ALLOWANCES SEC 17(3)

MEANING :-The term ALLOWANCE has

derivedfrom the word to allow. Thedictionary meaning of allowanceis any amount or sum allowedregularly. Allowances are given

in cash along with salary by theemployer. These allowances are

Given to an employee to meet some specific type of loss or expenditure of the employee or to help him to meet certain type of expenses. For eg:- House Rent Allowance is given to help the employee to pay the house rent or to get a house on rent. These are divides into three categories on the basis of their tax treatment.

FULLY EXEMPTE

D

FULLYTAXABLE

PARTIALLYTAXABLE

Foreign allowance only in case of Government employees posted outside India.

Dearness Allowance/Additional Allowance/High Cost Of Living Allowance

House Rent Allowance

House Rent Allowance given to judges of Supreme and High Court.

City Compensatory Allowance

Entertainment Allowance for Govt. Employees

Allowances from U.N.O.

Capital Compensatory Allowance

Allowances covered u/s 10(14)(i) Helper Allowance

FULLY TAXABLE PARTIALLY TAXABLE

Lunch Allowance (ii) Uniform Allowance

Tiffin Allowance (iii) Academic Allowance

Marriage Allowance (iv) Conveyance Allowance

Family Allowance (v) Travelling Allowance

Deputation Allowance

(vi) Any Special Allowance in the nature of composite hill compensatory or high altitude or snow bound avlanche allowance

Wardenship Allowance

(vii) Any Special Compensatory Allowance in the nature of border or remote or difficult or disturbed area

Non Practicing Allowance

(viii) Transport Allowance

Project Allowances (ix) Tribal Area Allowance

Overtime Allowances (x) Running allowance given to employees of transport sector

FULLY TAXABLE PARTIALLY TAXABLE

Entertainment Allowance for non-govt. employees

Children Education Allowance

Water & Electricity Allowances

Hostel Expenditure

AllowanceServant Allowances

Compensatory Field Area Allowance

Holiday Trip Allowances

Compensatory Modified Field Area

Allowance

Fixed Medical Allowance

Special Allowance in the nature of counter insurgency allowance given to the members of armed forces operating in areas away from their permanent locations for a period of more than 30days

(I)FULLY EXEMPTED ALLOWANCES Foreign allowance given by

government to its employees posted abroad is fully exempted.

House Rent Allowance given to judges of High Court and Supreme is fully exempted.

Sumptuary Allowances given to judges of High Court and Supreme Court is fully exempted.

(II) FULLY TAXABLE ALLOWANCES Dearness Allowance / Additional

Dearness Allowance/ High Cost of Living Allowance/ Interim Relief :- Employees having fixed income suffer the most due to rise in prices and to compensate their loss. They are paid such allowances. So, D.A. is nothing but an additional salary and it is fully taxable.

Sometimes it is mentioned that :- (i) D.A. enters into pay for service

benefits.(ii) D.A. enters into pay for retirement

benefits.

(iii) D.A. is given under the terms of employment (iv) Dearness payIt is treated as part of salary for certain purposes such

as provident fund, value of rent free, house rent allowance, bonus, gratuity, leave encashment etc…

City/Capital Compensatory Allowance :- these are given to compensate for the high cost of living in a particular big city of India or any other capital city. These are fully taxable

Lunch/Tiffin/Marriage/Family/Deputation/Wardenship/Non-practising/Project/Overtime/Fixed medical allowance:-these are fully taxable.

Entertainment allowance:-this allowance is fully taxable irrespective of any expenditure incurred on entertainment of guests or customers. But in case any amount is reimbursed against any expenditure incurred by employees on entertainment of guests or customers it shall be fully exempted.

U/s 16(ii) A deduction is allowed to those persons who received this allowance. Till assessment year 2001-02. This deduction was admissible both to government as well as private sector employees. But with the effect from assessment year 2003-04 this deduction is admissible only to government employees for an amount equal to least of following:-

Statutory Limit Rs5000 1/5 of basic salary only Actual entertainment allowance

received during the previous year.

(c)PARTIALLY TAXABLE ALLOWANCES House Rent Allowance (a) Employees living in hired (rented)

houses :- Sometimes the employer does not provide rent free accommodation but instead makes a provision to pay some amount in cash so that the employee may be compensated to some extent as far as is concerned. The amount of cash paid by the employer is called HOUSE RENT ALLOWANCE. Out of total HRA received an amount equal to the minimum of the following three items is exempted from tax u/s 10(13a) :-

50% of salary in case of Bombay, Calcutta, Delhi, Madras and 40% of salary in case of any other cities etc.

Actual House Rent Allowance received The amount by which the actual rent

paid by the employer exceeds 10% of his salary.

* Taxable HRA = Actual HRA received – Exempted

Amount

Allowances Covered u/s10(14) HELPER ALLOWANCE :- It is

exempted upto actual amount spent on engaging a helper required to perform the official duties.

UNIFORM ALLOWANCE:- It is exempted upto actual expenditure incurred on maintaining of the official uniform. Excess, if any, will be taxable.

