May 302015
 

Taxation of Allowances

Meaning of allowance

Allowance is generally defined as fixed quantity 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. It is fixed, pre-determined and given irrespective of actual expenditure

Under income tax act for exemption purpose allowances are categorized under three heads. One of the commonly used category is allowances which are based on actual amount expended by an employee. In our previous blog we discuss in detail 6 types of allowance where allowances are exempt up-to amount actually expended by employee.

Here in this blog we will discuss 2nd category of allowances which are exempted up-to amount specified in the income tax rules.

When Exemption Does Not Depend Upon Expenditure-

Name of allowance Brief Description of allowance Amount to be exempted from taxation
Special compensatory (Hill Areas) Allowance It includes any special compensatory allowance in the nature of special compensatory (hilly areas etc.) allowance or high altitude allowance or uncongenial climate allowance or snow bound area allowance or avalanche allowance. Amount exempt from tax varies from Rs. 300/- per month to Rs. 7000/- per month
Border area allowance It includes any special compensatory allowance in the nature of border area allowance or remote locality allowance or difficult area allowance or disturbed area allowance. The amount of exemption varies from Rs.200/- per month to Rs. 1,300/- per month
Tribal areas/Scheduled areas allowance Tribal area allowance is given in(a)Madhya Pradesh;

(b)Tamil Nadu;

(c) Uttar Pradesh;

(d)Karnataka;

(e)Tripura;

(f)Assam;

(g)West Bengal;

(h)Bihar;

(i)Orissa.

Rs.200/- per month
Allowance for transport employees It is an allowance granted to an employee working in any transport system to meet his personal expenditure during his duty performed in the course of running of such transport from one place to another place provided that such employee is not in receipt of daily allowance. The amount of exemption-a.    70% of such allowance; or

b.    Rs. 10,000/- per month, whichever is lower.

Children education allowance This allowance is given for children’s education. The amount exempt is limited to Rs. 100/- per month per child up to a maximum of two children.
Hostel expenditure allowance This allowance is granted to an employee to meet the hostel expenditure on his child It is exempt from tax to the extent of Rs. 300/- per month per child up to a maximum of two children.
Compensatory field area allowance If the exemption is taken,the same employee cannot claim any exemption in respect of border area allowance mentioned above. Exemption is limited to Rs. 2,600/- per month in some cases.
Compensatory modified area allowance If the exemption is taken the same employee cannot claim any exemption in respect of border area allowance mentioned above. Exemption is limited to Rs. 1,000/- per month in some cases.
Counter insurgency allowance It includes any special allowance in the nature of counter-insurgency allowance granted to the members if armed forces operating in areas away from their permanent locations.If this exemption is taken, the same employee cannot claim any exemption in respect of border area allowance mentioned above. Exemption is limited to Rs. 3,900/- per month in some cases.
Transport allowance Transport allowance is granted to an employee to meet his expenditure for the purpose of commuting between the place of his residence and the place of his duty. It is exempt up to Rs.800 per month. After FA 2015 get assent from president the exemption for this allowance increased to Rs. 1600/- per month.
Underground allowance Underground allowance is granted to an employee who is working in uncongenial,unnatural climate in underground mines. Exemption is limited to Rs. 800/- per month
High altitude allowance It is granted to the members of armed forces operating in high altitude areas. It is exempt from tax up to Rs.1,060/- per month (for altitude of 9,000 to 15,000 feet) orRs. 1,600 per month (for altitude above 15,000/-feet).
Highly active field area allowance This special allowance is granted to the members of armed forces in the nature of special compensatory highly active field area allowance. It is exempt from tax up to Rs.4,200/- per month. 
Island duty allowance This is special allowance is granted to the members of armed forces in the nature of Island (duty) allowance in Andaman and Nicobar and Lakshadweep group of Island. It is exempt up to Rs. 3,250/- per month.