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.

       1.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.

     2. 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

o    Rent paid as per actuals less 10% of Basic Salary

o    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.

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.

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.

         3. 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.