Meaning of Allowances under Income Tax

What do we mean by allowances:

Fixed amount of payment in cash or in other substance made by the employer to his employees monthly, other than salary is called an allowance. It is fixed sum of money paid regularly in addition to salary for the purpose of meeting some particular or unusual requirement or conditions connected with the services rendered by the employee.

From income tax point of view there are five categories of allowances:

  1. Fully exempt allowances
  • Allowances given outside India by Indian govt. to an Indian citizen
  • Allowances to employees of UNO
  • Allowances to supreme and high court judges
  1. Allowances exempt upto actual expenditure
  • Travelling-to meet the cost of travel
  • Daily Allowances- to meet the charge incurred by an employee on tour
  • Conveyance Allowances- to meet the petrol expenses in performance of office duty
  • Helper allowance- to appoint a helper for office work
  • Academic/research allowance
  • Uniform allowance
  1. Allowances exempt upto specified limit- lower is exempt
  • House rent allowance
  • Entertainment allowance for central govt. & state govt. employees
  1. Fully taxable allowance
  • Dearness allowance
  • City compensatory allowance
  • Warden allowance
  • Servant allowance
  • Tiffin allowance
  • Overtime allowance
  • Entertainment allowance is fully taxable for the employees other than central govt. & state govt. employees.
  1. Allowance for which a fixed amount is exempted
  • Children education allowance- maximum 100/- p.m. per child available for maximum 2 Children
  • Children hostel allowance – maximum 300/- p.m. per child for maximum 2 Children
  • Tribal area allowance- 200/- p.m.
  • Transport allowance -800/- is exempt & in case of handicapped employee 1600/- p.m.
  • Transport allowance for employees working in transport company-lower is exempt-
    • 70% of actual allowance
    • 10000 Rs. P.m.

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