What is the tax treatment for various allowances

What is the tax treatment for various allowances

What is salary?

Salaries and wages are compensations for work done or for services rendered. Generally, salaries are paid in connection with services of non- manual type of works, whereas wages are paid in connection with manual services. However, under Income Tax Act treatment is same for both salaries and wages.

Incomes Chargeable under the head Salaries:-

a)      Current Year salary.

b)      Arrears of salary, if not charged to tax in earlier years.

c)       Advance salary.

Taxability of salary:-

  • ·         Salary is always taxable on due or receipt basis whichever is earlier.
  • ·         Method of Accounting is irrelevant.
  • ·         In order to avoid double taxation of the same income, it is provided that where a salary is taxed on receipt basis, the same shall not be taxed on due basis.
  • ·         Salary from present employer as well as former employer is taxable.
  • ·         Salary received by partners are taxable under the head PGBP, but not under the head salaries.

Taxability of salary forgone: -

If the employee forgoes his salary, it is merely an application of income and hence such forgoing of salary is not deductible and full salary is taxable.

Taxability of salary surrendered: -

If any employee voluntarily surrenders his salary to central government, then such amount would be exempted from taxability of salary. Therefore, only the balance salary is taxable.

Taxability of tax-free salary: -

If the employer provides tax free salary to the employee, then the tax paid by the employer shall be treated as perquisite to employee. Therefore, employee has to include both the salary received and tax paid by the employer in his taxable income.

Taxability of annuity: -

Annuity is a yearly payment paid to the employee by the employer. Annuity from present employer is taxable as salary and annuity from former employer is taxable a s profit in lieu-of-salary. If annuity is received from any other person other than employer then it is taxable under the head “income from other sources”.

Tax treatment of various allowances:-

A.      For the following allowances, amount of exemption is the least of (i). actual allowance given and (ii). amount utilized for which such allowance is given.

1.       Travelling allowance / Transport allowance

2.       Daily allowance

3.       Conveyance allowance

4.       Helper allowance

5.       Academic allowance

6.       Uniform allowance

B.      For the following allowances the amount of exemption does not depend on the actual expenditure incurred by the employee.

Amount of exemption the least of following,

a.       The amount of allowance given by employer; and

b.      The amount specified in rule 2BB.

Nature of allowance

Amount specified in Rule 2BB

Children education allowance

Rs.100 per month per child. Maximum 2 children.

Children hostel expenditure allowance

Rs.300 p.m per child. Maximum of 2 children.

Transport allowance

Rs.1600 p.m. (if the employee is disabled then 3,200)

Mining or underground allowance

Rs.800 p.m

Tribal areal allowance

Rs.200 p.m

Compensatory field area allowance

Rs.2600 p.m

High altitude allowance

Rs. 1060 to 1600 p.m depending upon the place.

Special compensatory allowance for providing services in Hill areas

Rs. 300 p.m to Rs. 7000 p.m depending upon place

Border or remote or disturbed area allowance

Rs. 200 p.m to Rs. 1300 p.m

Compensatory modified field area allowance

Rs. 1000 p.m

Highly active field area allowance

Rs. 4200 p.m

Island duty allowance

Rs. 3250 p.m


C.      Exemptions in some special cases: -

a.       Allowances received by High Court judges, Fully exempt

b.      Allowances received by Employees of UNO, Fully exempt

c.       Sumptuary Allowance given to High court and supreme court judges is fully exempt

d.      Any allowance or Perquisite received by Government employees for services rendered outside India is fully exempt

e.      Allowances to Foreign Technicians and other Foreign Citizens

D.      Other allowances: -

a.       HRA: - Least of the following is exempt

                                                               i.      Actual amount of HRA received

                                                             ii.      40% of the Salary for the relevant period (50% in case of Metropolitan cities)

                                                            iii.      Rent paid less 10% of salary

b.      Entertainment allowance is exempt only to Govt. employees. Least of the following amounts is allowed as deduction

                                                               i.      Rs. 5000;

                                                             ii.      20% of basic salary;

                                                            iii.      Actual amount of allowance given.

c.       The following allowances are fully taxable:

                                                               i.      City compensatory allowance.

                                                             ii.      Tiffin allowance.

                                                            iii.      Fixed medical allowance.

                                                           iv.      Servant allowance.