TAXABLE AND NON TAXABLE ALLOWANCES UNDER SALARY

Definition of "allowance" has not been provided under Income Tax Act however generally  Allowance: means Fixed amount of money or ...

Definition of "allowance" has not been provided under Income Tax Act however generally Allowance: means Fixed amount of money or other substance given monthly in addition to salary to meet the particular type of expenditure.

Treatment under Income Tax : Allowances are part of salary and taxable in hands of the assessee if no specific exemption is given under the Income Tax Act/Rules.

Further Complete list of taxable and non taxable allowances has  not been provided under the Income Tax Act or Rules. We can divide the allowances under three categories.

1. Fully Exempted

2. Partly Exempted

3. Fully taxable.

The main example of partial exemption is HRA(House Rent Allowance ).House rent allowance is exempted u/s 10(13A) of the income tax act.Least of the following is exempted from Hra Received( details is available here)

1.     HRA received

2.     House rent paid minus 10 % of salary(salary means basic plus dp plus da if term of employment so provides)

3.     50% of salary(same meaning as above)in case of rented house situated in Bombay,Madras,Delhi or calcutta 40 % of salary ,if rented house is situated in any other places

Further few allowances has been exempted from Income tax as per section 10(14) of the Income Tax Act.Section 10(14) has two cluase (i) and (ii) which is reproduced hereunder.

10(14) (i) any such special allowance or benefit, not being in the nature of a perquisite within the meaning of clause (2) of section 17, specifically granted to meet expenses wholly, necessarily and exclusively incurred in the performance of the duties of an office or employment of profit [as may be prescribed], to the extent to which such expenses are actually incurred for that purpose;

As per 14(i) above if an allowance qualifies following conditions then it is qualified for exemption under this clause

1. The given allowance should not be in the nature of perquisite.
2. The given should be given for the expenses wholly, necessarily and exclusively incurred in the performance of the duties of an office.
3. Allowance should not be in personal nature.
4. The exemption shall be restricted to amount given by employer and actual Expenditure incurred by the employee for the purpose as given under point number 2 above.
5. No upper Limit has been prescribed for allowances covered under this clause.

Item prescribed under clause 10(14)(i) has been given in rules 2BB(1) which has been reproduced here under .

 (1) For the purposes of sub-clause (i) of clause (14) of section 10, prescribed allowances, by whatever name called, shall be the following, namely :—

• (a)  any allowance granted to meet the cost of travel on tour or on transfer;
• (b)  any allowance, whether, granted on tour or for the period of journey in connection with transfer, to meet the ordinary daily charges incurred by an employee on account of absence from his normal place of duty;
• (c) any allowance granted to meet the expenditure incurred on con-veyance in performance of duties of an office or employment of profit :Provided that free conveyance is not provided by the employer;
• (d) any allowance granted to meet the expenditure incurred on a helper where such helper is engaged for the performance of the duties of an office or employment of profit;
• (e)  any allowance granted for encouraging the academic, research and training pursuits in educational and research institutions;
• (f)  any allowance granted to meet the expenditure incurred on the purchase or maintenance of uniform for wear during the performance of the duties of an office or employment of profit.

Explanation : For the purpose of clause (a), "allowance granted to meet the cost of travel on transfer" includes any sum paid in connection with transfer, packing and transportation of personal effects on such transfer.

10(14)(ii) any such allowance granted to the assessee either to meet his personal expenses at the place where the duties of his office or employment of profit are ordinarily performed by him or at the place where he ordinarily resides, or to compensate him for the increased cost of living, [as may be prescribed} and to the extent  [as may be prescribed]

Provided that nothing in sub-clause (ii) shall apply to any allowance in the nature of personal allowance granted to the assessee to remunerate or compensate him for performing duties of a special nature relating to his office or employment unless such allowance is related to the place of his posting or residence.

Clause 10(14)(ii) specifically exempted the allowances which may also be in the nature of personal expenses but exempted under this clause. So the purpose of allowance covered under these clause can be personal or official or both. Further the clause also provides that the above allowance must be related to the place of his posting or residence.

