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Taxable and not taxable allowances in salary
Most of the taxpayers in India are those who have income only from salary. Whenever such taxpayers file their income tax return, they report their salary income in it.
But, even while reporting the salary income, they have to face a lot of problems, because there are many allowances included in the salary. Some allowances are also taxable in these allowances, some are tax free and some allowances are partially tax free and partially taxable.
Due to lack of knowledge of taxation and non-taxation of these allowances, a salaried employee is unable to calculate his tax.
In today's article (taxable and not taxable allowances in salary english) we will discuss about what are allowances and taxation of some important allowances.
What are allowances?
Allowance is a fixed amount which is given to an employee in addition to his salary. This fixed amount is given to the employee in respect of his service related needs or any expenses, so that an employee can perform his service properly.
For example, if a company makes one of its employees overtime, then the money it gives in return for overtime is called overtime allowance. Apart from this, the employee is given conveyance allowance to meet the expenses of commuting from his home to office.
These allowances are included in the salary itself but their tax calculation is different.
Salaried employees get a lot of allowances, out of which we will discuss some important allowances here.
Entertainment allowances ?Entertainment allowance is taxable for all employees of the private sector. The entertainment allowance given to the employees of the private sector is added to their salary component and after that the tax is calculated.
But, the employees of the government sector are given deduction in section 16(ii) of its Income Tax Act. The amount of entertainment allowance is first added to the salary of the Government sector employee and then exempted by computing the deduction in section 16(ii).
The relaxation of entertainment allowance in section 16(ii) will be given for the least amount of the following –
- 5000 or
- 20 % of basic salary
- entertainment allowance received
Whichever amount is the least of these three, will be given exemption in section 16(ii).
While giving relaxation of entertainment allowance, no other allowances, perquisites and other benefits will be added to the salary. Also, the amount of entertainment allowance actually spent will not be taken into account.
Allowance given for the education of children ?The children education allowance given by the employer to the employee is tax free up to some limit.
An employee gets maximum exemption of Rs 100 per child per month i.e. maximum exemption of Rs 1200 per child in the whole year. Maximum 2 children exemption can be taken by the employee.
The amount of total children education allowance received by the employee will be first added to the salary of the employee and after that maximum exemption can be taken.
Hostel expenditure allowance ?If the employee is given hostel expenditure allowance in addition to the education of the children, then the employee also gets exemption up to a limit.
An employee gets maximum exemption of Rs 300 per child per month i.e. maximum exemption of Rs 3600 per child in the whole year. Maximum 2 children exemption can be taken by the employee.
Dearness allowance ?Dearness allowances i.e. dearness allowance is given to government employees or pensioners. It is given to the employee to meet his cost of living.
Dearness Allowance is fully taxable to an employee.
conveyance allowances ?An employee is also sometimes given a conveyance allowance by the employer, which is given to the employee to meet the transportation expenses of commuting from his residence to the office. It is also known as transport allowance.
But, if the facility of transportation is given to the employee by a company, then conveyance allowance is not given in that case.
Employee is given exemption in income tax of conveyance allowance, which is given at the rate of Rs 1600 per month. But, if the employee is physically disabled then he will be given a relaxation of Rs 3200 per month.
For example, if an employee is given a conveyance allowance of Rs 3000 per month, then the taxable conveyance allowance for him will be 1400 (3000 -1600).
In the income tax exemption of conveyance allowance , the amount actually spent is not taken into account. If the employee spends more or less amount than 1600, then he will get a discount of Rs 1600 only.
But, in the Finance Act 2018, the government did away with the exemption of conveyance allowance and replaced it with the exemption of standard deduction.
The exemption of standard deduction was brought in place of conveyance allowance (1600 per month) and medical allowance (15000). Standard deduction of Rs 40,000 will be available to the salaried employee from the financial year 2018-19.
In the Interim Budget 2019, the limit of this deduction has been increased from 40 thousand to 50 thousand. But, a physically disabled employee can still get the exemption of conveyance allowance.
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Transport allowanceThis allowance is given to the employees working in the transport business to meet their personal expenses for working from one place to another. But, it is given to those employees who are not given daily allowance.
If an employee is given transport allowance, then he will get the exemption of the least amount from the following –
- 70 % of transport allowance
- Rs 10000 per month
Helper allowance ?In many cases, the employer also gives a helper allowance to an employee to appoint him as a helper.
Helper allowance will be tax free up to the limit, whichever is less of the following –
- Helper allowance actually received or
- Amount actually spent by the employee for the helper
Helper allowance will be added to the employee's salary and later this amount will be waived.
Uniform allowance ?Uniform allowance is given to the employee for the purchase or maintenance of the uniform to be worn in the office. This allowance is given only in the case when a special dress has been fixed for an organization.
Uniform allowance will be tax free up to the limit, whichever is less of the following –
- actually received the uniform allowance or
- Amount actually spent by the employee for the uniform
Uniform allowance will be added first in the salary of the employee and later this amount will be exempted.