.
PARTIALLY EXEMPT
ALLOWANCES
This category includes allowances which are exempt
upto certain limit. For certain allowances, exemption
is dependent on amount of allowance spent for the
purpose for which it was received and for other
allowances, there is a fixed limit of exemption.
2) 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
3) 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).
3) Special Allowances for meeting official
expenditure: Certain allowances are given to
the employees to meet expenses incurred
exclusively in performance of official duties and
hence are exempt to the extent actually
incurred for the purpose for which it is given.
These include travelling allowance, daily
allowance, conveyance allowance, helper
allowance, research allowance and uniform
allowance.
4) Special Allowances to meet personal
expenses: There are certain allowances given
to the employees for specific personal purposes
and the amount of exemption is fixed i.e. not
dependent on actual expenditure incurred in
this regard. These allowances include:
a) Children Education Allowance: This allowance is exempt
to the extent of Rs.100 per month per child for maximum of 2
children (grand children are not considered).
b) Children Hostel Allowance: Any allowance granted to an
employee to meet the hostel expenditure on his child is exempt
to the extent of Rs.300 per month per child for maximum of 2
children.
c) Transport Allowance: This allowance is generally given to
government employees to compensate the cost incurred in
commuting between place of residence and place of work. An
amount uptoRs.800 per month paid is exempt. However, in
case of blind and orthopedically handicapped persons, it is
exempt up to Rs. 1600p.m.
d) 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.
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
House Rent Allowance
(H.R.A.)
Entertainment Allowance
Entertainment tax is first included under the head “Salaries” and
thereafter a deduction is given on the basis enumerated as
follows
In case of government employee(i.e. Central Government or a
state Government employee), the least of (a) Rs.5000; (b)20
percent of salary; (c) amount of entertainment allowance
granted during the previous year, is deductible.
In order to determine the amount of entertainment
allowance, deductible from salary, the following points
need consideration:
4. For this purpose “salary” excludes any allowance. Benefit or
other perquisites.
5. Amount actually expended towards entertainment out of
entertainment allowance received is not taken into
consideration. Deduction is granted according to the aforesaid
rules, even if the amount received is not proved to have been
spend
6. From AY 2002-03, entertainment allowance deduction will not
be available to non government employees.
Uniform Allowance: The exemption depends
upon actual expenditure by the employee.
This allowance is given to the employee to
meet the expenditure on the purchase or
maintenance of uniform for wear during the
performance of duties of an office.
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.
Deductions from Salaries
Entertainment Allowance: Entertainment
Allowance, exemption is calculated as dealt above
and the Actual allowance is first added back in the
salary & then exemption is deducted for
calculation of Taxable value of Entertainment
Allowance.
Professional Tax: Professional Tax deduction is
available on PAID basis up to a maximum of Rs.
2,500/-; if tax is paid by employer on behalf of
employee first it is added back in salary & then
deducted on paid basis.
Gratuity
It is salary received by an individual paid by
the employee at the time of his retirement or
by his legal heir in the case of death of the
employee.