However to simplify the above clause any allowance which has been notified under the sub clause (ii) of sub section 14 of section 10 is exempted from Income Tax to the extend it has been provided in the respective clause.

The tax treatment of main allowances which are generally given to employeesis given below. The list is not exaustive(complete).You may ask query about your allownace in comment section.

1. Taxable allowance
• Dearness allowance :Taxable
• City compensatory allowance: Fully taxable.
• Project Allowance: Taxable
• Fixed medical allowance: Taxable.
• Servant/helper Allowance: taxable ,if helper is not used for official purpose.
• Tiffin Allowance: Taxable .
• Mobile allowance:Taxable as it is neither covered under 10(14)(i) nor under 10(14)(ii). However phone facility including mobile phone provided by employer free of cost is not covered under perquisites.
2. Fully Exempted allowances 
• Foreign Allowance: Exempt from tax if paid outside India By the government to the Indian citizen for rendering services outside India.
• Allowances to Supreme court/High court Judges: Not taxable.
• Servant/helper Allowance: Exempted ,if helper used for official purpose.
3. Partially Exempted allowances
• Transport Allowance: means allowance to meet expenses incurred for office to home and home to office is exempted up to 800 per month maximum.1600/- Per month in case of employee who is blind or orthopaedically handicapped(see details in complete List)
• Allowance to meet the cost of travel on tour or on transfer (including amount paid for packing and transportation of personal effects on such transfer):exempted to the extent allowances used for said purpose.
• Allowance (know as DA in TA bill) paid for purpose explained in point above ,to meet the ordinary daily charges on account of absence from his normal place of duty):exempted to the extent allowance used for the said purpose
• Conveyance allowance: To meet the expenditure on conveyance in performance of duties of an official nature: exempted to extent allowance used for said purpose
• Uniform allowance: exempted to the extent used for the said purpose
• Children Education allowance: Rs 100 per month per child up to maximum of two child is exempted if expenses made in India.
• Children hostel allowance 300 per month per child up to maximum of two child is exempted if expenses made in India.
• Allowance granted to employee working in transport system where no daily allowance has not been allowed to meet daily expenses, done to meet his personal expenses during duty performance from one place to other place: 70 % of such allowable exempted maximum up to 10000 per month.
• Allowance granted for encouraging the academic, research and other professional pursuits: exempted to the extent used for said purpose 
• Hilly area, remote area, field allowances are exempted on various rate complete List given below.

The complete list of  allowance which are generally paid to employees and covered under this list is given below (up to date 26/02/2014)

(2) For the purposes of sub-clause (ii) of clause (14) of section 10, the prescribed allowances, by whatever name called, and the extent thereof shall be the following, namely :—

