INCOME TAX LAW & PRACTICE - ALLOWANCES

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INCOME TAX LAW & PRACTICE
- ALLOWANCES
Prepared by,
Dr.Sangeetha R
Assistant Professor
Hindusthan College of Arts and Science, Coimbatore

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Allowances
 Allowance is a fixed amount of money given along with salary in order to meet
some particular requirement connected with the services rendered by the
employee.
 It is taxed on due or receipt basis.
 Allowances are generally classified into three categories:
(i) Fully Taxable Allowances
(ii) Partly Taxable or Partly Exempted Allowances
(iii) Fully Exempted Allowances.
 Allowances are generally taxable under section 15 on ‘due’ or receipt basis and
are to be included in the gross salary unless a specific exemption is provided
in respect of any such allowances.

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Allowances
Fully Exempted Fully Taxable Partially Taxable
(i) Allowances to Government
employee, rendering services
outside India
(ii) House Rent Allowance granted to
Judges of High court and supreme
court.
(iii) Sumptuary allowance given to High
Court and Supreme Court Judges.
(iv) Allowance received by an employee
of UNO from his employer.
(i) DA
(ii) CCA
(iii) Medical Allowance
(iv) Lunch Allowance
(v) Overtime allowance
(vi) Servant allowance
(vii) Family allowance
(viii) Tiffin allowance
(ix) Warden allowance
(x) Deputation allowance
(xi) Non practising allowance
(xii) Project allowance
(xiii) Dog allowance
(xiv) Capita l compensatory allowance
(xv) Marriage allowance
(xvi) Water and Electricity allowance
(xvii) Entertainment allowance for non
Govt. employees.
(i) HRA
(ii) Entertainment allowance
for Govt. employees
(iii) Education allowance
(iv) Helper allowance
(v) Uniform allowance
(vi) Academic Research
allowance
(vii) Conveyance allowance
(viii) Travelling allowance
(ix) Transport allowance
(x) Special allowance
(xi) Allowance for transport
employees
(xii) Daily allowance.

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I. FULLY EXEMPTED ALLOWANCES
These allowances are exempted in case of certain persons :
(i) Allowances received by a Government employee posted abroad [Sec 10(7)]
(ii) House rent allowance to judges of High court and Supreme Court – not
taxable.
(iii)Sumptuary allowances given to judges of High court and Supreme court are
not chargeable to tax.
(iv) Allowances received by UNO employees.
(v) Allowances paid to High Court Judges.
(vi) Transport allowance and Sumptuary allowance given to chairman and
members of UPSC are not chargeable to tax.

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II. FULLY TAXABLE ALLOWANCES
The following allowances are fully taxable :
(i) Dearness Allowance (DA)
- High cost of living allowance or Interim relief.
- These allowances are given by employer to the employees as
compensation for rise in prices.
- It is treated as part of salary for certain purposes such as provident
fund, value of rent free house, house rent allowance, bonus, gratuity,
leave encashment, etc.
(ii) City / Capital Compensatory Allowance
- given to compensate for the high cost of living in a big city or capital
city. The allowances are fully taxable.
(iii) Lunch allowance, Tiffin allowance, etc are fully taxable.
(iv) Entertainment allowance received by non-Govt. employees is fully taxable.

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III. PARTIALLY EXEMPTED ALLOWANCES
These exemptions are of two types :
(A)When exemption depends upon Actual Expenditure by the
employee :
The following allowances are exempt under Section 10(13A) and 10(14)
to the extent of the amount utilized for the specified purpose for which allowance
is received or to the extent of allowance, whichever is less.
(a)House Rent Allowance. Sec.10(13A)
- As per Rule 2A, it is exempted from tax upto the least of the following amounts:
(i) House Rent allowance actually received by the assessee, (or)
(ii) (a) If the accommodation is situated at Mumbai, Kolkatta, Delhi or Chennai –
An amount equal to 50 percent of Salary due to the assessee, and (b) If the
accommodation is situated at any other place – 40% of salary due to the
assessee.

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(iii) The excess rent paid over 10% of Salary.
Other relevant points :
(1) ‘Salary’ – Salary for the purpose of HRA means :
 Basic Salary
 Dearness allowance if terms of employment so provide, i.e., DA taken for
Service benefits and
 Commission based on turnover or Sales.
It excludes all other allowances and perquisites.
(2) ‘Salary’ shall be
 Determined on ‘due’ basis in respect of the period during which rental
accommodation is occupied by the assessee in the previous year.
 It, therefore follows that emoluments of a period, other than the previous year,
is not considered eventhough such amount is received during the previous year
and is taxable on ‘receipt’ basis.

