Taxable and Non-Taxable Allowance for Salaried in India

Budget 2020 Tax Highlights

Main highlights from the budget presented by Hon’ble Finance Minister Ms. Nirmala Sitharaman on 1st Feb 2020.

  • Option to the taxpayer choose between old income tax rate and slabs and the new ones.
  • New tax slabs offer reduction in applicable tax rate from 20% to 10% and from 30% to 20% in some cases.
  • In case the tax payer opts for new slabs and rates, no exemption or deduction can be claimed such as those on account of house rent allowance (HRA) investments, LIC premium, school fees, mediclaim etc.
  • Dividend Distribution Tax has been withdrawn, and dividend income shall be taxable in the hands of the recipient.
  • The Insurance coverage of deposit in a bank has been increased from Rs. 1 lakh to 5 lakh.
  • The home loan interest exemption limit of Rs. 1.5 lakhs for home loans sanctioned on and before 31st March 2020 have been extended by 1 year to 31st March 2021.

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
  • Dearness allowance
  • Entertainment allowance
  • Overtime allowance
  • City compensatory allowance
  • Interim allowance
  • Project allowance
  • Tiffin/meals allowance
  • Uniform allowance
  • Cash allowance
  • Non-practicing allowance
  • Warden allowance
  • Servant allowance
  • HRA except when it qualified as exempt under Section 10
  • Fixed medical allowance
  • Special allowance(including children education allowance, children hostel allowances)
  • Conveyance allowance above Rs. 19,200 per annum under section 10 (14) (ii) of income tax act
  • Entertainment allowance – deduction of 1/5 of salary or Rs. 5,000 whichever is less under section 16 (ii) of income tax act
  • HRA upto 40% of basic salary (50% in case of employees staying in 4 metros - Delhi, Mumbai, Chennai and Bangalore) subject to actual rent paid being more than HRA plus 10% of basic
  • Conveyance allowance upto Rs. 1,600 per month or Rs. 19,200 per annum
  • Payments to government employees posted abroad
  • Allowance for UN employees
  • Sumptuary allowance paid to judges of Supreme Court and High Courts
  • Compensatory allowance paid to judges of Supreme Court and High Courts

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 Allowance

    Entertainment 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 Allowance

    This 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 Allowance

    Meal 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 Allowance

    Interim allowance is an allowance provided by the employer instead of final allowance. Interim allowance is entirely taxable.
  • Cash Allowance

    Cash 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 Allowance

    Allowance provided for employees for hiring the services of servant, such allowance is always taxable.
  • Project Allowance

    If an employer provides allowance to employees to liquidate a project's expenses, then it called project allowance and it is completely taxable.
  • Warden Allowance

    If 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 Allowance

    When 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 Abroad

    When Indian government servants are paid while serving their employment tenure in other countries, this allowance is considered as non taxable.
  • Allowances Paid to UNO Employees

    Allowances that are paid to UNO Employees are completely non taxable.
  • Allowances Paid to Judges of HC & SC

    Allowances 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 Allowances

    When 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 Limit

    This 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 Limit

    House 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 Exemption

    This 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 Allowance

    A 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.
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