TABLE

Sl. No.	Name of allowance	Place at which allowance is exempt	Extent to which allowance is exempt
(1)	(2)	(3)	(4)
1.	Any Special Compensatory Allowance in the nature of  [Special Compensatory (Hilly Areas) Allowance] or High Altitude Allowance or Uncongenial Climate Allowance or Snow Bound Area Allowance or Avalanche Allowance	I. (a) Manipur Mollan/RH-2365.    (b) Arunachal Pradesh  (i) Kameng; (ii) North Eastern Arunachal Pradesh where heights are 9,000 ft. and above; (iii) Areas east or west of Siang and Subansiri sectors (c)  Sikkim  (i)  Area North-NE-East of line Chhaten LR 0105, Launchung LR 1902, pt. 4326 LW 1790, pt. 4349 LW 1479, pt. 3601 LW 1471 to mile 13 LW 1367 to Berluk LW 2253. (ii)  All other areas at 9,000 ft. and above. (d)  Uttar Pradesh Areas of Harsil, Mana and Malari Sub-divisions and other areas of heights at 9,000 ft. and above. (e)  Himachal Pradesh  (i)  All areas at 9,000 ft. and above ahead of line joining Puhka-jakunzomla towards the bower. (ii)  Area ahead of line joining Karchham and Shigrila towards the bower. (iii) All areas in Kalpa, Spiti, Lahul and Tisa. (f)  Jammu and Kashmir  (i)  All areas from NR 396950 to NR 350850, NR 370790, NR 311776 North of Shaikhra Village, North of Pindi Village to NR 240800. (ii)  Areas of Doda, Sank and other posts located in areas at a height of 9,000 ft. and above. (iii) North of line Kud-Dudu and Bastt-garh, Bilwar, Batote and Patnitop. (iv) All areas ahead of Zojila served by Road Srinagar-Zojila-Leh in Leh District. (v)  Gulmarg - All areas forward of line joining Anita Linyan 3309 - Kaunrali - 2407. (vi) Uri South - All areas forward of Kaunrali - Kandi 1810 Kustam 1505 - Sebasantra 1006 Changez 0507 - Jak 19904 Keekar 9704 Jamun 9607 Neeta 9508. (vii) BAAZ Kaiyan Bowl - All areas forward of Dulurja 9712-BAAZ 0317 - Shamsher 0416 including New Shamsher 0615 - Zorawar 1017 - Malaugan Base 1027 - Radha 0836 to Nastachun Pass 9847. (viii) Tangdhar - All areas west of Nastachun Pass Tangdhar Bowl and on Shamshabari Range and forward of it. (ix)  Karan and Machhal sub-sectors - All areas along the line Pharkiangali 0869 to Z Gali 4376 andforward of Shamshabari Range. (x)  Panzgam, Trehgam and Drugmul.	[Rs. 800] per month
		II. Siachen area of Jammu and Kashmir	[Rs. 7,000] per month
		III. All places located at a height of 1,000 metres or more above the sea level, other than places specified at (I) and (II) above.	[Rs. 300] per month
[2.	Any Special Compensatory Allowance in the nature of Border Area Allowance, Remote Locality Allowance or Difficult Area Allowance or Disturbed Area Allowance	I. (a) Little Andaman, Nicobar and Narcondum Islands;    (b) North and Middle Anda-mans;    (c) Throughout Lakshadweep and Minicoy   Islands;   (d) All places on or north of the following demarcation line: Point 14600 (2881) to Sala MS 2686-Matau MS 6777 - Sakong MT 1379-Bamong-Khonawa MO 2803 - Nyapin MO 7525 - River Khru to its junction with the river Kamla MP - 2226 - Taliha - Yapuik MK 7410 - Gshong MK 9749 - Yinki Yong NF 4324-Damoroh MF 6208 - Ahinkolin NF 8811 - Kronli MG 2407 - Hanli NM 4096 -Gurongon NM 4592-Loon NM 7579 - Mayuliang NM 0169-Chawah NM 9943 - Kamphu NM 1125 - Point 6490 (NM 1493) Vijayanagar NSA 486; (e)  Following areas in Himachal Pradesh :  (i)  Pangi Tehsil of Chamba District; (ii)  Following Pancha-yats and villages of Bharmour Tehsil of Chamba District : (A)  Panchayat : Badgaun, Bajol, Deol Kugti Naya-gam and Tundah. (B)  Villages : Ghatu of Gram Panchayat Jagat Kanarsi of Gram Pan-chayat, Cau-hata. (iii) Lahaul and Spiti District; (iv) Kinnaur district: (A) Asrang, Chitkul and Hango Kuno Charang Panchayats; (B) 15/20 Area comprising the Gram Pancha-yats of Chhota Khamba, Na-thpa and Rupi; (C) Pooh Sub-Division excluding the Panchayat Areas specified above. (v) 15/20 Area of Rampur