Manage Allowances

1

2
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.

3

• The salary allowances can be bifurcated into
  three broad categories, taxable, non-taxable and
  partly taxable allowances.

4
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.

5

• 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.

6
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
• Rent paid as per actuals less 10 of Basic Salary
• 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.
• 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.

7

• Conveyance Allowance (CA)
• Conveyance allowance, also called Transport
  Allowance. Thats 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 AllowanceEmployees 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.

8
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.

9