In India, the tax rules are generally different for the individuals those are salaried and are having other types of income source. ITR e-filing has become a boon to them. In order to file their returns and the knowledge of the allowances that are paid generally by the employers to meet various costs can come in handy while they are filing income tax return.

What is an Allowance?

An allowance is a financial benefit which is given to the employee by the employer over and above the regular salary. These benefits are generally provided to cover the expenses which may be incurred to facilitate the employee. For example, Conveyance Allowance is the allowance that is paid to the employee for commuting to the workplace. Some of these allowances are

  • Taxable under the Salaries head;
  • Some are partly taxable or;
  • few are non-taxable or;
  • Fully exempted from taxes.

Taxable Allowances

  1. Dearness Allowance: Dearness Allowance (DA) is considered as an allowance which is paid to the employees as a cost of living. The allowance is paid to the employees to cope with inflation.
  2. Entertainment Allowance: Employees are also allowed one-fifth of the basic salary or Rs. 5,000. This is an allowance that is provided to the employees to reimburse the expenses which are incurred on the hospitality. The Government employees can claim an exemption which is provided in section 16 (ii). All the other employees are required to pay tax on it.
  3. Overtime Allowance: Employers may also provide an overtime allowance to the employees working above the regular work hours. This is called as the overtime and any kind of allowance and is fully taxable.
  4. City Compensatory Allowance: City compensatory allowance is paid to the employees working in an urban center which is expensive and to cope with the inflated living costs of the cities. This allowance is also fully taxable.
  5. Interim Allowance: When an employer gives any kind of Interim allowance in lieu of the final allowance. This is fully taxable.
  6. Project Allowance: When an employer provides an allowance to the employees to meet the project expenses.
  7. Tiffin/Meals Allowance: Sometimes, the employers may provide Tiffin/Meals allowance to the employees which are fully taxable.
  8. Cash Allowance: When the employer provides a cash allowance like marriage allowance, demise allowance or the holiday allowance.

Partly Taxable allowances:

  1. House Rent Allowance (HRA): When an employer pays an allowance to the employees for the accommodation. Tax exemption is under section 10 (13A) can be claimed on whichever amount is lower of the three:
  • Rent paid: 10% of the  Basic Salary;
  • In Metros i.e Delhi, Mumbai, Chennai or Kolkata, 50% of the basic salary;
  •  40% of the accommodation is for non-metro.

Any amount of the House Rent Allowance that is received after claiming such kind of deduction is also taxable.

  1. Fixed Medical Allowance: This is an allowance is paid by the employer when the employee or any of family members fall sick for the cost. Reimbursement will not exceed Rs.15,000 per year.
  2. Special Allowance: A special allowance is also paid to the employees and is covered under section 14(i). It does not fall within the purview of a prerequisite.

 Non-Taxable allowances:

  1. Allowances that is paid to the Govt. servants abroad: When the government employee of India are paid allowances when they are serving abroad.
  2. Sumptuary allowances: Sumptuary allowances which are paid to the judges of HC and SC are not taxed.
  3. Allowance paid by UNO: Allowances which is received by the employees of UNO are fully exempt from tax.
  4. Compensatory allowance paid to judges: When a judge receives a compensatory allowance, it is also not taxable.

For any help on ITR Filing feel free to consult the tax experts at LegalRaasta. You can file ITR yourself via our ITR software or get CA’s help on filing income tax return. You can also use the option of Business Return, Bulk Return or Revised Return Filing.