Tehsil comprising of Panchayats of Koot, Labana-Sadana, Sarpara and Chandi Branda of Shimla District. (vi) 15/20 Area of Nirmand Tehsil, comprising the Gram Panchayats of Kharga, Kushwar and Sarga of Kullu District. (f) Chimptuipui District of Mizoram and areas beyond 25 km. from Lunglei town in Lunglei District of Mizoram. (g) Following areas in Jammu and Kashmir:  (i)  Niabat Bani, Lohi, Malhar and Macchodi of Kathua District; (ii)  Dudu Basantgarh Lander Bhamag Illaqa, Thakrakote and Nagote of Udhampur District; (iii) All areas in Tehsil Mahore except those specified at III(f)(i) below in Udhampur District; (iv) Illaqas of Padder and Niabat Nowgaon in Kishtwar Tehsil of Doda District; (v)  Leh District; (vi) Entire Gurez - Niabat, Tangdhar Sub-Division and Keran Illaqa of Baramulla District. (h) Following areas of Uttar Pradesh :— (i)  Chamoli District; (ii)  Pithoragarh District; (iii) Uttarkashi District. (i)  Throughout Sikkim State.	Rs. 1,300 per month
		II.  Installations in the Continental Shelf of India and the Exclusive Economic Zone of India.	Rs. 1,100 per month
		III. (a) Throughout Arunachal Pradesh other than areas covered by those specified at I(d) above. Rs. 1,050 per month     (b) Throughout Nagaland State.     (c) South Andaman (including Port Blair).    (d) Throughout Lunglei District (excluding areas beyond 25 km. from Lunglei town) of Mizoram.   (e)  Dharmanagar, Kailasahar, Amarpur and Khowai in Tripura.   (f)  Following areas in Jammu and Kashmir :  (i) Areas up to Goel from Kamban side and areas upto Arnas from Keasi side in Tehsil Mahore of Udhampur District; (ii) Matchill in Baramulla District. (g) Following areas in Himachal Pradesh :  (i)  Bharmour Tehsil, excluding Panchayats and villages covered by those specified at I(e)(ii) above of Chamba District; (ii)  Chhota Bhangal and Bara Bhangal area of Kangra District; (iii) Kinnaur District other than areas specified at I(e)(iv); (iv) Dodra - Kawar Tehsil, Gram Panchayats of Darkali in Rampur, Kashapath Tehsil and Munish, Ghori Chaibis of Pargana Sarahan of Shimla District.
		IV. (a) Throughout Aizawal District of Mizoram;   (b) Throughout Tripura except areas those specified at III(e);   (c) Throughout Manipur;  (d) Following areas of Himachal Pradesh :  (i) Jhandru Panchayat in Bhatiyat Tehsil, Churah Tehsil, Dalhousie Town (including Banikhet proper) of Chamba District; (ii)  Cuter Seraj (excluding Village of Jakat-Khana and Burow in Nirmand Tehsil of Kullu District; (iii) Following areas of Mandi District : (A) Chhuhar Val-ley (Joginder-nagar Tehsil); (B) Bagra, Ch-hatri, Chhot-dhar, Garagu-shain, Gatoo, Gharyas, Janjehli, Jaryar, Johar Kalhani Kalwan, Kho-lanal, Loth, Silibagi, Somachan, Thachdhar, Tachi and Thana Panchayats of Thunag Tehsil; (C) Binga, Kam-lah, Saklana, Tanyar and Tarakholah, Panchayats of Dharampur Block; (D) Balidhar, Bag-ra, Gopalpur, Khajol, Mahog, Mehudi, Manj, Pekhi, Sainj, Sarahan and Teban, Pan-chayats of Karsog Tehsil; (E) Bohi, Batwara, Dhanyara, Paura-Kothi, Seri and Shoja, Panchayats of Sundernagar Tehsil. (iv) Following areas and offices of Kangra District : (A) Dharamshala town and Women's ITI; Dari, Mechanical Workshop, Ramnagar; Child Welfare and Town Country Planning Offices, Sakoh; CRSF Office at lower Sakoh; Kangra Milk Supply Scheme, Shamnagar; Tea Factory, Dari; Forest Corporation Office, Sham-nagar; Tea Factory, Dari; Settlement Office, Shamnagar and Binwa Project, Sham-nagar. Offices located outside the Municipal limit of Dharamshala town but included in Dharamshala town for purposes of eligibility to special Compensatory (Remote Locality) Allowance; (B) Palampur town, including HPKVV Campus at Palampur and H.P. Krishi Vishvavidya-laya Campus; Cattle Deve-lopment Office/ Jersy Farm, Banuri; Sericulture Office/Indo-German Agriculture Workshop/HPPWD