Direct & Indirect Taxes, Tax Ready Reckoner, Tax Management, Tax Act. & Rules, Tax Planning & Tax Savings.

Direct & Indirect Taxes, Tax Ready Reckoner, Tax Management, Tax Act. & Rules, Tax Planning & Tax Savings.

Tax Treatment of ‘Allowances’ Income to be included in Gross Salary- for computing Salary Income

Allowance is a fixed monetary amount paid by the employer to the employee for meeting some  particular expenses, whether personal or for the performance of his duties. These allowances are  generally taxable and are to be included in the gross salary unless a specific exemption has been  provided in respect of any such allowance. Specific exemptions in respect of allowances are provided  under the following sections:

(1)          House Rent Allowance (HRA) — Section 10(13A)

(2)          Prescribed Special Allowances — Section 10(14)

The above allowances shall be exempt either in full or upto a certain limit and the balance, if any,  shall be taxable and thus included in gross salary.

The treatment of some of the allowances is as under:

Note :

Entertainment Allowance :

however, does not fall under section 10 and therefore it is not subject to  any exemption. The entire entertainment allowance received by an employee is first included in gross  salary and thereafter a deduction under section 16(ii) is allowed only to a government employee from  gross salary on account of such entertainment allowance, already included. The same is discussed  later. 

Tax Treatment of ‘Allowances’ Income to  be included in Gross Salary- for computing Salary Income
Tax Treatment of ‘Allowances’ Income to be included in Gross Salary- for computing Salary Income

1.   Treatment of ‘House Rent Allowance (HRA)’ [Section 10(13A) and Rule 2A]  – for computing Salary Income.

Quantum of Exemption:

Minimum of following three limits:

  Mumbai/Kolkata/Delhi/Chennai Other Cities
(i) Allowance actually received Allowance actually received
(ii) Rent paid in excess of 10% of salary Rent paid in excess of 10% of salary
(iii) 50% of salary 40% of salary

 

Note :

The exemption in respect of HRA is based upon the following factors: 

(1) Salary 

(2) Place of residence 

(3) Rent paid 

(4) HRA received. 

Since there is a possibility of change in any of the above factors during the previous year, exemption for  HRA should not always be calculated on annual basis. As long as there is no change in any of the above factors  it can be calculated together for that period. Whenever there is a change in any of the above factors, it should be  separately calculated till the next change.

2.   [Section 10(14)]- Treatment of ‘Special Allowances’   – for computing Salary Income.

Prescribed allowances which are exempt under section 10(14) are of the following two types:

(A) Special Allowances for performance of  official duties:

These allowances are not in the  nature of a perquisite within the meaning of  section 17(2) and are specifically granted to  meet expenses wholly, necessarily and  exclusively incurred in the performance of  duties of an office or employment of profit.  These allowances will be exempt the extent such  expenses are actually incurred for that purpose.  [Section 10(14)(i)].

(B) Allowances to meet personal expenses: 

These allowances are granted to the employee to  meet his personal expenses either at the place  where the duties of his office or employment of  profit are ordinarily performed by him or at the  place where he ordinarily resides. These  allowances are exempt to the extent prescribed.  [Section 10(14)(ii)].

(A)   Special Allowances which are Exempt to the extent of actual amount received or the  amount spent for the performance of the duties of an office or employment of profit, whichever is  less:

These allowances are:

(a)       Travelling Allowance:

Any allowance granted to meet the cost of travel on tour or on transfer  of duty. “Allowance granted to meet the cost of travel on transfer” includes any sum paid in  connection with transfer, packing and transportation of personal effects on such transfer;

(b)       Daily Allowance:

Any allowance, whether granted on tour or for the period of journey in  connection with transfer, to meet the ordinary daily charges incurred by an employee on  account of absence from his normal place of duty;

(c)        Conveyance Allowance:

Any allowance granted to meet the expenditure incurred on  conveyance in performance of duties of an office or employment of profit, provided that free  conveyance is not provided by the employer. Expenditure incurred on journey from residence to office and back to residence shall not be treated as expenditure incurred on conveyance in  performance of official duties;

(d)       Helper Allowance:

Any allowance, by whatever name called, granted to meet the expenditure  incurred on a helper where such helper is engaged for the performance of the duties of an  office or employment of profit;

(e)       Academic Allowance:

Any allowance, by whatever name called, granted for encouraging  academic, research and training pursuits in educational and research institutions;

(f)        Uniform Allowance:

Any allowance, by whatever name called, granted to meet the  expenditure incurred on the purchase or maintenance of uniform for wear during the  performance of the duties of an office or employment of profit.

Quantum of Exemption:

The above allowances shall be exempt to the extent of minimum of the following:

(1)          Actual allowance received.

(2)          Actual amount spent for the purposes of duties of office or employment.

(B)   Allowances to meet personal expenses

These allowances can be of the following two types:

(1)          Allowances which are exempt to the extent  of amount received or the limit specified,  whichever is less  .

(2)          Allowance which is exempt to the extent of  certain percentage of amount received. 

(1) Allowances which are exempt to the extent of amount received or the limit specified,  whichever is less:

  Name of Allowances Exemptions
(a) Children education allowance: Exempt upto actual amount received per child

or

₹100 p.m.  per child upto a maximum of 2 children,

whichever is less.

(b) Hostel expenditure allowance: Exempt upto actual amount received per child

or

₹300 p.m.  per child upto a maximum of 2 children,

whichever is less.

(c) Tribal area, Scheduled Area/Agency area allowance: Exempt upto actual amount received

or

₹200 per month,

whichever is less.

