- What
is allowance?
The
allowance is the fixed amount of money or other substance given regularly in
addition to salary for the purpose of meeting some particular requirement
connected with the services rendered by the employee or as compensation for
unusual conditions of the service. The allowances are fixed amount and it is
not directly related to actual expenditure of the employee.
- There
are some special allowances which are exempt from tax u/s 10(14), that we can
classify into two categories namely:
1.
When exemption
depends upon actual expenditure by employee;
2.
When exemption
does not depend upon actual expenditure by employee.
The
provisions of section 10(14) are given below:
1.
Types
of allowances, whose exemption depends upon the actual expenditure by the
employee-:
Under
this category, the following allowances are exempt u/s 10(14) to the extent the
amount is utilized for the specified purpose for which the allowance is
received. In other words, in the cases given below the amount of exemption u/s 10(14) is:-
- The
amount of the allowance given by employer; or - The
amount utilized for the specific purpose for which allowance is given,
Whichever
is less.
Exemption
is available on the aforesaid basis in the case of following allowances-
Name |
Nature of Allowance |
Travelling allowance/ Transfer |
Any allowance (by whatever name |
Conveyance allowance |
Allowance |
Helper allowance |
Any allowance (by whatever name |
Daily allowance |
Any allowance whether granted on tour |
Uniform allowance |
Any allowance (by whatever name |
Research allowance |
Any allowance (by whatever name |
Note: As stated
earlier, the amount of exemption in the above cases is amount of allowance or
the expenditure incurred for the specific purpose for which allowance is given,
whichever is lower.
The
provisions illustrated below will help you to get the clear idea of the tax
treatment of the aforesaid allowances. :
Column 1 |
Column 2 |
Column 3 |
Column 4 |
Column 5 |
Nature of
|
Amount of (Rs.) |
Amount |
Amount exempt (least among column 2 & |
Amount chargeable to tax (column 2 less |
Travelling allowance given for |
45,000 |
40,000 |
40,000 |
5,000 |
Transfer allowance given at the time |
30,000 |
33,000 |
30,000 |
Nil
|
2.
Types
of allowances, whose exemption does not depend upon actual expenditure by
employee
Under
this category, the amount of exemption does not depend upon expenditure
incurred by the employee. Regardless of amount of expenditure, the allowances
given below are exempt to the extent of-
- The amount of
allowance; or - The amount
specified in rule 2BB
Whichever is
less.
On
the above basis exemption is available in the case of the following allowances.
Important point:
It
may be noted that in these cases, the amount of actual expenditure is not taken
into consideration.
Sr. No. |
Name of allowance |
Nature |
Exemption as specified in rule 2BB |
1. |
Special compensatory (Hills Area |
Any special compensatory allowance in the |
Amount exempt from tax varies from
|
2. |
Children Education Allowance |
Allowance given for children’s |
Up to Rs. 100 per month per child for |
3. |
Hostel Expenditure Allowance |
Allowance granted to an employee to |
Up to Rs. 300 per month per child for |
4. |
Tribal areas/ scheduled areas |
It is given in (a) Madhya Pradesh; (b) |
Rs. 200 per month. |
5. |
Allowance for transport employee. |
Allowance granted to employee working in any transport system to meet his |
Exemption is (a) 70 per cent of such allowance; or (b) Rs. 10,000 per month, Whichever |
6. |
Transport |
Allowance granted to employee to meet |
Up to Rs. 800 per month. (Rs. 1,600 In the case of Chairman/ members of |
7. |
Underground Allowance |
Allowance granted to an employee who |
Up to Rs. 800 per month. |
8. |
Border Area Allowance |
Any special compensatory allowance in |
The amount of exemption varies from |
9. |
Compensatory field area allowance |
Compensatory |
Up to Rs. 2,600 per month. |
10. |
Compensatory modified area allowance |
Compensatory |
Up to Rs. 1,000 per month. |
11. |
Island Duty Allowance |
Allowance granted to the members of |
Up to Rs. 3,250 per month. |
12. |
Counter insurgency allowance |
Allowance granted to the members of |
Up to Rs. 3,900 per month. |
13. |
Highly active field area allowance |
Allowance granted to the members of |
Up to Rs. 4,200 per month. |
Note: As stated
earlier, the amount of exemption in the above cases is amount of allowance or
amount specified in the rule whichever is lower.
How to save tax
on the allowances by restructuring of salary?
Taxpayer
can request his employer and ask for restructuring of the salary according to
the exemptions available under the income tax act.
For example, if employer is paying allowances of
Rs. 1500 to employee which are fully taxable.
Now employer can restructure this allowance in
following manner:
Children
Education Allowance Rs.100
Hostel
Expenditure Allowance Rs.300
Transport
Allowance Rs.800
Other
Allowances Rs. 300
Total Exempt allowances
is Rs. 1200
Total taxable allowance
is Rs. 300
So
by doing proper restructuring of salary employee can save the tax on allowances.