Tax Free Allowances
Tax Free Allowances
An allowance is a fixed amount paid to an employee at regular intervals. It is usually paid for meeting a particular requirement connected with the services rendered by the employee or as compensation for unusual conditions. Certain allowances called special allowances are tax-exempt under Section 10(14) of the Income Tax Act. In this article, we look at such tax-free allowances paid to an employee and the tax implications of the allowances.
Variable Allowances are those for which the Income Tax Act does not prescribe a fixed qualifying amount. Hence, any amount can be claimed as exempt provided the conditions mentioned in the Act are satisfied.
Any allowance provided to meet the charges of travel on tour or on the transfer of duty is called travelling allowances. Allowances in reference to the cost of travel on transfer include any amount paid in relation to transfer, packaging and transportation of such transfer.
Daily allowance is provided to employees to meet the daily expenses incurred when on tour or for the period of a transfer in the job. This type of allowance is bestowed when the employee is not in the usual place of duty.
Research/ Academic Allowance
Allowance endowed for the reason of promoting academic and research-related training, education or professional duties is known as academic or research allowance.
Allowance for conveyance is provided to employees to compensate them for the cost incurred while travelling for official duties. However, the employer doesn’t get paid for the commute from home to work as it is not considered as an official duty. The allowance for travel from home to work is treated under another section of allowance termed as ‘Transport allowance’, which isn’t exempt from tax.
In certain peculiar cases, the employer might allow the employee to recruit a helper for performing his official duties. In such cases, a helper allowance is granted.
An allowance that has been provided for the purchase or maintenance of uniform which is to be used during duty in the office is called a uniform allowance. This allowance could be availed only for the specific uniform stated by the organization. Generally, it is not significant to embellish details of such expenses incurred unless the expense is not commensurate with the salary. In most cases, it is not required to keep proof of documents as a simple declaration meets the requirement.
For this category of allowances, the exemption is available only to the extent of the monetary ceiling limit mentioned under the Act. The limit for each of the specified allowances is mentioned below:
|Allowance Type||Limit of Allowance Provided under the Act|
|Compensatory Allowance|| This type of allowance is provided for individuals working in places of high altitude or hilly areas. This is also referred to as climate allowance:
Mountainy areas of HP, UP, J&K and North East – Rs.800
Siachen is of J&K – Rs.7000 per month
Any place above 1000 meters or more – Rs.300
|Scheduled or tribal or agency areas allowance||Karnataka, West Bengal, MP, Assam, Orissa, Tamil Nadu, Bihar, UP and Tripura. – Rs. 200|
|Allowance for duty in the border area or remote area or any difficult/disturbed areas||Allowances starting from Rs.200 to Rs.1300 pm are exempt|
|Allowance for children’s education||Rs.100 p.m for each child and for a limit of two children.|
|Allowance for working in a transport system for personal expenses, while on duty||70% of allowance up to Rs.10,000 pm.|
|Field area allowance||Places such as Nagaland, J&K, HP, UP, AP, Sikkim, and Manipur – Rs.2600 pm|
|Allowance for employee’s children’s hostel expenses||Rs.300 pm for each child for a limit of children.|
|Allowance provided to armed forces in cases of counter-insurgency||Rs.3900 per month|
|Transport allowance to physically challenged employees who are on duty for travel to work||Rs.1600 per month|
|Transport allowance for travelling between Work and Home||Rs.1600 pm|
|Compensatory allowance for duty in a modified field area||Certain places of West Bengal, North Eastern States, Rajasthan, Union Territories of J&K and Ladakh, UP and HP – Rs.1000 pm|
|Island Duty Allowance granted to armed forces in Andaman & Nicobar and Lakshadweep||Rs.3250 per month|
|Allowance for working in underground mines||Rs.800 per month|
|Special compensatory highly active field area allowance||Rs.4200 pm|
|Allowance for armed forces in a high altitude area||9000 – 15,000ft – Rs.1060 pm
Above 15,000 ft – Rs.1600 pm
Treatment of Entertainment Allowance
As per Section 16(ii), the Entertainment Allowance received by any employee is added in the computation of the gross salary. The entertainment allowance is fully taxable for the employees those who are working in the private sectors. This deduction is granted only to a Government employee where the assessee is not entitled to any exemption but subjected to the deduction from the gross salary to the extent of a minimum of 3 limits that are given as follows:
- Actual entertainment allowance that is received during the previous year.
- 20% of basic salary
- Deduction amount will be Rs.5000
Even if the Government employee spends the whole of the entertainment allowance or even an amount higher than the entertainment allowance received is spent on the entertainment for the official purposes. The deduction is restricted to the amount as per the provisions specified above.
Fully Taxable Allowances
Some of these following tax-free allowances are fully taxable as the general rule of allowances are not specifically covered under fully and partially exempted allowances.
- Dearness Allowance
- City Compensatory Allowance
- Tiffin/Lunch Allowance
- Overtime Allowance
- Fixed Medical Allowance
- Family Allowance
- Non-practising Allowance
- Warden Allowance
- Servant Allowance
There are certain individuals who also receive some special tax-free allowances, which are exempt under Section 10(14):
- Allowances granted to High Court Judges
- An Allowance which is given to a UNO employee
- Sumptuary allowances received by Supreme Court and High Court Judge
- Allowances granted to government employees who are Indian citizens, working abroad