(d) Special compensatory hilly area allowance or high altitude allowance etc.: Exemption  varies from ₹300 to ₹7,000 per month.
(e) Border area, remote area allowance, disturbed area allowance, etc.: Exemption varies from ₹200 p.m. to ₹1,300 p.m.
(f) Compensatory field area allowance: Exempt to the extent of ₹2,600 p.m.
(g) Compensatory, modified field area allowance: Exempt to the extent of ₹1,000 p.m.
(h) Counter insurgency allowance granted to members of armed forces: Exempt to the extent of  ₹3,900 p.m.
(i) Transport allowance: Any transport allowance granted to an employee to meet his  expenditure for the purpose of commuting between the place of his residence and the place of  his duty, to the extent of ₹1,600 p.m. (Omitted by Notification No. 17/2018, dated 6.4.2018  due to introduction of standard deduction)

 

However, such transport allowance granted to an employee, who is blind or deaf and dumb or  orthopaedically handicapped with disability of lower extremities, is exempt to the extent of  ₹3,200 p.m. instead of ₹1,600. (It will continue to be exempt even for A.Y. 2019-20 and  onwards)

(j) Underground allowance: Any underground allowance granted to an employee who is  working in uncongenial, unnatural climate in underground mines shall be exempt to the  extent of ₹800 p.m.
(k) High altitude (uncongenial climate) allowance: Given to the member of the armed forces…

for  altitude of 9000 ft to 15000 ft ₹1,060 p.m.

and

for altitude above 15000 ft ₹1,600 p.m.

(l) Special compensatory highly active field area allowance granted to members of armed  forces: Exempt to the extent of ₹4,200 p.m.
(m) Island (duty) allowance: Given to the member of the armed forces in the Andaman &  Nicobar and Lakshadweep Group of Islands exempt to the extent of ₹3,250 p.m.

 

Note :

(1)          Assessee claiming exemption of allowance mentioned under clauses (f) and (g) above shall not be entitled  to the exemption in respect of allowance referred to under clause (e) above. 

(2)          Assessee claiming exemption in respect of the allowance mentioned under clause (h) above shall not be  entitled to the exemption in respect of disturbed area allowance mentioned under clause (e) above. 

(3)          It may be noted that allowances mentioned above are exempt to the extent of amount  received or the limit specified, whichever is less. Actual expenditure in this case has no relevance. 

(4)          If the employee receives such allowances in excess of the amount exempt above, the excess if any  received by the employee shall be taxable in his hands. 

(2) Allowance which is exempt to the extent of certain percentage of amount received

Allowance allowed to transport employees working in any transport system:

If any fixed  allowance is given by the employer to the employee who is working in any transport system, to meet  his personal expenditure during his duty performed in the course of running of such transport from one  place to another, the amount of exemption shall be 70% of such allowance or ₹10,000 p.m., whichever  is less.

Note :

Exemption will be allowed to the transport employees only when they are not in receipt of daily allowance. If  they are in receipt of daily allowance, they can claim exemption under Special Allowance (A) clause (b) above. 

Amendment made by the Finance Act, 2020 

If an employee opts to be taxed as per the new alternative regime under section 115BAC, he will not  be entitled to claim exemption of above allowances prescribed under section 10(14) (other than those  as may be prescribed for this purpose).

3.   Treatment of ‘Entertainment Allowances’ – for computing Salary Income.

This deduction is allowed only to a Government employee. Non-Government employees shall not  be eligible for any deduction on account of any entertainment allowance received by them.

In case of entertainment allowance, the assessee is not entitled to any exemption but he is entitled  to a deduction under section 16(ii) from gross salary. Therefore, the entire entertainment allowance  received by any employee is added in computation of the gross salary.

The Government employee is,  then, entitled to deduction from gross salary under section 16(ii) on account of such entertainment  allowance to the extent of minimum of the following 3 limits.

(i)            Actual entertainment allowance received during the previous year.

(ii)           20% of his salary exclusive of any allowance, benefit or other perquisite.

(iii)          ₹5,000.

Note :

1.            For purpose of deduction in respect of entertainment allowance, the actual amount spent towards  entertainment expenses is irrelevant. Even if the Government employee spends the entire amount of  entertainment allowance or even an amount greater than the entertainment allowance received is spent on  entertainment for official purposes, the deduction shall be minimum of the above 3 limits. 

2.            Amount actually spent out of entertainment allowance is irrelevant for claiming deduction. 

3.            Sumptuary allowance has to be treated as an entertainment allowance. 

4.   Treatment of ‘Allowances which are Exempt in case of certain Persons’  – for computing Salary Income.

(i)            Allowances to a citizen of India, who is a Government employee, rendering services outside  India. [Section 10(7)]

(ii)           Allowances to High Court judges under section 22A(2) of the High Court Judges (Conditions  of Service) Act, 1954.

(iii)          Sumptuary allowance given to High Court and the Supreme Court judges. Sumptuary allowance are in the nature of entertainment allowance.

(iv)          Allowance received by an employee of United Nations Organisation (UNO) from his  employer.

5.   Allowances which are fully Taxable  – for computing Salary Income.

All other allowances excepting those discussed in preceding paras, are fully taxable. Some of such  allowances are enumerated as under:

(1)          Dearness Allowance (DA)

(2)          City Compensatory Allowance (CCA)

(3)          Medical Allowance: Fully taxable, irrespective of whether any amount has been spent on  medical treatment or not.

(4)          Lunch Allowance/tiffin allowance

(5)          Overtime Allowance

(6)          Servant Allowance

(7)          Warden Allowance

(8)          Non-practising Allowance

(9)          Family Allowance

See also  Incomes Chargeable to Tax under Profits and Gains of Business or Profession
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