Academic Research Allowance:- It is exempted upto actual expenditure incurred for research . Excess, if any, is taxable.

Conveyance allowance:- It is exempted upto actual expenditure incurred in performance of official duty. In case amount received is more than actual expenditure, excess, if any, will taxable.

Travelling, transfer or daily allowance:- It is exempted upto actual expenditure incurred for the purposes of employment. Excess, if any, will taxable. Any allowance granted to meet the cost of travel on tour or on transfer shall be exempted. Any allowance whether granted to employee to meet the ordinary daily charges incurred by such employee on account of absence from his normal place of employment shall also be exempted.

Such allowance shall include any sum paid in connection with transfer, packing and transportation of personal effects on such transfer. Allowances mentioned in point (i) to (v) are exempted upto the amount spent by the employees for the purpose of which these allowances are given to the employees

So, exemption shall be the least of the following to amount:-

a) The amount of the allowance received.b) The amount actually spent by the employees

for the purpose for which the allowance is givenThis clearly means that these allowances are given

to meet employees expenses incurred in performance of in official work or duties and in case any part of these allowances is saved then the same shall be taxable.

Any special allowance in the nature of Composite Hill Compensatory Allowance/ High Altitude Allowance/Uncongenial Climate Allowance/Snow Bound Area Allowance/ Avalanche Allowance:- Exemption allowed upto Rs 300 p.m. to Rs 7000 p.m.

Any special compensatory allowance in the nature of Border Area Allowance/Remote Area Allowance /Difficult Area Allowance :- Exemption allowed upto Rs200 p.m. to Rs1300 p.m.

iv Compensatory Field Area Allowance:-

exemption allowed upto Rs2600 p.m. Compensatory Modified Field Area

Allowance:- Exemption allowed upto Rs1000 p.m.

Counter Insurgency Allowance / Compensatory Field Area Allowance :- Exemption allowed upto Rs 3900 p.m.

Highly Active Field Area Allowance :- Exemption allowed upto Rs. 4200 p.m.

Underground Allowance given to coal mine workers:- Exempted allowed upto Rs 800 p.m.

Island Duty Allowance given to Armed Forces posted in Andaman & Nicobar and Lakshadweep group of islands:- Exemption upto allowed Rs3250 p.m.

Transport Allowance:- As per the recommendations of the 5th pay commission , the central government has allowed transport allowance to his employees. As per orders any allowance given with effect from 1-8-1997 under the name of transport allowance to any employee whether government or private shall be exempted upto Rs800 p.m. Excess, if any, shall be taxable. But in case of handicapped with disability of lower extremities or a blind employee it shall be exempted upto Rs1,600 p.m.

Tribal Area Allowance:- This allowance is exempted upto Rs200 p.m. in the states of Madhya Pradesh, Tamil Nadu, Uttar Pradesh, Karnataka, Tripura, Assam, West Bengal, Bihar and Orissa.

Any Running Flight Allowance:- Granted to an employee of transport system to meet his personal expenditure during the 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….. It is exempted upto 70% of such allowance or Rs10,000 p.m. whichever is less.

Children Education Allowance:- If any amount is given employer to employee as education allowance for the education of own children in India, it shall be exempted upto Rs100 p.m. per child for two children only.

Example:- Mr. X is employed by an MNC and is paying him Rs500 p.m. as children education allowance to all the three children who are studying in a school at Bangalore.

Solution :-Exemption allowed: I II III Received 500p.m. 500p.m.

500p.m.Exemption Allowed 100p.m. 100p.m.

Nil

NOTE:- Exemption is allowed for any two children of the employee. The term ‘child’ includes all the legal children including a step child and a legally adopted child but does not include grand children.

Exemption shall be allowed irrespective of the actual expenditure incurred by the employee on the education of the children.

In case employee is getting both education as well as hostel allowance; he is allowed separate exemption for education and hostel allowance but for only two children.

Hostel Expenditure Allowance:- Any allowance granted by employer to meet the hostel expenditure of employees’ children it shall be exempted upto Rs300 p.m. for per child maximum for two children only.

Domestic Servant Allowance:- Fully taxable. It is taxable even if amount received is actually spent for engaging a domestic servant.

Any Special Allowance:- In the nature of counter insurgency allowance given to the members of the armed forces operating in areas away from their permanent locations for a period of more than 30 days shall be exempted upto Rs1,300 p.m.

MEANING OF SALARY FOR DIFFERENT PURPOSES

For H.R.A/PF/Gratuity and leave encashment

Pay+ D.P+ D.A+ Commission on turnover achieved by him

For specified cases All what he gets in cash less exemptions, if any, less

deductions u/s 16, must be more than Rs.50,000.

For deduction u/s 16(ii) Only Basic Salary

For gratuity under Payment of Gratuity Act

Pay + Full D.A.

For rent free house Pay +D.P + D.A + any fee, commission, bonus.

Taxable portion of other allowances + Taxable E.A

+Leave encashment pertaining to current year.

THANK YOU