Allowances are fixed amounts paid by employer to employee for meeting certain type of expenditures. People often ask questions like:
Does basic salary includes allowance?
What is the difference between salary and allowance?
Is allowance included in salary?
Which allowances are exempt from income tax?
To answer these questions, we have to understand the definition of section 17 and exemptions allowed under section 10 of the income tax act, 1961.
Subsections of section 17 are not exhaustive definitions, these are inclusive definitions. This means salary will not only be restricted to those terms that are specifically mentioned in these sub sections, but will extend to many other things that an employer gives to employees. Due to the inclusive nature of section 17, allowance is also considered as part of salary and taxable in addition to other components under the head salaries.
However to tax it under the head income from salaries, you are required to satisfy the basic condition of employee and employer relationship.
For certain type of allowances, exemption is provided in section 10 of the income tax act, 1961. These are discussed below in this article.
House rent allowance
House rent allowance is paid by the employer to the employee to meet the expenses of house rent. In short, its referred to as HRA.
House rent allowance paid to employees is always taxable under the head income from salaries. However, income tax act 1961 allow exemption under section 10(13A) based on the city of the living.
We have written a different article to show you how HRA is calculated.
Prescribed special allowances under section 10(14)
Allowances specified under section 10(14) can be broadly classified into following two heads:
- Allowances for performance of official duties
- Allowances to meet personal expenses
Allowances to perform official duties
Certain allowances are granted by employers to employees to meet expenses which are wholly and exclusively incurred in the performance of official duties. As per the provisions of section 10(14)(i), for these type of allowances least of the following will be allowed as exemption:
- Actual allowance granted by the employer to employees.
- Actual expenses incurred for the purpose of duties of office or employment.
Below is a list of allowances for which exemption is specified under section 10(14)(i) read with rule 2BB of the income tax rules:
|Travelling||To meet the cost of travel on tour or on transfer of duties|
|Daily expenses||To meet the ordinary daily charges incurred at the time of tour or for the period of journey in connection with transfer. Daily charges must be incurred at a place other than the normal place of duty or on account of absence from normal place of duty.|
|Conveyance||Granted by the employer to meet the expenditure incurred on conveyance in performance of duties of an office|
|Helper||To meet the cost of helper in performance of duties of an office or employment of profit|
|Academic||To encourage academic, research and training pursuits in educational and research institutions|
|Uniform||For purchase or maintenance of official uniform for wear during the performance of duties.|
Allowances to meet personal expenses
Employer grants certain allowances to meet personal expenditures of employee. Here are all those allowances that are exempted to the extent prescribed under section 10(14)(ii).
Here is the snapshot of the maximum permissible exemption limit for all the specified allowances to meet personal expenses. If you want to know in detail, then refer rule 2BB.
|Allowances For||Maximum limit or specified limit|
|1||Children’s education||Rs 100 per month per child up to a maximum of 2 children|
|2||Hostel expenditures||Rs 300 per month per child up to a maximum of 2 children|
|3||Tribal area, scheduled area/agency area||Rs 200 per month|
|4||Special compensatory hilly area or highaltitude||Rs 300 to Rs 7000 per month|
|5||Border area, remote area and disturbed area||Rs 200 per month to Rs 1300 per month|
|6||Compensatory field area||Rs 2,600 per month|
|7||Compensatory modified field area||Rs 1000 per month|
|8||Counter insurgency granted to members of armed forces||Rs 3,900 per month|
|9||Transport granted to an employee who is blind or deaf and dumb or orthopedically handicapped with disability of lower extremities||Rs 3,200 per month|
|10||For working in uncongenial, unnatural climate in underground mines||Rs 800 per month|
|11||Working in High altitude (uncongenial climate) given to armed forces||For altitude of 9000ft to 15,000ft the maximum amount allowed is Rs 1060 per month. For altitude above 15,000 ft maximum amount allowed is Rs 1,600 per month|
|12||Special compensatory highly active field area granted to members of armed forces||Rs 4,200 per month|
|13||Armed forces for Working in Andaman & Nicobar and Lakshadweep group of islands Island (duty)||Rs 3,250 per month|
- Serial number 5 exemption will not be available if assessee wants to claim exemption in serial number 6&7.
- Serial number 5 exemption will not be available if assessee wants to claim exemption in serial number 8.
According to the provisions of section 10(14)(ii), the least of the following will be exempted from the actual allowances specifically given by employer to meet personal expenditures. Actual amount spent has no relevance.
- Actual allowance granted by the employer to employees, or
- The limit as specified above against the type of allowances.
After deducting the exempted amount from actual allowances, the excess if any received from employer shall be taxable in the hands of employee. This means the taxable part of the allowance will be included in gross salary calculation.
Please note, section 10 does not specify any exemption for entertainment allowances. However, you can claim a deduction from gross salary under section 16(ii) for entertainment allowances in addition to standard deduction and professional tax deduction.
In addition to the above allowances and section 16 deductions, employees are also eligible to claim tax deductions under chapter VI-A.
Tax deduction from gross salary under section 16
An employee after calculating gross salary is eligible for following 3 deductions under section 16 to calculate taxable salary or income under the head salaries.
- Standard deduction of Rs 40,000/Rs 50,000
- Deduction for entertainment allowance
- Professional tax
Tax deductions applicable to an individual under chapter VI-A
Employees can take tax benefits of chapter VI-A in addition to tax benefits for all eligible allowances and section 16 deductions.
Under chapter VI-A, you will be allowed to following number of deductions from gross total income based on your eligibility to calculate taxable income.
- Section 80C – in respect of life insurance, contributions to PPF, Employee Provident Fund, Tution fees etc
- 80ccc – Pension fund
- 80ccd – Contribution to national pension system
- 80ccg – in respect of investment made under any ESS
- 80d – in respect of medical insurance premium
- 80dd – maintenance of a dependent being a person with disability including medical treatment
- 80ddb – in respect of medical treatment
- 80e – interest on loan taken for higher studies
- 80ee – interest on loan taken for residential house property
- 80g – donation to certain funds, charitable institutions etc.
- 80gg – Deduction in respect of rent paid
- 80gga – Certain donations for scientific research or rural development
- 80ggc – Contribution given to political parties
- 80ia – products and gains from industrial undertakings or enterprises engaged in infrastructure development.
- 80iab – profits and gains by an undertaking or enterprise engaged in the development of special economic zone.
- 80ib – profits and gains from certain industrial undertakings other than infrastructure development undertaking.
- 80iba – profits from housing project
- 80ic – profits and gains of certain undertaking in certain special category of states
- 80id – in the case of hotels and convention center in NCR
- 80ie – in respect of undertaking in north-eastern states
- 80jja – in respect of profits and gains from the business of collecting and processing of biodegradable waste.
- 80jjaa – in respect of employment of new employees
- 80qqb – in respect of royalty income of authors
- 80rrb – in respect of royalty of patents
- 80tta – in respect of interest on deposits in savings accounts
- 80u – in case of a person with disability