Tax Treatment Of Different ‘Allowances’ Under The Head ‘ Income from Salary’

1.

Various Form Of Salary an Employee gets from his Employer

2.

Meaning Of Allowance under the head income from Salary

3.

Allowances For Which Exemption Is Based On Lower Of Amount Of Allowance Or Amount Spent For The Purpose Of Allowance.

4.

Allowances For Which Exemption Is Based On Lower Of Amount Of Allowance Or Prescribed Amount

5.

Allowances For Which Exemption Is Based On Specific Method Of Computation

6.

Points To Be Kept In Mind While Making Practical Implication Of The Provisions Of Computation Of Exemption In Respect Of HRA

1.      Various Form Of Salary an Employee gets from his Employer

 An employee gets salary in any of the following forms from his employer :

 

 Different Forms of salary

Example

Monthly basic salary (i.e., payment for the work done by the employee)

Mr. Kumar working in Essem Ltd at a monthly salary of Rs. 84,000.

Monthly allowances (i.e., payment for meeting any specific objective)

Mr. Kumar is working in Essem Ltd. Apart from basic salary the company pays him house rent allowance of Rs. 2,520 per month.

Different perquisites (i.e., different facilities provided by the employer)

Mr. Kumar is working in Essem Ltd. Apart from basic salary and different allowances paid to him, the company has provided him with free use of a car. The car can be used for official as well as private purposes and entire cost of the car is borne by the employer.

 

 

 In this advance learning we will learn the tax treatment of different allowances.

 

 Illustration

From the following information provided by Mr. Kumar, compute his income chargeable to tax under the head salaries.

 

        Basic salary per month Rs. 84,000

        Dearness allowance per month Rs. 66,000

        Taxable value of various allowances (per month) Rs. 25,000

        Value of perquisites provided by the employer (for the year) Rs. 1,00,000

 

**

An employee gets salary in any of the following forms from his employer :

 

        Monthly basic salary (i.e., payment for the work done by the employee).

        Monthly allowances (i.e., payment for meeting any specific objective).

        Different perquisites (i.e., different facilities provided by the employer).

        Retirement benefits (like gratuity, provident fund payments, pension, etc).

 

 Particulars

(Rs.)

Basic salary (Rs. 84,000 × 12)

10,08,000

Dearness allowance (Rs. 66,000 × 12)

7,92,000

Taxable allowances (Rs. 25,000 × 12)

3,00,000

Taxable value of perquisites

1,00,000

Taxable salary

22,00,000

 

In this case, taxable salary will be computed as follows :

 

2.      Meaning Of Allowance under the head income from Salary

Allowance is generally a fixed amount given on a regular basis to meet some particular requirement. From taxation point of view, allowance can be classified as taxable allowance and exempt allowance. Exempt allowance can be further classified as follows :

 

        Allowances for which exemption is based on specific method of computation.

        Allowances for which exemption is based on lower of amount of allowance or amount spent for the purpose of allowance.

        Allowances for which exemption is based on lower of amount of allowance or prescribed amount

 

The detailed discussion on each of the aforesaid category of allowances is given below.

 

3.      Allowances For Which Exemption Is Based On Lower Of Amount Of Allowance Or Amount Spent For The Purpose for which Allowance is granted.

 

As per section 10(14), in case of following allowances (by whatever name called), exemption is lower of :

 

(a)       The amount of allowance, or

(b)       The amount spent for the purpose for which allowance is granted:

 

 Allowance

Example

Travelling allowance/Transfer allowance - Any allowance granted to meet the cost of travel on tour or transfer (including any sum paid in connection with transfer, packing and transportation of personal effects on transfer) is exempt under section 10(14).

Mr. Kapoor is working in Essem Ltd. at Delhi. He is being transferred to Mumbai. The company paid him Rs. 84,000 to meet the expenditure on transfer. He actually incurred Rs. 80,000 on account of expenditure on transfer. In this case, the amount of exemption will be Rs. 80,000, being lower of amount of allowance or the amount spent for the purpose of allowance.

Conveyance allowance - Conveyance allowance granted to meet the expenditure on conveyance in performing official duty is exempt under section 10(14).

Mr. Kapoor is working in Essem Ltd. The company is paying him Rs. 8,400 per month as conveyance allowance. In the month of April he had actually incurred Rs. 9,000 on account of expenditure on conveyance in performing official duty. In this case, the amount of exemption will be Rs. 8,400, being lower of amount of allowance or the amount spent for the purpose of allowance.

Daily allowance - Any allowance granted to meet the ordinary daily expenditure incurred by the employee on account of his absence from normal place of duty, due to tour or journey in connection with his transfer, is exempt from tax under section 10(14).