Division, Bundla; Electrical Sub-Division, Lohna; D.P.O. Corporation, Bundla and Electrical HPSEE Division, Ghuggar offices located outside the Municipal limits of Palam-pur town but included in Palampur town for the purpose of above allowance; (v) Chopal Tehsil; Ghoris, Panjgaon, Patsnu, Naubis and Teen Koti of Pargana Sarahan; Deothi Gram Pancha-yat of Taklesh Area; Pargana Barabis; Kasba Rampur and Ghori Nog of Pargana Rampur of Rampur Tehsil of Shimla District and Shimla Town and its suburbs (Dhalli, Jatog, Kasumpti, Mashobra, Taradevi and Tutu); (vi) Panchayats of Bani, Bakhali (Pachhad Tehsil), Bharog Bhe-neri (Paonata Tehsil), Birla (Nahan Tehsil), Dibber (Pachhad Tehsil) of Thanan Kasoga (Nahan Tehsil) in Sirmour District and Transgiri Tract of Sirmour District; (vii) Mangal Panchayat of Solan District; (e) Following areas in Jammu and Kashmir :  (i)  Areas in Poonch and Rajouri Districts excluding the towns of Poonch and Rajouri and Sunderbani and other Urban areas in the two districts; (f)  Following areas in Jammu and Kashmir : Areas not included in I(g), III(f) and IV(e) above, but which are within a distance of 8 km. from the line of actual control or at places which may be declared as qualifying for Border Allowance from time to time by the State Government for their own staff.	Rs. 750 per month
		V.  Jog Falls in Shimoga District in Karnataka.	Rs. 300 per month.
		VI. (a) Throughout the State of Himachal Pradesh other than areas covered by those specified in I(e), III(g) and IV(d)     (b) Throughout the State of Assam and Meghalaya	Rs. 200 per month.]
3.	[Special Compensatory (Tribal Areas/Schedule Areas/Agency Areas) Allowance]	(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.
4.	Any 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	Whole of India	70 per cent of such   allowance up to a maximum of  [Rs. 10,000] per month.
5.	Children Education Allowance	Whole of India	[Rs. 100] per month per child up to a maximum of two children.
6.	Any allowance granted to an employee to meet the hostel expenditure on his child	Whole of India	[Rs. 300] per month per child up to a maximum of two children.
7.	Compensatory Field Area Allowance	(a)  Following areas in Arunachal Pradesh :—   (i) Tirap and Changlang Districts; (ii)  All areas North of line joining point 4448 in LZ 4179-Nukme Dong MS 3272-Sepla MT 2969-Palin MO 9213-Daporijo NR 5841-Along NL 1273-Hunli NM 3196-Tidding Tuwi MT 6369-Hayuliang NN 0170-Tawaken MT 8136-Champai Bun NM 8814, all inclusive. (b) Throughout Manipur and Nagaland. (c)  Following areas in Sikkim :— All areas North and North East of line joining Phalut LV 4750-Gezing LV 7059-Mangkha LV 6160-Penlang La LW 0666-Rangli LW 1448-BP 1 in LW 2453 on Indo-Bhutan Border, all inclusive. (d)  Following areas in Himachal Pradesh : All areas East of line joining Umasila NV 3951-Udaipur NY 8663-Manikaran SB 2300-Pir Parbati Pass TA 1459-Taranda TA 2335-Barasua Pass TA 8801, all inclusive. (e)  Following areas in Uttar Pradesh :— All areas North and North-East of line joining Barasua Pass Gangnani TG 1362-Govind Ghat TG 0937-Tapovan TH 1822-Musiari TN 8982-Relagad TO 2466, all inclusive. (f) Following areas in Jammu and Kashmir :—  (i)  Areas North and East of line joining Zojila MU 3036-Baralachala NE 6672 along the Great Himalayan Range, all inclusive; (ii)  All areas West of line joining point 1556 in NR 5470-Gulmarg MT 3105-Naushara MY 3105-Ringapat MT 2133-Handwara MT 2043-Laingyal MT 2339-Point 8405 in NG 4565-North of line joining point 8403-Bunakut MT 5453-Razan NN 2239-Zojila, all inclusive; (iii) All areas West of line joining tip of Chicken Neck RD 7073-Canal junction RD 6364-Mawa Brahmana RD 6183-Chauki RD 6393-Road junction RD 6499-Baramgala MY 3854-Point 1556 in NR 5470, all inclusive.	[Rs. 2,600] per month.
