Taxability of Allowances
Introduction
Allowances are salary components paid to employees to meet specific expenses. Allowances are generally taxable unless explicitly exempted by the Income-tax Act.
Key Types of Allowances
- Dearness Allowance (DA)
- Paid to offset inflation and rising living costs.
- Fully taxable.
- Included in salary for calculating exemptions (e.g., HRA, retirement compensation).
- City Compensatory Allowance (CCA)
- Paid to compensate for the high cost of living in metropolitan cities.
- House Rent Allowance (HRA)
- Exemption available if the employee pays rent for residential accommodation and does not own such accommodation.
- Exempt amount is based on salary, HRA, rent paid, and the city (metro/non-metro).
- Allowances for Armed Forces
- Fully or partially exempt based on statutory limits. [See Rule 2BB]
- Allowances for Official Duties
- Exempt to the extent of actual expenses incurred for official purposes. It includes uniform allowance, helper allowance, daily allowance, etc.
- Personal Allowances
- Allowances for personal convenience are exempt up to specified limits; others are taxable.
- Children Education Allowance is tax-exempt up to 100 per month per child (max 2 children), regardless of actual education expenses.
- Transport allowance up to 3,200/month is tax-exempt only for employees with specified disabilities.
- Foreign Allowance
- Fully exempt if paid by the Government to Indian citizens for services rendered outside India (Section 10(7)).
- Allowances from other employers are exempt to the extent of actual expenses incurred.
- Exempt Allowances
- UNO Employees: Allowances exempt under the UN (Privileges and Immunities) Act, 1947.
- Judges: Specified allowances (e.g., sumptuary) are exempt.
- UPSC Chairman/Members: Certain transport and sumptuary allowances are exempt.
- SAARC Teachers: Exempt under DTAAs, subject to conditions.