Mr. Kapoor is working in Essem Transport. The company is paying him Rs. 8,400 per month as daily allowance to meet the ordinary daily expenditure incurred by the employee on account of his absence from normal place of duty, due to tour or journey in connection with his transfer. In the month of April, he had actually spent Rs. 8,000, on account of ordinary daily expenditure incurred by him on account of his absence from normal place of duty. In this case, the amount of exemption will be Rs. 8,000, being lower of amount of allowance or the amount spent for the purpose of allowance.

Helper allowance - Any allowance granted to meet the expenditure on a helper engaged for performing official duty is exempt from tax under section 10(14).

Mr. Kapoor is working in Essem Ltd. The company is paying him Rs. 2,520 per month as helper allowance to meet the expenditure on a helper engaged for performing official duty. In the month of April, he had actually spent Rs. 2,000 on account of salary of helper deployed by him for performing official duty. In this case, the amount of exemption will be Rs.

2,000, being lower of amount of allowance or the amount spent for the purpose of allowance.

Research allowance - Any allowance granted to meet the expenditure on academic research and other professional pursuits, is exempt from tax under section 10(14).

Mr. Kapoor is working in Essem Educational Academy. The company is paying him Rs. 840 per month as research allowance to meet the expenditure on academic research. In the month of April, he had actually incurred no expenditure on academic research. In this case, the amount of exemption will be Nil, being lower of amount of allowance or the amount spent for the purpose of allowance.

Uniform allowance - Any allowance granted to meet the expenditure on purchase or maintenance of uniform (for wearing during performance of official duty), is exempt from tax under section 10(14).

Mr. Kapoor is working in Essem Ltd. The company is paying him Rs. 2,520 per month as uniform allowance to meet the expenditure on maintenance of official uniform. In the month of April, he had actually spent Rs. 3,000 on account of expenditure on maintenance of uniform. In this case the amount of exemption will be Rs. 2,520, being lower of amount of allowance or the amount spent for the purpose of allowance.

Illustration (Amount spent less than amount received)

From the following information provided by Mr. Keshav, compute the taxable value of various allowances given to him by his employer.

 

Name of the allowance

Amount of allowance (Rs.)

Amount spent (Rs.)

Travelling allowance

8,400

7,400

Conveyance allowance

10,000

8,500

Daily allowance

12,000

10,000

Helper allowance

8,000

5,000

Research allowance

4,000

3,000

Uniform allowance

3,000

2,500

 

As per section 10(14), in case of following allowances (by whatever name called), exemption is lower of :

 

(a)       The amount of allowance, or,

 

(b)       The amount spent for the purpose for which allowance is granted.

 

(1)       Travelling allowance/Transfer allowance - Any allowance granted to meet the cost of travel on tour or transfer (including any sum paid in connection with transfer, packing and transportation of personal effects on transfer) is exempt under section 10(14).

 

(2)       Conveyance allowance - Conveyance allowance granted to meet the expenditure on conveyance in performing official duty is exempt under section 10(14).

 

(3)       Daily allowance - Any allowance granted to meet the ordinary daily expenditure incurred by the employee on account of his absence from normal place of duty, due to tour or journey in connection with his transfer is exempt from tax under section 10(14).

 

(4)       Helper allowance - Any allowance granted to meet the expenditure on a helper engaged for performing official duty is exempt from tax under section 10(14).

 

(5)       Research allowance - Any allowance granted to meet the expenditure on academic research and other professional pursuits is exempt from tax under section 10(14).

 

(6)       Uniform allowance - Any allowance granted to meet the expenditure on purchase or maintenance of uniform (for wearing during performance of official duty) is exempt from tax under section 10(14).

 

Considering the above provisions, the taxable value of allowance will be computed as follows :

 

Name of the allowance

Amount of allowance (Rs.)

(a)

Amount spent (Rs.)

(b)

Exemption

(Rs.)

(c) = Lower of(a) or (b)

Taxable allowance (Rs.)

(d) = (a) – (c)

Travelling allowance

8,400

7,400

7,400

1,000

Conveyance allowance

10,000

8,500

8,500

1,500

Daily allowance

12,000

10,000

10,000

2,000

Helper allowance

8,000

5,000

5,000

3,000

Research allowance

4,000

3,000

3,000

1,000

Uniform allowance

3,000

2,500

2,500

500

Taxable value of allowance

9,000

 

Illustration (Amount spent more than amount received)

 

From the following information provided by Mr. Keshav, compute the taxable value of various allowances given to him by his employer.

 

Name of the allowance

Amount of allowance (Rs.)

Amount spent (Rs.)

Travelling allowance

8,400

17,400

Conveyance allowance

10,000

18,500

Daily allowance

12,000

15,000

Helper allowance

8,000

9,000

Research allowance

4,000

5,000

Uniform allowance

3,000

5,500

 

As per section 10(14), in case of following allowances (by whatever name called), exemption is lower of :

 

(a) The amount of allowance, or,

 

(b) The amount spent for the purpose for which allowance is granted.