8.	Compensatory Modified Field Area Allowance	(a)  Following areas in Punjab and Rajasthan :— Areas West of line joining Jessai, Barmer, Jaisalmer, Pokharan, Udasar, Mahajan Ranges, Suratgarh, Lalgarh, Jattan, Abohar, Govindgarh, Fazilka, Jandiala Guru, Moga, Dholewal, Deas, Bir Sarangwal, Hussainiwala, Dera Baba Nanak, Laisain pulge upto the international border, all inclusive. (b) Following area in Haryana :— Satrod (Hissar). (c) Following areas in Himachal Pradesh :— Areas North of line joining Narkhanda, Keylong upto Field Area line/High Altitude line. (d) Following areas in Arunachal Pradesh and Assam :—  (i)  Cachar and North Cachar Districts of Assam including Silchar; (ii)  All areas of Arunachal Pradesh and Assam North of river Brahmaputra except Tejpur - Misamari and Field Areas. (e) Throughout Mizoram and Tripura. (f) Following areas in Sikkim and West Bengal :— Areas Northwards of line joining Sevoke LV 9112-Burdong LV 985-Sherwani LV 9453 -Bagrakot LW 0113-Damdim LW 1109-New Mal-Hasimara-QB 7894 Ganga Ram Tea Estate QA 1377 upto the High Altitude line/field area line/international border, all inclusive. (g) Following areas in Uttar Pradesh :— Areas North of line joining Uttarkashi, Karan Prayag, Gauchar, Joshimath, Chamoli, Rudra Prayag, Askote, Charamgad, Dharchula, Kausani and Narendra Nagar upto inter-national border, all inclusive. (h) Following areas in Jammu and Kashmir :— (i)  Areas West of line joining Pattan, Baramulla, Kupwara, Drugmula, Panges, Mankes, Buniyar, Pantha Chowk, Khanabal, Anantnag, Khundru and Khru upto the existing High altitude line, all inclusive; (ii)  Areas West of line joining - BP-19, Brahmanadi-Bari, Jindra, Dhansal, Katra, Sanjhi Chatt, Batote, Patnitop, Ram-ban and Banihal upto the existing High altitude line, all inclusive.	[Rs. 1,000] per month
9.	Any special allowance in the nature of counter-insurgency allowance granted to the members of armed forces operating in areas away from their permanent locations [***]	Whole of India	[Rs. 3,900] per month.
[10.	Transport allowance granted to an employee (other than an employee referred to in serial number 11] to meet his expenditure for the purpose of commuting between the place of his residence and the place of his duty	Whole of India	Rs. 800 per month.]
[11.	Transport allowance granted to an employee, who is blind or orthopaedically handicapped with disability of lower extremities, to meet his expenditure for the purpose of commuting between the place of his residence and the place of his duty	Whole of India	Rs. 1,600 per month.]
[12.	Underground Allowance granted to an employee who is working in uncongenial, unnatural climate in underground  [***] mines	Whole of India	Rs. 800 per month.]
[13.	Any special allowance in the nature of high altitude (uncongenial climate) allowance granted to the member of the armed forces operating in high altitude areas	(a) For altitude of 9,000 to 15,000 feet (b) For altitude above 15,000 feet	Rs. 1,060 per month. Rs. 1,600 per month.
14.	Any special allowance granted to the members of the armed forces in the nature of special compensatory highly active field area allowance	Whole of India	Rs. 4,200 per month.]
[15.	Any special allowance granted to the member of the armed forces in the nature of Island (duty) allowance	Andaman & Nicobar and Lakshadweep Group of Islands	Rs. 3,250 per month:]

Provided that any assessee claiming exemption in respect of the allowances mentioned at serial numbers 7 and 8 shall not be entitled to the exemption in respect of the allowance referred to at serial number 2:

Provided further that any assessee claiming exemption in respect of the allowance mentioned at serial number 9 shall not be entitled to the exemption in respect of disturbed area allowance referred to at serial number 2.]

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