Taxable and Non-Taxable Allowance for Salaried in India
What are allowances?
An allowance is a fixed amount of money received by a salaried employee from his employer to meet a particular type of expenditure over and above salary. For example, companies provide overtime allowance to employees if they work more than fixed working hours. Similarly, there are many other allowances which are provided to salaried individuals. Allowances are treated as part of the salary and are taxable, except for those for which specific exemptions have been provided under various sections of Income Tax Act. Based on their respective tax treatment, these allowances can be categorized into three buckets - Taxable, non taxable and partially taxable.
Taxable, Non-Taxable and Partially Taxable Allowances AY 2017-18
|Taxable Allowances||Partially-Taxable allowances||Non-Taxable allowances|
Read on the definition and about various allowances that fall under each of these three buckets.
Taxable Allowances in India
Taxable allowances are allowances that are treated as a part of salary and are not either fully or partially exempted under any sections of Income Tax. Some of the popular allowances that belong to this category are:
Entertainment AllowanceEntertainment allowance is the amount of money given to an employee to make payments towards hospitality of their customers for drinks, meals, business outings, client meetings, hotels and more. The allowance is completely taxable for all private sector employees. However, government employees can claim exemption on this tax, as quoted under section 16 (ii) and the amount of exemption is limited to the lowest of following i) 20% of gross salary (excluding all other allowance, perks and benefits), ii) Actual entertainment allowance and iii) Rs. 5,000.
Overtime AllowanceThis allowance is received by employees tend to work more than the operational hours decided by the company. It can happen due to urgent assignments and firm project deadlines. Any Overtime Allowance received by the employees is completely taxable.
Dearness Allowance (DA)Dearness allowance is allowed to be paid to public sector employees and pensioners as a cost of living adjustment to neutralize the impact of inflation and difference is cost of living for employees living in different cities and towns.
Meal AllowanceMeal allowances are paid for meals/refreshments/tiffin services to their employees and are completely taxable.
City Compensatory Allowance (CCA)CCA is offered by companies to its employees compensate for a relatively high cost of living in metropolitan cities. This allowance is used to incentivize and retain employees in towns and cities where the cost of living is higher compared to employees working in other locations.
Interim AllowanceInterim allowance is an allowance provided by the employer instead of final allowance. Interim allowance is entirely taxable.
Cash AllowanceCash allowance for expenditure like marriage allowance, holiday allowance and other similar allowances provided by employer, it is fully taxable in the hands of employees.
Servant AllowanceAllowance provided for employees for hiring the services of servant, such allowance is always taxable.
Project AllowanceIf an employer provides allowance to employees to liquidate a project's expenses, then it called project allowance and it is completely taxable.
Warden AllowanceIf an employee pays tax to an employee who is working as a warden/keeper in any institute. This allowance is considered as taxable.
Non-Practicing AllowanceWhen a doctor gets associated with clinics of various laboratories or medical institutes, any non practicing allowance paid to them is taxable.
Non-Taxable Allowances in India
Non taxable allowances are those allowances that are a part of an individual's salary which are fully exempted from taxes. Here is the list of allowances that are totally non -taxable.
Allowances Paid to Government Employees AbroadWhen Indian government servants are paid while serving their employment tenure in other countries, this allowance is considered as non taxable.
Allowances Paid to UNO EmployeesAllowances that are paid to UNO Employees are completely non taxable.
Allowances Paid to Judges of HC & SCAllowances that are paid to the judges of High Court and Supreme Court are completely exempted from tax. These allowances are called as sumptuary allowances.
Compensatory AllowancesWhen Judges of High Court and Supreme Court receive any compensatory allowances, these are exempted allowances in income tax.
Partially Taxable Allowances in India
Partially taxable allowances are those allowances which can be exempted from tax to a certain limit, as per specified in the income tax rules & regulations. Some of the partially taxable allowances are mentioned below.
Conveyance Allowance Exemption LimitThis type of allowance is paid to employees for commuting to their work place from home every day. If a conveyance allowance is less than Rs. 1,600, then it will be considered as non-taxable. The allowance is exempted up to Rs. 1,600 only, any amount more than that will be taxable as per income tax act.
House Rent Allowance (HRA) Exemption LimitHouse rent allowance is provided to the employees by a company to help them in coping up with their accommodation expenses. But, if an individual doesn't lives in a rented space, this allowance is fully taxable. Employees can claim deduction on house rent allowance under section 10 (13A), if:
- Actual HRA received by an individual from employer
- If the employee resides in metro cities like Delhi, Mumbai, Chennai or Bangalore, actual rent paid should be as much as 50% of the basic salary
- 40% of basic salary for people living in non metros
- Excess of rent paid annually over 10% of annual salary
Medical Allowance ExemptionThis is an allowance paid by an employer when the employee or any of his family members fall sick and requires prolonged medical treatment. However, if the medical expense exceeds a certain amount (e.g. Rs. 15,000), then it becomes taxable.
Special AllowanceA special allowance is paid to an employee for the performance of a duty, under section 14(i). This allowance does not fall within the category of a perquisite and is partially taxable.
What is the difference between reimbursement and an allowance?
- Allowance: Allowances are basically a part of an individual's salary package to cover the expenses that may incur in the course of his employment. For instance, if a person uses his own vehicle to commute from home to workplace, then the company will provide a transport allowance for the same. Similarly, there are many other allowances endowed by the employers for the benefit of employees. Allowances are categorized under three parts, taxable, non taxable and partially taxable allowances.
- Reimbursement: A reimbursement is an expense which is made for an employee on the employer's behalf. Reimbursements are always related to business expenses and do not add anything to an employee's income. Thus, a reimbursement is not taxable at all.