 

(1)       Travelling allowance/Transfer allowance - Any allowance granted to meet the cost of travel on tour or transfer (including any sum paid in connection with transfer, packing and transportation of personal effects on transfer) is exempt under section 10(14).

 

(2)       Conveyance allowance - Conveyance allowance granted to meet the expenditure on conveyance in performing official duty is exempt under section 10(14).

 

(3)       Daily allowance - Any allowance granted to meet the ordinary daily expenditure incurred by the employee on account of his absence from normal place of duty, due to tour or journey in connection with his transfer, is exempt from tax under section 10(14).

 

(4)       Helper allowance - Any allowance granted to meet the expenditure on a helper engaged for performing official duty is exempt from tax under section 10(14).

 

(5)       Research allowance - Any allowance granted to meet the expenditure on academic research and other professional pursuits is exempt from tax under section 10(14).

 

(6)       Uniform allowance - Any allowance granted to meet the expenditure on purchase or maintenance of uniform (for wearing during performance of official duty) is exempt from tax under section 10(14).

 

Considering the above provisions, the taxable value of allowance will be computed as follows :

 

Name of the allowance

Amount of allowance (Rs.)

(a)

Amount spent (Rs.)

(b)

Exemption

(Rs.)

(c) =

Lower of (a) or (b)

Taxable allowance (Rs.)

(d) = (a) – (c)

Travelling allowance

8,400

17,400

8,400

Nil

Conveyance allowance

10,000

18,500

10,000

Nil

Daily allowance

12,000

15,000

12,000

Nil

Helper allowance

8,000

9,000

8,000

Nil

Research allowance

4,000

5,000

4,000

Nil

Uniform allowance

3,000

5,500

3,000

Nil

Taxable value of allowance

Nil

4.      Allowances For Which Exemption Is Based On Lower Of Amount Of Allowance Or Prescribed Amount

In case of following allowances, exemption will be lower of the amount of allowance or amount prescribed under rule 2BB.

 

This category includes following important allowances :

 

        Children’s education allowance. Exemption in this case will be Rs. 100 per month per child up to a maximum of two children.

        Any allowance granted to an employee to meet the hostel expenditure on his child. Exemption in this case will be Rs. 300 per month per child up to a maximum of two children.

        Transport allowance granted to an employee to meet his expenditure for the purpose of commuting between the place of his residence and the place of his duty. Exemption in this case will be Rs. 800 per month. Exemption will be Rs. 1,600 per month in case of an employee, who is blind or orthopaedically handicapped with disability of lower extremities.

 

Apart from above allowances, this category includes following allowances also:

        Hill area allowance or high altitude allowance or uncongenial climate allowance or snow bound area allowance or avalanche allowance or Tribal area allowance. Exemption in this case depends on the area of deputation.

 

        Special compensatory allowance in the nature of border area allowance, remote locality allowance or difficult area allowance or disturbed area allowance. Exemption in this case depends on the area of deputation.

        Allowance granted to an employee working in any transport system to meet his personal expenditure during his 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. Exemption in this case will be 70% of such allowance up to a maximum of Rs. 10,000 per month.

        Compensatory field area allowance (for certain specified area). Exemption is Rs. 2,600 per month.

        Compensatory modified field area allowance (for certain specified area). Exemption is Rs. 1,000 per month.

        Any special allowance in the nature of counter-insurgency allowance granted to the members of armed forces operating in areas away from their permanent locations. Exemption will be Rs. 3,900 per month.

        Underground allowance granted to an employee who is working in uncongenial, unnatural climate in underground mines. Exemption will be Rs. 800 per month.

        Any special allowance in the nature of high altitude (uncongenial climate) allowance granted to the members of the armed forces operating in high altitude areas. Exemption will be Rs. 1,060 per month for altitude of 9,000 to 15,000 feet and Rs. 1,600 per month above 15,000 feet.

        Any special allowance granted to the members of the armed forces in the nature of special compensatory highly active field area allowance. Exemption will be Rs. 4,200 per month.

        Any special allowance granted to the members of the armed forces in the nature of Island (duty) allowance. Exemption will be Rs. 3,250 per month.

 

It should be noted that an employee claiming exemption in respect of compensatory field area allowance and compensatory modified field area allowance cannot claim exemption in respect of special compensatory allowance in the nature of border area allowance, remote locality allowance or difficult area allowance or disturbed area allowance.

 

Illustration (Children’s education allowance for two children)

Mr. Kapoor receives children’s education allowance of Rs. 300 per month per child for his 2 children. What will be the taxable value of children’s education allowance in the hands of Mr. Kapoor?

