Allowance Exempted under the income tax act 1961

What are allowances?

Allowances are the monetary support that is permitted within the permissible limit. Allowances are financial benefit given by the employer over and above the regular salary. Under the income tax act, allowances incurred to meet expenses in performance of duties of an office or employment of office are mainly exempted.

Income tax act allows exemption up to a certain limit to the taxpayers which includes salaried person. Allowances are benefited to the employees taking high salaries and it helps them to structure their salary and reduce the income tax liabilities up to a certain limit.

Allowances are taxable under the income tax act on ‘’due’’ or ‘’accrual basis’’ irrespective of the fact that it is paid in addition to or in lieu of salary. Under the income tax there are 3 type of allowances- fully taxable allowances, Fully exempted allowances, partly exempted allowances.

We are here providing you the list of allowance and tax treatment of different allowances:

Allowances

Tax Treatment

City Compensatory allowance

This allowance is fully taxable

Dearness Allowance

Fully taxable

Overtime Allowance

Fully taxable

House rent allowance (Section 10(13A)

HRA is exempted up-to a certain limit as per the rule 2A of the income tax act

The least of the following is exempt from tax:

a) Actual HRA Received

b) 40% of Salary (50%, if house situated in Mumbai, Calcutta, Delhi or Madras)

c) Rent paid minus 10% of salary

* Salary= Basic + DA (if part of retirement benefit) + Turnover based Commission

 

Note:

HRA is fully taxable of employee owns house or he does not pay any rent
  • Even if you own a house, you can claim deduction under section 10 (13A) if you reside in a rent rented property
  • It is mandatory for employee to report PAN of the landlord to the employer if rent paid is more than Rs. 1,00,000
  • Entertainment allowance received by the Government employees (Fully taxable in case of other employees)

    Entertainment allowance is first added in salary income than deduction is given to the government employees:

    Least of the following is deductible :

    a) Rs 5,000

    b) 1/5th of salary (excluding any allowance, benefits or other perquisite)

    c) Actual entertainment allowance received

    Special Allowances (Section 10(14) read with rule 2BB)

     

     

    Children Education Allowance

     

    Exempt up-to Rs. 100 pm per child up to a maximum of 2 children

     

    Hostel Expenditure Allowance

     

     

    Exempt up to Rs. 300 per month per child up to a maximum of 2 children

    Transport Allowance to meet expenditure for the purpose of commuting between place of residence and place of duty

    Rs. 3,200 pm, who is blind or deaf and dumb or orthopedically handicapped with disability of lower extremities

     

    Transport Allowance to an employee working in any transport business to meet his personal expenditure during his duty performed while running of such transport from one place to another place provided employee is not in receipt of daily allowance.

     

    Amount of exemption shall be lower of following:

    a) 70% of such allowance; or

    b) Rs. 10,000 per month.

     

    Conveyance Allowance granted in performance of duties of an office

     

    Exempt up-to the amount of actual expenditure incurred

    Daily Allowance/Helper/Assistant Allowance/Uniform Allowance

     

    Exempt up to the amount of expenditure incurred.

    Special compensatory Allowance (Hilly Areas)

     

    Exempt from tax varies from Rs. 300 per month to Rs. 7,000 per month.

    Border area allowances, Remote Locality allowance or Disturbed Area allowance

           or Difficult Area Allowance

    Exempt from tax varies from Rs. 200 per month to Rs. 1,300 per month.

    Tribal area allowance given in (a) Madhya Pradesh (b) Tamil Nadu (c) Uttar Pradesh (d) Karnataka (e) Tripura (f) Assam (g) West Bengal (h) Bihar (i) Orissa

     

    Rs. 200 per month

    Compensatory Field Area Allowance. If this exemption is taken, employee cannot claim any exemption in respect of border area allowance

     

    Rs. 2,600 per month

    Compensatory Modified Area Allowance. If this exemption is taken, employee cannot claim any exemption in respect of border area allowance 

     

    Rs. 1,000 per month

     

     

    Counter Insurgency Allowance granted to members of Armed Forces operating in areas away from their permanent locations. If this exemption is taken, employee cannot claim any exemption in respect of border area allowance 

     

    Rs. 3,900 per month

     

     

    Underground Allowance is granted to employees working in uncongenial, unnatural climate in underground mine

     

    Up to Rs. 800 per month

     

    High Altitude Allowance is granted to armed forces operating in high altitude areas 

     

     

     

    a) Up to Rs. 1,060 per month (for altitude of 9,000 to 15,000 feet)

    b) Up to Rs. 1,600 per month (for altitude above 15,000 feet)

    Highly active field area allowance granted to members of armed forces

     

    Up to Rs. 4,200 per month

     

    Island Duty Allowance granted to members of armed forces in Andaman and Nicobar and Lakshadweep group of Island

     

     

    Up to Rs. 3,250 per month

    Allowances paid to Hight court judges, Supreme court judges and chief election Commissioner/other election commissioner are exempt subject to certain conditions.

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