What is an Allowance?

 An allowance is the financial benefit given to the employee by

the employer over and above the regular salary. These
benefits are provided to cover expenses which may be
incurred to facilitate the discharge of service.
 Allowance are generally calculated on Basic Salary. Basic
salary is the fixed salary, invariable, minimum wages,
mandatory pay, fixed by the company to pay the employees.
 The salary allowances can be bifurcated into three broad
categories, taxable, non-taxable and partly taxable allowances.
 The salary allowances can be bifurcated into three
broad categories, taxable, non-taxable and partly
taxable allowances.
 Taxable Allowances

 Dearness Allowance (DA)

Dearness Allowance (DA) is an allowance paid to employees as a cost of living
adjustment allowance paid to the employees to cope with inflation. DA paid to
employees is fully taxable with salary. Dearness Allowance is calculated as a
percentage of an Indian citizen's basic salary to mitigate the impact of inflation on
people.

 Entertainment Allowance (EA)

Employees are allowed the lowest of the declared amount --one-fifth of basic
salary, actual amount received as allowance or Rs. 5,000. This is an allowance
provided to employees to reimburse the expenses incurred on the hospitality of
customers. However, Government employees can claim exemption in the manner
provided in section 16 (ii). All other employees have to pay tax on it.

 Tiffin/Meals Allowance
Tiffin / Lunch Allowance It is fully taxable. It is given to employees for lunch as
coupons or added as part of salary.
 Overtime Allowance
Employers may provide an overtime allowance to employees working over
and above the regular work hours. This is called overtime and any allowance
received for this is fully taxable.
 Partly Taxable Allowances

 House Rent Allowance (HRA)

 House rental allowance (HRA) is allowance paid for house rent . Tax exemption
under section 10 (13A) can be claimed on whichever amount is lower of the
three:
 HRA as per actuals received by the employee
 Rent paid as per actuals less 10% of Basic Salary
 In Metros i.e Delhi, Mumbai, Chennai or Kolkata, as much as 50% of basic salary
or else 40% of it if the accommodation is in a non-metro.
 Any amount of House Rent Allowance received after claiming such deduction is
taxable.
 Medical Allowance
 This is an allowance paid by the employer when the employee or any of his
family members fall sick for the cost incurred on their treatment. If any such
reimbursement exceeds Rs.15,000 per year; the same is taxable.
 Conveyance Allowance (CA)
 Conveyance allowance, also called Transport Allowance. That’s paid by the
company towards cost of travel from home to work and back and is exempt
from Income tax. Allowances are generally offered to employees on top of their
basic salary component and may or may not be taxable as per the Income Tax
Act.

 Education Allowance
Employees are given a certain amount to educate their children in India.
Any sum spent more than the provided limit of Rs. 100 per month per
child for maximum two children, is taxable.
 Non Taxable Allowances

 Some of the allowances, usually paid to Government servants, judges

and employees are not taxable. These are:

 Allowances paid to Govt. servants abroad: When servants of

Government of India are paid an allowance while serving abroad, such
income is fully exempt from taxes.

 Allowances to Judges of Supreme Court or High Court are not taxable.