 

**

 

As per rule 2BB(2), an employee can claim exemption in respect of children’s education allowance of lower of the amount of allowance or Rs. 100 per month per child (upto 2 children). In this case, the exemption will be as follows :

 

Particulars

(Rs.)

Total children’s education allowance per month (Rs. 300 per child or Rs. 600 for 2 children)

600

(–) Exemption as per rule 2BB(2) (*)

200

Taxable value of allowance per month

400

 

(*) Exemption will be lower of the amount of allowance or Rs. 100 per month per child (upto 2 children). In this case, employee is receiving Rs. 300 per month per child. Exemption will be Rs. 100 per month per child and will be limited upto 2 children. Hence, exemption will be Rs. 200 per month.

 

Illustration (Children’s education allowance for more than two children)

 

Mr. Kapoor receives children’s education allowance of Rs. 50 per month per child for his 3 children. What will be the taxable value of children’s education allowance in the hands of Mr. Kapoor?

 

**

 

As per rule 2BB(2), an employee can claim exemption in respect of children’s education allowance of lower of the amount of allowance or Rs. 100 per month per child (upto 2 children). In this case the exemption will be as follows :

 

Particulars

(Rs.)

Total children’s education allowance per month (Rs. 50 per child or Rs. 150 for 3 children)

150

(–) Exemption as per rule 2BB(2) (*)

100

Taxable value of allowance per month

50

 

(*) Exemption will be lower of the amount of allowance or Rs. 100 per month per child (upto 2 children). In this case, employee is receiving Rs. 50 per month per child. Thus, exemption will be Rs. 50 per month per child and will be limited to 2 children. Hence, exemption will be Rs. 100 per month (Rs. 50 × 2).

 

Illustration (Children’s education allowance for more than two children)

Mr. Kapoor receives children’s education allowance of Rs. 150 per month per child for his 3 children. What will be the taxable value of children’s education allowance in the hands of Mr. Kapoor?

 

**

 

As per rule 2BB(2), an employee can claim exemption in respect of children’s education allowance of lower of the amount of allowance or Rs. 100 per month per child (upto 2 children). In this case the exemption will be as follows :

 

Particulars

(Rs.)

Total children’s education allowance per month (Rs. 150 per child or Rs. 450 for 3 children)

450

(–) Exemption as per rule 2BB(2) (*)

200

Taxable value of allowance per month

250

 

(*) Exemption will be lower of the amount of allowance or Rs. 100 per month per child (upto 2 children). In this case, employee is receiving Rs. 150 per month per child. Thus, exemption will be Rs. 100 per month per child and it will be limited to 2 children. Hence, exemption will be Rs. 200 per month (Rs. 100 × 2).

 

Illustration (Children’s education allowance with details of amount spent by the employee on education of his children)

Mr. Kapoor receives children’s education allowance of Rs. 1,500 per month per child for his 3 children. He actually spends Rs. 3,000 per month on education per child. What will be the taxable value of children’s education allowance in the hands of Mr. Kapoor?

 

**

 

As per rule 2BB(2), an employee can claim exemption in respect of children’s education allowance of lower of the amount of allowance or Rs. 100 per month per child (upto 2 children). The exemption will be limited to Rs. 100 per month, irrespective of the actual amount spent by the employee on education of his children. In this case, the exemption will be as follows :

 

Particulars

(Rs.)

Total children’s education allowance per month (Rs. 1,500 per child or Rs. 4,500 for 3 children)

4,500

(–) Exemption as per rule 2BB(2) (*)

200

Taxable value of allowance per month

4,300

 

(*) Exemption will be lower of the amount of allowance or Rs. 100 per month per child (upto 2 children). In this case, employee is receiving Rs. 1,500 per month per child. Thus, exemption will be Rs. 100 per month per child and it will be limited to 2 children. Hence, exemption will be Rs. 200 per month (Rs. 100 × 2).

 

Illustration (Children’s hostel allowance for two children)

Mr. Sunil receives hostel allowance for meeting the hostel expenditure of his children of Rs. 400 per month per child for his 2 children. What will be the taxable value of hostel allowance in the hands of Mr. Sunil?

 

**

 

As per rule 2BB(2), an employee can claim exemption in respect of allowance granted for meeting the hostel expenditure of his child. Exemption will be lower of the amount of allowance or Rs. 300 per month per child (upto 2 children). In this case, the exemption will be as follows :

 

Particulars

(Rs.)

Total children’s hostel allowance per month (Rs. 400 per child or Rs. 800 for 2 children)

800

(–) Exemption as per rule 2BB(2) (*)

600

Taxable value of allowance per month

200

 

(*) Exemption will be lower of the amount of allowance or Rs. 300 per month per child (upto 2 children). In this case, employee is receiving Rs. 400 per month per child. Exemption will be Rs. 300 per month per child and will be limited to 2 children. Hence, exemption will be Rs. 600 per month (Rs. 300 × 2).

