Saturday, May 17, 2014

Income Under the Head Salaries: Allowance and Its Types

Allowances [Section 17(3)]:
The term allowance has been derived from the word “To allow”. As per oxford dictionary the word “Allowance” means “any amount or sum allowed regularly”. As such allowances are given in cash along with salary by the employer. These allowances are given to an employee to meet some specific type of loss or expenditure of the employee or to help him to meet certain type of expenses. These are divided into various categories based on the basis of their tax treatment. These are:

(i) Allowances for performance of official duties 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.      Conveyance allowance
b.      Helper allowance
c.       Academic research allowance
d.      Uniform allowance
e.       Travelling allowance


(ii) Partly taxable allowance
House Rent Allowance Section 10(13A) and Rule 2A: HRA is exempt under section 10(13A) to the extent of the minimum of the following three amounts:
House situated in Delhi, Mumbai Chennai & Kolkata
House situated in any other city
Minimum of the following 3 limits
Minimum of the following 3 limits
(i) Allowance actually received; or
(i)    Allowance actually received; or
(ii) Rent paid in excess of 10% of salary; or
(ii)    Rent paid in excess of 10% of salary; or
(iii) 50% of salary
(iii)   40% of salary
Meaning of salary: Basic salary plus D.A. to the extent the terms of employment so provide plus commission if fixed percentage of turnover. Salary is to be taken on due basis.

Some other allowances are:
Nature of benefit/allowance/perquisite
Amount of exemption
                (i)            Children education allowance
Rs. 100 p.m. per child for a maximum of 2 children
                (ii)           Hostel expenditure allowance
Rs. 300 p.m. per child for a maximum of 2 children
                (iii)          Special compensatory (Tribal area/ Schedule area/Agency area) allowance
Rs. 200 p.m.
                (iv)         Transport allowance
Rs. 800 p.m. but for handicapped employees Rs. 1600 p.m.
                (v)          Allowance to transport employees
70% of the allowance, maximum Rs. 6000 p.m.
                (vi)         Underground allowance
Rs. 800 p.m.

(iii) Fully exempted allowance
a.      Allowances to a citizen of India, who is a Government employee, rendering services outside India. [Section 10(7)]
b.      Allowances to High Court judges
c.       Sumptuary allowance given to High Court and the Supreme Court judges.
d.      Allowance received by an employee of UNO from his employer.

(iv) Fully taxable allowance: All other allowances excepting those discussed above are fully taxable. Some of such allowances are enumerated as under:
a.      Dearness Allowance (DA)
b.      City Compensatory Allowance (CCA)
c.       Medical Allowance: Fully taxable.
d.      Lunch Allowance/Tiffin allowance
e.       Overtime Allowance
f.        Servant Allowance
g.      Warden Allowance
h.      Non-practicing Allowance
i.         Family Allowance
j.        Entertainment allowance. But in case of government employee’s a deduction is allowed u/s 16(ii) at the least of the following:
(a)    Statutory limit: 5000
(b)   1/5th of basic salary
(c)    Actual entertainment allowance

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