Allowances Under Income Tax Act1961

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

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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.

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.