 

Illustration (Children’s hostel allowance for more than two children)

Mr. Anurag receives hostel allowance for meeting the hostel expenditure of his children of Rs. 200 per month per child for his 3 children. What will be the taxable value of hostel allowance in the hands of Mr. Anurag?

 

**

 

As per rule 2BB(2), an employee can claim exemption in respect of allowance granted for meeting the hostel expenditure of his child. Exemption will be lower of the amount of allowance or Rs. 300 per month per child (upto 2 children). In this case, the exemption will be as follows :

Particulars

(Rs.)

Total children’s hostel allowance per month (Rs. 200 per child or Rs. 600 for 3 children)

600

(–) Exemption as per rule 2BB(2) (*)

400

Taxable value of allowance per month

200

 

(*) Exemption will be lower of the amount of allowance or Rs. 300 per month per child (upto 2 children). In this case, employee is receiving Rs. 200 per month per child. Thus, exemption will be Rs. 200 per month per child and it will be limited to 2 children. Hence, exemption will be Rs. 400 per month (Rs. 200 × 2).

 

Illustration (Children’s hostel allowance for more than two children)

Mr. Anurag receives hostel allowance for meeting the hostel expenditure of his children of Rs. 1,000 per month per child for his 3 children. What will be the taxable value of hostel allowance in the hands of Mr. Anurag?

 

**

 As per rule 2BB(2), an employee can claim exemption in respect of allowance granted for meeting the hostel expenditure of his child. Exemption will be lower of the amount of allowance or Rs. 300 per month per child (upto 2 children). In this case, the exemption will be as follows :

 

Particulars

(Rs.)

Total children hostel allowance per month (Rs. 1,000 per child or Rs. 3,000 for 3 children)

3,000

(–) Exemption as per rule 2BB(2) (*)

600

Taxable value of allowance per month

2,400

 

(*) Exemption will be lower of the amount of allowance or Rs. 300 per month per child (upto 2 children). In this case, employee is receiving Rs. 1,000 per month per child. Thus, exemption will be Rs. 300 per month per child and it will be limited to 2 children. Hence, exemption will be Rs. 600 per month (Rs. 300 × 2).

 

Illustration (Hostel allowance with details of amount spent by the employee on hostel expenditure of his children)

Mr. Anurag receives hostel allowance of Rs. 2,000 per month per child for his 3 children for meeting the hostel expenditure of his children. He actually spends Rs. 10,000 per month on hostel expenditure of his each child. What will be the taxable value of hostel allowance in the hands of Mr. Anurag?

 

**

 As per rule 2BB(2), an employee can claim exemption in respect of allowance granted for meeting the hostel expenditure of his child. Exemption will be lower of the amount of allowance or Rs. 300 per month per child (upto 2 children). The exemption will be limited to Rs. 300 per month, irrespective of the actual amount spent by the employee on hostel expenditure of his children. In this case the exemption will be as follows :

 

Particulars

(Rs.)

Total children’s hostel allowance per month (Rs. 2,000 per child or Rs. 6,000 for 3 children)

6,000

(–) Exemption as per rule 2BB(2) (*)

600

Taxable value of allowance per month

5,400

 

(*) Exemption will be lower of the amount of allowance or Rs. 300 per month per child (upto 2 children). In this case, employee is receiving Rs. 2,000 per month per child. Thus, exemption will be Rs. 300 per month per child and it will be limited upto 2 children. Hence, exemption will be Rs. 600 per month (Rs. 300 × 2).

 

Illustration (Transport allowance, amount received more than specified amount)

Mr. Jay is receiving transport allowance of Rs. 2,000 per month from his employer (for meeting the expenditure of journey between home and office). What will be the tax treatment of transport allowance in the hands of Mr. Jay?

 

**

 

As per rule 2BB(2), exemption in respect of transport allowance will be lower of the amount of allowance or Rs. 800 per month. In this case the exemption will be as follows:

 

Particulars

(Rs.)

Actual amount of transport allowance

2,000

(–) Exemption as per rule 2BB(2) @ Rs. 800 per month

800

Taxable value of allowance per month

1,200

 

Illustration (Transport allowance, amount received less than specified amount)

 

Mr. Jay is receiving transport allowance of Rs. 500 per month from his employer (for meeting the expenditure of journey between home and office). What will be the tax treatment of transport allowance in the hands of Mr. Jay?

 

**

 

As per rule 2BB(2), exemption in respect of transport allowance will be lower of the amount of allowance or Rs. 800 per month. In this case the exemption will be as follows:

Particulars

(Rs.)

