Allowances: Types, Taxable and Non- Taxable Allowance for Salaried in India

The more allowances you claim, the less income tax is withheld from your pay. Fewer or zero allowances mean more income tax is withheld from your pay. To put it another way: More allowances equal more take-home pay and money in your pocket.

Taxable Allowances	Partially-Taxable Allowances	Non- Taxable Allowances
Dearness Allowance Entertainment Allowance Overtime Allowance City compensatory allowance Interim Allowance Project Allowance Tiffin/meals allowance Uniform allowance Cash allowance Non-practicing allowance Warden allowance Servant allowance	HRA except when it qualified as exempt under Section 10 Fixed medical allowance Special allowance Conveyance allowance above Rs. 19,200 per annum under section 10 (14) (ii) of income tax act Education Allowance Leave Travel Allowance	Payments to government employees posted abroad Allowance for UN employees Sumptuary allowance paid to judges of Supreme Court and High Courts Compensatory allowance paid to judges of Supreme Court and High Courts

Taxable Allowances in India

1. Dearness Allowance

Dearness Allowance (DA) is given by certain employers to their employees, compensating them for an increase in the cost of living. The purpose behind providing this allowance is to reduce the impact of rising inflation. It is generally paid in the form of a fixed percentage of basic salary. According to the Income Tax Act, the entire amount of DA received is taxable and has to be declared at the time of filing income tax returns. 

2. Entertainment Allowance

Entertainment allowance is given to the employees to reimburse the expenses incurred on the hospitality of the customers. The allowance is completely taxable for all private-sector employees. However, government employees can claim exemption from the same under section 16 (ii) and the amount of exemption is limited to the lowest of the following:

(a)20% of gross salary (excluding all other allowance, perks and benefits)

(b)Actual entertainment allowance 

(c)Rs. 5,000

3. Overtime Allowance

Overtime allowance is given to employees who tend to work more than the operational hours decided by the company. Any such allowance received by the employee is fully taxable.

4. City Compensatory Allowance

City Compensatory Allowance or CCA is given by certain companies to their employees to compensate them for a relatively high cost of living in metropolitan areas. 

5. Interim Allowance

Interim Allowance is an allowance given by the employer instead of a final allowance. Interim allowance is fully taxable. 

6. Project Allowance

When an employer provides an allowance to employees to liquidate a particular project’s expenses, it is called project allowance and is fully taxable.

7. Tiffin/meals allowance

In some cases, employers may provide tiffin/meal allowance to their employees which is fully taxable.

8. Uniform allowance

Uniform allowance is the allowance given by the employer to the employee for the purchase and maintenance of the uniform which he or she is supposed to wear during the performance of his/her duty.

9. Cash allowance

Cash allowance for expenditures like holidays, marriage, and other similar events provided by the employer is fully taxable in the hands of employees. 

10. Non-practicing allowance

When a doctor gets associated with clinics of various laboratories or medical institutes, any non-practicing allowance paid to them is taxable.

11. Warden allowance

If an employer pays an allowance to an employee working as a warden i.e. as a keeper of an educational institution, the allowance received is fully taxable.

12. Servant allowance

When an employer pays an employee to engage services of a servant, such an allowance is taxable. 

Partially Taxable Allowances in India

1. HRA except when it qualified as exempt under Section 10

House Rent Allowance (HRA) is paid to the employees by the company to help them in coping up with their accommodation expenses. But if an employee does not stay in a rented place, then this allowance is fully taxable. Employees can claim deduction on house rent allowance under Section 10 (13A) if:

• Actual HRA is received by an individual from an employer
• If the employee resides in metro cities like Delhi, Mumbai, Chennai, or Bangalore, the actual rent paid should be as much as 50% of the basic salary
• 40% of the basic salary for people living in non-metros
• Excess of rent paid annually over 10% of annual salary

2. Fixed medical allowance

This is an allowance provided by the employer when the employee or any of his family members fall sick for the cost incurred on their treatment. If the amount exceeds Rs. 15,000 per year, the same becomes taxable. 

3. Special allowance

A special allowance is paid to an employee for the performance of a duty mentioned under section 14 (i). This allowance does not fall in the category of perquisite and is partially taxable. 

4. Conveyance allowance above Rs. 19,200 per annum under section 10 (14) (ii) of income tax act

An amount of Rs. 1,600 per month  (Rs. 19,200 annually) is provided to the employees for commuting from home to office and vice-versa. Any expense over and above that is taxable.

5. Education Allowance

This is the amount given by the employer for the education of the children of the employees.  Any amount spent more than the provided limit of Rs. 100 per month per child for maximum two children, is taxable.

6. Leave Travel Allowance

Leave Travel Allowance (LTA) is offered for travelling anywhere in India. Deduction on the fare cost is provided to some extent, and the balance is taxable.

Non-Taxable Allowances in India 

1. Payments to government employees posted abroad

Any amount paid as a provision for rendering services outside India by the Government Employees is exempted.

2. Allowance for UN employees

Benefits received by the people working in the United Nations Organisation (UNO) are fully exempt.

3. Sumptuary allowance paid to judges

Allowances that are paid to the judges of the High Court and Supreme Court are completely exempted from tax. These allowances are called sumptuary allowances.

4. Compensatory allowance paid to judges

When Judges of the High Court and Supreme Court receive any compensatory allowances, these are exempted from tax.

What is the difference between reimbursement and an allowance?

Allowances are basically a part of an individual’s salary package to cover the expenses that may incur in the course of his employment. For instance, if a person uses his own vehicle to commute from home to the workplace, then the company will provide a transport allowance for the same while reimbursement is an expense that is made for an employee on the employer’s behalf. Reimbursements are always related to business expenses and do not add anything to an employee’s income. Thus, reimbursement is not taxable at all.

What are allowances in salary?

As per the Income Tax Act, allowances are the monetary benefits given by the employer to the employee over and above the basic salary for meeting various expenses.

What is a monthly allowance?

Monthly Allowance is the monetary benefit that the employees get for meeting fixed monthly expenses like electricity bills, broadband, etc.

How is the taxable income calculated?

The taxable income is calculated by adding income from all the sources an individual has earned in the financial year and deducting the applicable exemptions and deductions from the gross total income.

What is conveyance allowance?

Conveyance Allowance is the amount an employer pays an employee to travel to and from work. It is an allowance. Hence is exempt from tax up to a specific limit. It appears on the earnings side of the salary slip.

What is a position allowance?

In this situation, the company may provide an allowance that would bring the expatriate’s level of compensation to that of the lowest-paid local hire in the same position.