Allowance which are not taxable in the hands of salary earners

  •         What
    is allowance?

The
allowance is the fixed amount 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 of the service. The allowances are fixed amount and it is
not directly related to actual expenditure of the employee.

  •         There
    are some special allowances which are exempt from tax u/s 10(14), that we can
    classify into two categories namely:
     

1.     
When exemption
depends upon actual expenditure by employee;

2.     
When exemption
does not depend upon actual expenditure by employee.

The
provisions of section 10(14) are given below:

1.    
Types
of allowances, whose exemption depends upon the actual expenditure by the
employee-:

Under
this category, the following allowances are exempt u/s 10(14) to the extent the
amount is utilized for the specified purpose for which the allowance is
received. In other words, in the cases given below the amount of exemption u/s 10(14) is:-

  •          The
    amount of the allowance given by employer; or
  •          The
    amount utilized for the specific purpose for which allowance is given,

Whichever
is less.

Exemption
is available on the aforesaid basis in the case of following allowances-

Name
of Allowance

Nature of Allowance

Travelling allowance/ Transfer
allowance

Any allowance (by whatever name
called) granted to meet the cost of travel on tour or on transfer of duty
(including any sum paid in connection with transfer, packaging and
transportation of personal effects on such transfer.)  Please Note: – Transport allowance which is
given for the purpose of travelling form residence to office is NOT covered
here.

Conveyance allowance

Allowance
granted to meet the expenditure on conveyance in performance of duties of an
office (Kindly noted that expenditure for covering the journey between office
and place of residence is not treated as “expenditure in performance of
duties of office”. It is exempt under 2nd category.)

Helper allowance

Any allowance (by whatever name
called) granted to meet the expenditure on a helper where such helper is
engaged for the performance of official duties.

Daily allowance

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.

Uniform allowance

Any allowance (by whatever name
called) granted to meet the expenditure on the purchase or maintenance of
uniform for wear during the performance of duties of an office.

Research allowance

Any allowance (by whatever name
called) granted for encouraging the academic research and training pursuits
in educational and research institution.

Note: As stated
earlier, the amount of exemption in the above cases is amount of allowance or
the expenditure incurred for the specific purpose for which allowance is given,
whichever is lower.

The
provisions illustrated below will help you to get the clear idea of the tax
treatment of the aforesaid allowances. :

Column 1

Column 2

Column 3

Column 4

Column 5

Nature of
Allowance

 

Amount of
allowance given by employer

     (Rs.)

Amount
actually spent for the purpose given in column 1.  (Rs.)

Amount exempt (least among column 2 &
3)   (Rs.)

Amount chargeable to tax (column 2 less
column 4)   (Rs.)

Travelling allowance given for
official purpose

45,000

40,000

40,000

5,000

Transfer allowance given at the time
of transfer of employee from one city to another.

30,000

33,000

30,000

Nil

 

 

2.    
Types
of allowances, whose exemption does not depend upon actual expenditure by
employee

Under
this category, the amount of exemption does not depend upon expenditure
incurred by the employee. Regardless of amount of expenditure, the allowances
given below are exempt to the extent of-

  •          The amount of
    allowance; or
  •          The amount
    specified in rule 2BB

Whichever is
less.

On
the above basis exemption is available in the case of the following allowances.

  Important point:

It
may be noted that in these cases, the amount of actual expenditure is not taken
into consideration.

Sr. No.

Name of allowance

Nature
of allowance

Exemption as specified in rule 2BB

1.

Special compensatory (Hills Area
Allowance)

 Any special compensatory allowance in the
nature of special compensatory (hills areas) allowance or high altitude
allowance or climate allowance.

Amount exempt from tax varies from
Rs.300 to Rs.7000 per month as notified.  

 

2.

Children Education Allowance

Allowance given for children’s
education.

Up to Rs. 100 per month per child for
maximum TWO children.

3.

 Hostel Expenditure Allowance

Allowance granted to an employee to
meet the hostel expenditure on his child

Up to Rs. 300 per month per child for
maximum TWO children.

4.

Tribal areas/ scheduled areas
allowance

It 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.

5.

Allowance for transport employee.

Allowance granted to 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.

Exemption is

(a) 70 per cent of such allowance; or

(b) Rs. 10,000 per month,

Whichever
is Less.

6.

Transport
Allowance

Allowance granted to employee to meet
his expenditure for the purpose of travelling between the place of residence
and the place of his duty.

Up to Rs. 800 per month. (Rs. 1,600
per month in case of an employee who is blind or handicapped)

 In the case of Chairman/ members of
UPSC, transport allowance is fully exempt from tax.

7.

Underground Allowance

Allowance granted to an employee who
is working in unnatural climate in underground mines.

Up to Rs. 800 per month.

8.

Border Area Allowance

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.

9.

Compensatory field area allowance

Compensatory
Field Area Allowance. If this exemption is taken, employee cannot claim any
exemption in respect of border area allowance (Subject to certain conditions
and locations)

Up to Rs. 2,600 per month.

10.

Compensatory modified area allowance

Compensatory
Modified Area Allowance. If this exemption is taken, employee cannot claim
any exemption in respect of border area allowance (Subject to certain
conditions and locations)

Up to Rs. 1,000 per month.

11.

Island Duty Allowance

Allowance granted to the members of
armed forces in the nature of island (duty) allowance in Andaman and Nikobar
and Lakshadweep group of island.

Up to Rs. 3,250 per month.

12.

Counter insurgency allowance

Allowance granted to the members of
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.

Up to Rs. 3,900 per month.

13.

Highly active field area allowance

Allowance granted to the members of
armed forces in the nature of special compensatory highly active field area
allowance

Up to Rs. 4,200 per month.

Note: As stated
earlier, the amount of exemption in the above cases is amount of allowance or
amount specified in the rule whichever is lower.

 

How to save tax
on the allowances by restructuring of salary?

Taxpayer
can request his employer and ask for restructuring of the salary according to
the exemptions available under the income tax act.

 For example, if employer is paying allowances of
Rs. 1500 to employee which are fully taxable.

 Now employer can restructure this allowance in
following manner:

Children
Education Allowance Rs.100

Hostel
Expenditure Allowance Rs.300

Transport
Allowance Rs.800

Other
Allowances Rs. 300

Total Exempt allowances
is Rs. 1200

Total taxable allowance
is Rs. 300

So
by doing proper restructuring of salary employee can save the tax on allowances. 

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