Actual amount of transport allowance

500

(–) Exemption as per rule 2BB(2) (lower of Rs. 800 per month or actual amount of allowance)

500

Taxable value of allowance per month

Nil

 

Illustration (Transport allowance, with details of amount spent by the employee)

Mr. Jay is receiving transport allowance of Rs. 1,500 per month from his employer (for meeting the expenditure of journey between home and office). He actually spends Rs. 3,000 per month on journey between office and his residence. What will be the tax treatment of transport allowance in the hands of Mr. Jay?

 

**

 

As per rule 2BB(2), exemption in respect of transport allowance will be lower of the amount of allowance or Rs. 800 per month. The exemption will be computed as above, irrespective of the actual amount spent by the employee. In this case the exemption will be as follows :

 

Particulars

(Rs.)

Actual amount of transport allowance

1,500

(–) Exemption as per rule 2BB(2) (lower of Rs. 800 per month or actual amount of allowance)

800

Taxable value of allowance per month

700

 

Illustration (Transport allowance for blind employee, amount received more than specified amount)

Mr. Jay (blind) is receiving transport allowance of Rs. 2,000 per month from his employer (for meeting the expenditure of journey between home and office). What will be the tax treatment of transport allowance in the hands of Mr. Jay?

 

**

 

As per rule 2BB(2), exemption in respect of transport allowance will be lower of the amount of allowance or Rs. 800 per month. However, in case of an employee who is orthopaedically handicapped or blind, the exemption will be increased to Rs. 1,600 per month. In this case the exemption will be as follows :

 

Particulars

(Rs.)

Actual amount of transport allowance

2,000

(–) Exemption as per rule 2BB(2) @ Rs. 1,600 per month

1,600

Taxable value of allowance per month

400

Illustration (Transport allowance for orthopaedically handicapped, amount received less than specified amount)

Mr. Jay (orthopaedically handicapped) is receiving transport allowance of Rs. 1,000 per month from his employer (for meeting the expenditure of journey between home and office). What will be the tax treatment of transport allowance in the hands of Mr. Jay?

 

**

 

As per rule 2BB(2), exemption in respect of transport allowance will be lower of the amount of allowance or Rs. 800 per month. However, in case of an employee who is orthopaedically handicapped or blind, the exemption will be increased to Rs. 1,600 per month. In this case the exemption will be as follows :

 

Particulars

(Rs.)

Actual amount of transport allowance

1,000

(–) Exemption as per rule 2BB(2) (lower of Rs. 1,600 per month or actual amount of allowance)

1,000

Taxable value of allowance per month

Nil

 

Illustration (Transport allowance for blind employee, with details of amount spent by the employee)

Mr. Jay (blind) is receiving transport allowance of Rs. 2,500 per month from his employer (for meeting the expenditure of journey between home and office). He actually spends Rs. 3,000 per month of expenditure on journey between office and his residence. What will be the tax treatment of transport allowance in the hands of Mr. Jay?

 

**

 

As per rule 2BB(2), exemption in respect of transport allowance will be lower of the amount of allowance or Rs. 800 per month. However, in case of an employee who is orthopaedically handicapped or blind, the exemption will be increased to Rs. 1,600 per month. The exemption will be computed as above irrespective of the actual amount spent by the employee. In this case the exemption will be as follows :

 

Particulars

(Rs.)

Actual amount of transport allowance

2,500

(–) Exemption as per rule 2BB(2) (lower of Rs. 1,600 per month or actual amount of allowance)

1,600

Taxable value of allowance per month

900

 

Illustration (Transport allowance, with details of amount spent by the employee)

Mr. Jay is receiving transport allowance of Rs. 1,500 per month from his employer (for meeting the expenditure of journey between home and office). He actually spends Rs. 3,000 per month of expenditure on journey between office and his residence. What will be the tax treatment of transport allowance in the hands of Mr. Jay?

 

**

 

As per rule 2BB(2), exemption in respect of transport allowance will be lower of the amount of allowance or Rs. 800 per month. The exemption will be computed as above, irrespective of the actual amount spent by the employee. In this case the exemption will be as follows :

 

Particulars

(Rs.)

Actual amount of transport allowance

1,500

(–) Exemption as per rule 2BB(2) (lower of Rs. 800 per month or actual amount of allowance)

800

Taxable value of allowance per month

700

 

Illustration (Allowance granted to an employee working in any transport system to meet his personal expenditure)

Mr. Raja is working in a transport company. He receives Rs. 20,000 per month on account of allowance to meet his personal expenditure during his duty performed in the course of running of the transport vehicle from one place to another place. What will be the tax treatment of the allowance in the hands of Mr. Raja?

