Taxable Allowances & Non-Taxable Allowances for Salaried Individual

When an employer gives his employee a financial benefit over and above his salary, it is an allowance offered by him to cover all the expenses to facilitate discharge of services. For instance, one may pay a Conveyance allowance to cover costs incurred for back and forth from the workplace to place of residence.

Taxable allowances

  • Dearness allowance: The employees get dearness allowance (DA) for filing the cost of living adjustments one makes coping up the inflation. The DA is taxable for the employees along with the salary. The IT Act makes it mandatory that the DA should be disclosed along with the salary while filing returns.
  • Entertainment Allowance: This allowance is usually shown as the lowest of the three, i.e., one-fifth of the basic salary, the amount actually received, or Rs. 5000. This compensation is offered to the employees for the expenses incurred on the hospitality of the customers. The government workers can however, claim exemption under section 16 (ii). The other staffs have to pay taxes on the same.
  • Overtime allowance: If the employees work overtime, they are offered an overtime allowance. This is the time they devote other than the working hours.
  • City compensatory allowance: This benefit is offered to the urban living employees who bear huge expenses for living in the inflated costing areas.
  • Interim allowance: The allowance given by the employer interim to the final contribution is an interim allowance.
  • Project allowance: The allowance given to employees to cover up the project expenses is project allowance.
  • Meals/Tiffin allowance: The employers may also offer meal allowances for the food expenses while working.
  • Cash allowance: The cash contributions include holiday allowance, marriage allowance, bereavement allowance, etc.
  • Non-practicing allowance: This allowance is for the physicians who are attached to the different clinical centres of numerous laboratories and institutes.
  • Warden allowance: this is paid to an employee working as a warden. For example: in the case of an educational institute.
  • Servant allowance: this is for the employees for work as servants.

Partly-taxable allowances

House Rent Allowance (HRA): This is one of the partially-taxable allowances. The employer pays the employee for his accommodation in the same case. An employee can claim for exemption U/S 10 (13A) for an amount among the below options (whichever is lower):

  • Rent paid minus 10% of basic salary
  • 50% basic salary in cities like Delhi, Mumbai, Kolkata and Chennai and 40% basic salary for non-metro areas.
  • The HRA received by the employee

Any amount exceeding the minimum of these is subject to taxes along with the basic salary.

Fixed medical allowance: This is a fee paid by the employer for medical treatments of the employee and family members. The reimbursement exceeding Rs. 15,000 is subject to taxes.

Special allowance: This is covered U/S 14 (I). It is again partly taxable.

Non-taxable:

  • The allowances given to government servants, employees and judges of UNO are not subject to taxes.
  • Government servants while serving abroad receiving allowances are not taxable.
  • Sumptuary allowances: these are paid to the HC and SC judges being non-taxable.
  • The allowances paid to UNO employees are fully exempt.
  • Compensatory allowances paid to judges are again not taxable.
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