Allowances Under the Head “Salaries”

Allowances form a significant part of salary income and are classified into three categories for tax purposes: Fully Taxable, Partially Exempt, and Fully Exempt. Below is a detailed breakdown:

1. Fully Taxable Allowances

These allowances are fully added to taxable income:

• Dearness Allowance (DA)
• City Compensatory Allowance
• Overtime Allowance
• Fixed Medical Allowance
• Servant/Driver Allowance
• Non-Practicing Allowance (for doctors)
• Project Allowance
• Tiffin/Lunch Allowance

Tax Impact:

• No exemptions available
• Must be reported in Form 16

2. Partially Exempt Allowances

(A) House Rent Allowance (HRA) [Sec 10(13A)]

Exemption = Least of:

1. Actual HRA received
2. 50% of salary (for metro cities) or 40% (non-metro)
3. Rent paid – 10% of salary (Basic + DA)

Example:

• Basic + DA = ₹50,000/month
• HRA = ₹20,000/month
• Rent paid = ₹15,000/month (Delhi)
• Exemption = Least of:
  • ₹20,000
  • ₹25,000 (50% of ₹50,000)
  • ₹15,000 – ₹5,000 = ₹10,000
• Taxable HRA = ₹20,000 – ₹10,000 = ₹10,000/month

(B) Leave Travel Allowance (LTA) [Sec 10(5)]

• Exempt for domestic travel (air/rail/road)
• Limit:Economy class airfare or AC-1 train fare
• Frequency:2 trips in a block of 4 years

(C) Special Allowances [Sec 10(14)]

3. Fully Exempt Allowances

These are not taxable at all:

• Foreign Allowance (for govt. employees posted abroad)
• UNO/International Organization Allowances
• Sumptuary Allowance (for judges/high-ranking officials)
• Compensatory Field Area Allowance (for armed forces)

4. Taxation Rules Summary

5. Example Calculation

Employee Details:

• Basic = ₹60,000/month
• DA = ₹10,000/month
• HRA = ₹25,000/month (Rent paid = ₹20,000/month, Mumbai)
• Transport Allowance = ₹2,000/month
• Children Edu Allowance = ₹300/month (1 child)

Taxable Allowances:

1. HRA Exemption= Least of:

• • ₹25,000
  • ₹35,000 (50% of ₹70,000)
  • ₹20,000 – ₹7,000 = ₹13,000
    → Taxable HRA = ₹25,000 – ₹13,000 = ₹12,000/month

2. Transport Allowance= ₹2,000 – ₹1,600 = ₹400/month
3. Children Edu Allowance= ₹300 – ₹100 = ₹200/month
4. Total Taxable Allowances = ₹12,000 + ₹400 + ₹200 = ₹12,600/month