How to Structure Allowances for Saving Income Tax

There are different categories of allowance based on their taxability .i.e. Exempted, Exempted upon actual expenditure, Fully Taxable, Taxable after specified Limit. One can always plan this salary; so that his/her tax liability can be minimized such as inclusion of Transport allowance of Rs 800/- in salary but care should be take in structuring allowances like only married person having children can get the benefit of children hostel allowances and children education allowances, so unmarried person should not include this type of allowances in their salary. For allowances which are exempted upon actual expenditure one should take care of getting proper invoice/receipt/bill for those services from others to whom payments are made like taking petrol bill for petrol allowances.

A) Fully exempted allowances .i.e. not taxable

  1. Foreign allowances
  2. Allowances to high court or supreme court judges
  3. Allowances paid to high court judge under service act
  4. Allowances from UNO
  5. Overseas allowances

B) Allowances exempted upon actual expenditure

  1. Travelling allowance
  2. Daily allowance
  3. Covance allowance
  4. Helper allowance
  5. Research allowance/academic allowance
  6. Uniform allowance

C) Taxable allowances

  1. Dearness allowance
  2. Fixed medical allowance
  3. Tiffin allowance/lunch allowance
  4. Servant allowance
  5. Project allowance
  6. Family allowance
  7. Special allowance
  8. Petrol allowance
  9. Overtime allowance
  10. City compensatory allowance
  11. Rural allowance

D) Allowances exempted upto specified limit

Allowances

Exemption

  1. Transport allowance

Rs. 800 per month

Rs. 1600 per month for blind & handicapped

  1. Children education allowance

Rs. 100 per month upto two children (not exempt for children studying abroad)

  1. Children hostel allowance

Rs. 200 per month upto two children

  1. Tribal area allowance

Rs. 200 per month

(allowed in MP,TN,UP, Karnataka, Tripura, Assam, west Bengal, Bihar, Orissa)

  1. Transport system allowance

Rs.6000 per month or 70% 0f allowance

(whichever is lower)

  1. Underground allowance

Rs. 800 per mont


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