Taxable and Non-Taxable Allowance

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What is Allowance?

An allowance is a stipulated sum of payment that a salaried employee receives from his employer to meet a particular type of expense over and above his/her income. For instance, companies provide overtime allowance to their workers if they work for more than the specified working hours.

Allowances are treated as a part of the income and are taxable, except for those for have specific exemptions under various sections of the Income Tax Act. These allowances can be listed into three categories based on their respective tax treatment – Taxable, non-taxable and partially taxable allowances.

Taxable, Non-Taxable and Partially Taxable Allowances for 2020-21

Taxable Allowances on Income

Taxable allowances are a part of income and are not fully or partially exempted under income tax sections. Some of the renowned allowances that belong to this list are:

Entertainment Allowance

  • Entertainment allowance is the sum of money provided to an employee to make payments towards their customers’ hospitality for drinks, meals, business outings, client meetings, hotels, and more. The allowance is absolutely taxable for every private-sector employee. However, government employees can claim an exemption on this tax, as stated under section 16 (ii), and the amount of exemption is restricted to the least of the following
  1. 20% of overall income (excluding all other allowance and benefits),
  2.  Real entertainment allowance, and 
  3. ₹ 5,000.

Overtime AllowanceTaxable and Non-Taxable Allowance

  • This allowance is received by employees who tend to work more than the company’s operational hours. It can happen because of critical duties and firm project deadlines. Any Overtime Allowance acquired by the employees is absolutely chargeable.

Dearness Allowance (DA)

  • Dearness allowance is authorized to be paid to public sector representatives and pensioners as a reward for living change to counterbalance inflation and is different for different cities and states.

Meal Allowance

  • Meal allowances are granted for meals/refreshments/tiffin services to their workers and are absolutely taxable. 

City Compensatory Allowance (CCA)

  • Companies offer CCA to their employees remunerate for a considerably high cost of residing in cosmopolitan cities. This allowance is used to requite and retain employees in towns and cities where the cost of living is higher than employees working in other locations.

Interim Allowance 

  • An interim allowance is an endowment provided by the business instead of a final commission. This allowance is wholly taxable.

Cash Allowance

  • Cash allowance for expenses like holiday allowance, marriage allowance, and other similar allowances provided by the employer is wholly taxable in employees’ hands.

Servant Allowance

  • Allowance granted for workers for obtaining the services of the retainer; such allowance is continually taxable.

Project Allowance

  • If an employer provides an allowance to employees to liquidate a project’s expenses, then it called project allowance, and it is completely taxable.

Warden Allowance

  • Suppose an employee returns tax to an employee operating as a warden/keeper in any institute. Such an allowance is considered taxable. 

Non-practicing Allowance

  • When a doctor is working with clinics of several laboratories or medical institutes, any non-practicing allowance paid to them is taxable.

Non-Taxable Allowances on Income

Non-taxable allowances are those commissions that are part of the employee’s income that are fully excluded from taxes. The list of non-taxable allowances is as follows:

Commissions Paid to Government Employees Abroad

  • When Indian government employees are compensated for while serving their employment tenure in other nations, this allowance is recognized as non-taxable.

Allowances Paid to HC & SC Judges

  • Allowances paid to the High Court judges and Supreme Court judges are completely exempted from tax. These allowances are called sumptuary allowances.

Compensatory Allowances

  • When Judges of the HC and SC receive any compensatory allowances, these are exempted allowances in income tax.

Partially Taxable Allowances in India

  • Partially taxable allowances are those grants that can be excused from tax to a certain limit, as stipulated in the IT rules & guidelines. Some of the partially taxable allowances are given here:

Conveyance Allowance Exclusion Limit

  • This type of commission is paid to workers for commuting from home to their office every day. If a conveyance allowance is less than ₹ 1,600, then it will be considered non-taxable. The allowance is exempted up to ₹ 1,600 only, any amount more than taxable as per the IT rule.

House Rent Allowance (HRA) Exemption

House rent allowance exemption is granted to the workers by a business to help them cope with their accommodation expenses. But, if an individual doesn’t live in a leased space, this endowment is wholly chargeable. Employees can claim cutbacks on house rent discount under section 10 (13A), if:

  • Actual HRA obtained by an individual from the employer
  • If the employee stays in cosmopolitan cities like New Delhi, Mumbai, Bengaluru or Chennai, the overall rent deposited should be at least 50% of the primary salary
  • 40% of basic salary for people living in smaller towns.
  • Excess of rent spent annually over 10% of yearly salary

Medical Allowance Exemption

  • This is an employer’s allowance when the employee or any of his family members fall sick and requires prolonged medical treatment. But in case the medical expenditure exceeds a specific amount (e.g. ₹ 15,000), it becomes taxable.

Special Allowance

  • A special endowment is paid to an individual for the administration of a job under section 14(i). This commission does not fall within the category of a perquisite and is partially taxable.

Difference between reimbursement and allowance

  • Reimbursement: A reimbursement is an expenditure that is made on behalf of the employer for an employee. They are mostly related to business expenses and do not add anything extra to an employee’s salary. Hence, reimbursement is not taxable at all.
  • Allowance: Allowances are usually a part of an individual’s salary package to cover the expenditures that may be included in his employment. For instance, the company will provide a transport allowance if an employee uses his/her own vehicle to go from home to the office. Similarly, there are many other commissions endowed by employers for the benefit of employees. Allowances are categorized into three parts, taxable, non-taxable, and partially taxable allowances.

Dialabank helps you to consider and get all the knowledge about various allowances related to your salary.

FAQs about Taxable and non-taxable Allowances

What are the allowances in salary?

As per the Income Tax Act, allowances are the employer’s financial benefits to the employee in addition to the basic salary for meeting various expenditures.

What are the different types of allowances?

In terms of taxability, there are 3 types of allowances;

  • Taxable Allowances: They are fully taxable.
  • Partially Taxable Allowances: They are the Allowances in which some part is exempt, and some part is taxable.
  • Non-Taxable Allowances: They are the Allowances that are fully exempt from tax.

What is the monthly allowance?

Monthly Allowance is the financial add-on that the employees acquire for meeting fixed monthly expenses like electricity bill, broadband, etc.

How is the taxable income calculated?

The taxable income is calculated by adding income from all the sources an individual has earned in the financial year and deducting the applicable exemptions and deductions from the gross total income.

What does taxable income mean?

When you adjust the gross income with the applicable exemptions and deductions, you get the Total or Taxable income. It is the income on which the income tax has to be calculated.

What is taxable income for salaried employees?

The taxable income of salaried employees can be calculated by adding the income from salary, house property and other sources and deducting the applicable exemptions and deductions.

How much is foreign income tax-free in India?

If you are an Indian resident, then any income earned by you anywhere in the world is taxable in India, and it has to be treated like just any other income to calculate Income Tax. However, in the case of NRIs, the income received in India is taxable.

Is interest in NRE fixed deposit taxable?

The interest on NRE fixed deposit is taxable only when the NRI becomes an Indian resident.