 

**

 

As per rule 2BB(2), an employee working in any transport system can claim exemption in respect of allowance granted to meet his personal expenditure during his duty performed in the course of running of such transport vehicle from one place to another place, provided he is not in receipt of daily allowance. Exemption in this case will be 70% of such allowance up to a maximum of Rs. 10,000 per month. In this case the exemption will be as follows :

 

Particulars

(Rs.)

Actual amount of allowance

20,000

(–) Exemption as per rule 2BB(2) (70% of the amount of allowance (i.e. Rs. 14,000 subject to maximum of Rs. 10,000)

10,000

Taxable value of allowance per month

10,000

5.      Allowances For Which Exemption Is Based On Specific Method Of Computation

Under this category following allowances are covered:

 

(a)        Entertainment allowance

(b)       House rent allowance

 

Detailed discussion on both of the above is given below :

 

(A) Entertainment allowance :

 

Exemption in case of entertainment allowance is available only to an employee of Central Government or State Government. Entertainment allowance is first included in the salary and then a deduction is allowed of lower of (a) 20% of salary (i.e., basic salary only), or (b) Rs. 5,000, or (c) actual amount of allowance for the year. This deduction is available only to Central Government or State Government employees. Entire amount of entertainment allowance is taxable in the hands of non-Government employees.

 

Example

Mr. Suraj is employed in Essem Ltd. He is receiving entertainment allowance of Rs. 10,000 per month. His basic salary is Rs. 50,000 per month. In this case, entire amount of entertainment allowance will be charged to tax in the hands of Mr. Suraj, since he is a non-Government employee.

 

Illustration (Entertainment allowance for Government employee)

Mr. Sujal is employed in SM Ltd. He is receiving entertainment allowance of Rs. 20,000 per month. He actually spends Rs. 5,000 per month on entertainment. His basic salary is Rs. 84,000 per month. What will be the amount of exemption in respect of entertainment allowance in the hands of Mr. Sujal?

 

**

 

Exemption in respect of entertainment allowance is available only to an employee of the Central Government or State Government. Entertainment allowance is first included in the salary and then a deduction is allowed of lower of the following:

 

(a)        20% of salary (i.e., basic salary only) or

(b)       Rs. 5,000 or

(c)        Actual amount of allowance for the year.

 

This deduction is available only to an employee of the Central Government or the State Government. Entire amount of entertainment allowance is taxable in the hands of non-Government employees. In this case, Mr. Sujal is not a Government employee and, hence, he cannot claim exemption in respect of entertainment allowance. Hence, entire amount of entertainment allowance will be taxed in his hands.

 

Illustration (Entertainment allowance for Government employee)

Mr. Sunil is a Government employee. He is receiving entertainment allowance of Rs. 1,000 per month. His basic salary is Rs. 84,000 per month. What will be the amount of exemption in respect of entertainment allowance in the hands of Mr. Sunil?

 

**

 

Exemption in respect of entertainment allowance is available only to an employee of the Central Government or the State Government. Entertainment allowance is first included in the salary and then a deduction is allowed of lower of the following:

 

(a)        20% of salary (i.e., basic salary only) or

(b)       Rs. 5,000 or

(c)        Actual amount of allowance for the year.

 

This deduction is available only to an employee of the Central Government or the State Government. In this case, Mr. Sunil is a Government employee and, hence, he can claim exemption in respect of entertainment allowance. The amount of exemption will be as follows :

 

(*) Exemption as per Section 16(ii) in respect of entertainment allowance will be computed as follows :

 

        Rs. 2,01,600 (being 20% of basic salary of Rs. 84,000 per month).

        Rs. 5,000

        Rs. 12,000 (Actual amount of allowance Rs. 1,000 × 12)

 

Exemption will be Rs. 5,000, being lower of above. This amount will be deductible from salary income.

 

Illustration (Entertainment allowance for Government employee)

 

Mr. Krunal is a Government employee. He is receiving entertainment allowance of Rs. 5,000 per month. His basic salary is Rs. 25,200 per month. He actually spends Rs. 6,000 per month on entertainment. What will be the amount of exemption in respect of entertainment allowance in the hands of Mr. Krunal?

 

**

 

Exemption in respect of entertainment allowance is available only to an employee of the Central Government or the State Government. Entertainment allowance is first included in the salary and then a deduction is allowed of lower of the following:

 

(a)        20% of salary (i.e., basic salary only) or

(b)       Rs. 5,000 or

(c)        Actual amount of allowance for the year.

 

This deduction is available only to an employee of the Central Government or the State Government. The exemption will remain same, irrespective of the amount spent for the purpose of allowance. In this case, Mr. Sunil is a Government employee and, hence, he can claim exemption in respect of entertainment allowance. The amount of exemption will be as follows :

 

Exemption as per Section 16(ii) in respect of entertainment allowance will be computed as follows :

 

        Rs. 60,480 (being 20% of basic salary of Rs. 25,200 per month).