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 Likewise, emoluments of the period during which rented accommodation is
not occupied in the previous year, is left out of the aforesaid computations.
(3) Full House rent allowance Taxable :
 In case an employee is living in his own house and is receiving H.R.A or is
living in a house for which he is not paying any rent, full amount of HRA is
taxable.
Meaning of “Salary”
1 Basic Salary Xxx
2 D.A. (Forming part of Salary) xxx
3 Fixed % of commission on sales made by the
employee
xxx

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(b) Amount of Exemption under Section 10(14) is as under :
(i) The amount of the allowance; or
(ii) The amount utilised for the specific purpose for which allowance is given, whichever is lower.
The following allowances fall under this category :
(1) Travelling Allowance and Transfer allowance
(2) Conveyance allowance
(3) Daily allowance
How to Calculate Taxable / Exempted HRA ?
** Least of the following required
Actual HRA received XXX 1. Actual HRA XXX
Less : Exempted** XXX 2. Rent Paid – 10% of Salary* XXX
Taxable XXX 3.40% or 50% of Salary* XXX
Whichever less is exempted
Note :
1. * Salary = Basic Salary + D.A (Forming part) + Fixed Percentage (%) of Commission
2. 50% of Salary is to be considered in case of Delhi, Mumbai, Kolkatta and Chennai and 40% in other.

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(4) Helper allowance
(5) Academic allowance
(6) Uniform allowance
(B) When Exemption does not depend upon Expenditure i.e.,
exemption is a specified amount :
 Allowances which are exempt to the extent of amount received or the limit
specified in rule 2BB for exemption whichever is less.
 Regardless of the amount of expenditure, the allowances given below are
exempt to the extent of : (a) the amount of allowance or; (b) the amount
specified in rule 2BB.
(1) Children Education Allowance – exempt upto actual amount received or
Rs.100 p.m per child upto a maximum of 2 children, whichever is less.
(2) Hostel expenditure allowance – exempt upto amount received or Rs.300 p.m
per child upto a maximum of two children whichever is less.

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(3) Tribal area allowance – exempt upto actual amount received or Rs.200
p.m, whichever is less. The exemption is available in M.P, Tamilnadu, U.P,
Karnataka, Tripura, Assam, West Bengal, Bihar and Orissa.
(4) Special compensatory allowance (Hill Areas) – includes sundry allowances.
(i) Special allowance
(ii) High altitude allowance
(iii) Uncongenial climate allowance
(iv) Snow Bound Allowance and
(v) Avalanche allowance
- Amount exempt from tax varies from Rs.300p.m to Rs.7000 per month.
(5) Border area allowance - amount of exemption varies from Rs.200 p.m to
Rs.1300 p.m
(6) Compensatory field area allowance – exemption is limited to Rs.2600 pm in
some cases. If exemption is taken in the case of compensatory field area allowance, no exemption can be taken in
respect of border area allowance.

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(7) Compensatory modified area allowance – Exempted is limited to Rs.1000
per month. If this exemption is taken, the same assessee cannot claim exemption
in respect of border area allowance.
(8) Counter insurgency allowance – given to the members of armed forces
operating in area away from their permanent location for a period of more than
30 days shall be exempted upto Rs.3900 p.m.
(9) Transport allowance – will be exempt subject to a maximum of Rs.3200 p.m
in the case of an employee who is blind or orthopedically handicapped.
(10) Underground allowance – granted to an employee who is working in
uncongenial, unnatural climate in underground coal mines. It will be exempt
subject to a maximum of Rs.800 p.m
(11) High altitude allowance – granted to the members of armed forces working
in high altitude, exempt from tax upto Rs.1060 p.m for altitude of 9000 to 15000
feet or Rs.1600 p.m for altitude above 15000 feet.

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(12) Highly Active field Area allowance – granted to the members of armed
forces in the nature of special compensatory highly active field area allowance,
exempt from tax upto Rs.4200 per month.
(13) Island duty Allowance – granted to the members of armed forces in the
nature of island duty allowance in Andaman and Nicobar and Lakshadweep
group of islands is exempt upto Rs.3,250 per month.
(14) Entertainment Allowance – included in the income from Salary under
Section 15, and then deduction is allowed under Section 16(ii) on the basis of
following conditions :
(a) In the case of Government Employee : In the case of a Central Government or
State Govt. employee, the least of the following is deductible U/s 16(ii) :
(i) Rs.5000
(ii) 20 percent of Basic Salary or
(iii)Amount of entertainment allowance granted during previous year.

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(b) In the case of Non Government Employees – included employees of
statutory corporations and local authority, entertainment allowance is not
deductible U/s 16(ii).
(c) Actual Expenditure – for all type of employees – Govt, Semi-Govt, non-Govt.
How to calculate Exemption for EAT
For Government Employees
[State / Central]
For Non-Government Employees
(including employees of statutory
corporation or local authority) [all
employees except Central and State Govt.]
Least of the following exempted
1. Actual EA received XXX
2. Absolute limit of Rs.5000 XXX
3. 20% or 1/5th of basic salary** XXX • No deduction u/s 16(ii)
Whichever less is exempted u/s 16(ii) • Full [gross] amount is taxable
** Note : Only basic salary / pay to be considered

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(15) Allowance for Transport Employees or running flight allowance
- If any fixed allowance is given by the employer to the employee who is working
in any Transport system to meet his personal expenses incurred during his
duty performed in the course of running of such transport from one place to
another, the amount of exemption shall be 70% of such allowance or
Rs.10,000pm. whichever is less.
- This exemption is allowed only when they are not in receipt of daily allowance.
- If they are in receipt of daily allowance, they can claim exemption on the basis
of amount spent for the specified purpose.