        Rs. 5,000

        Rs. 60,000 (Actual amount of allowance Rs. 5,000 × 12)

 

Exemption will be Rs. 5,000, being lower of above. This amount will be deductible from salary income.

 

(B)    House rent Allowance (HRA)

House rent allowance is given to an employee to meet the expenditure incurred by him on account of rent of residential accommodation.

 

Example

Mr. Kumar is Accounts Manager in Essem Ltd. The company is paying him Rs. 8,400 per month as allowance for meeting the expenditure incurred by him on account of rent of residential accommodation. In this case, Rs. 8,400 is house rent allowance.

As per section 10(13A) and Rule 2A, exemption in respect of HRA is least of the following amounts:

 

        50% of salary, when residential house is situated at Mumbai, Kolkata, Delhi or Chennai and 40% of salary, where residential house is situated at any other place.

        HRA actually received by the employee in respect of the period during which rental accommodation is occupied by the employee and rent expenditure was incurred by the employee, during the previous year.

        Rent paid in excess of 10% of salary.

 

While determining salary to be used for computation of exemption in respect of house rent allowance following points should be kept in mind :

 

(1)       Meaning of salary, i.e., ingredients of salary

(2)       Period of salary

 

Detailed discussion on the above points is given below :

 

(1) Meaning of salary, i.e., ingredients of salary

Salary for the purpose of computing exemption in respect of house rent allowance will include basic salary, dearness allowance forming part of salary while computing all retirement benefits and commission based on fixed percentage of turnover achieved by the employee. Apart from this, salary for this purpose does not include any other allowance/perquisites.

Mr. Kumar is Production Manager in Essem Ltd. The company is paying him following amounts:

 

 Basic salary of Rs. 84,000 per month.

 

 Dearness allowance of Rs. 25,200 per month. This amount is considered as salary while computing all retirement benefits.

 

 Dearness allowance of Rs. 20,000 per month. This amount is not considered as salary while computing all retirement benefits.

 

 Fixed monthly commission of Rs. 1,000.

 

 Apart from monthly commission of Rs. 1,000, he is also entitled to 1% commission on turnover achieved by him. Turnover achieved by him during the month of April amounted to Rs. 2,00,000. Commission on Rs. 2,00,000 @ 1% will amount to Rs. 2,000.

 

 Value of perquisite arising from free use of motor car provided by the employer amounted to Rs. 4,000 per month.

 

 House rent allowance of Rs. 6,000 per month.

 

In this case, while computing exemption in respect of house rent allowance, salary will be computed as follows :

 

Particulars

(Rs.)

Basic salary (it is considered while computing exemption in respect of house rent allowance)

84,000

Dearness allowance forming part of salary while computing retirement benefits, i.e., DA (as considered while computing exemption in respect of house rent allowance)

25,200

Dearness allowance not forming part of salary while computing retirement benefits, i.e., DA (not considered while computing exemption in respect of house rent allowance)

----------

Fixed monthly commission (not considered while computing exemption in respect of house rent allowance)

----------

Commission based on fixed percentage of turnover achieved by the employee (considered while computing exemption in respect of house rent allowance)

2,000

Perquisite on account of car provided by the employer (perquisites are not considered while computing exemption in respect of house rent allowance)

----------

Salary for the purpose of computation of exemption in respect of House rent allowance

1,11,200

(2) Period of salary

Salary for this purpose shall be computed on due basis in respect of period during which the accommodation is occupied by the employee in the previous year. Hence, any payments not pertaining to the

Example

Mr. Krunal is working in Essem Ltd. at a monthly salary of Rs. 84,000 (basic salary) and dearness allowance of Rs. 16,000 (considered as salary for computing retirement benefits). During the month of March 2013, Mr. Kapoor received advance salary for the month of April, 2013. In this case, while computing exemption in respect of house rent allowance for the month of March, 2013, advance salary of April, 2013 will not be considered. In other words, while computing exemption in respect of house rent allowance for the month of March, 2013, salary will be taken as Rs, 1,00,000 (i.e., basic salary and DA only for the month of March, 2013).

 

Illustration (Exemption in case of house rent allowance in case of Government and non-Government employee)

Mr. Amit (place of posting Bhatinda) has provided following information regarding his salary structure for the year 2012-13:

 

Particulars

(Rs.)

Basic salary

2,52,000

Dearness allowance forming part of salary while computing all retirement benefits

2,48,000

Commission (Rs. 5,000 per month)

60,000

House rent allowance (Rs. 10,000 per month)

1,20,000

Other allowance (fully taxable)

40,000

Value of perquisites provided by the employer

1,00,000

 

He has taken a residential accommodation on rent at a monthly rent of Rs. 12,000. From the above information compute the amount of taxable house rent allowance if Mr. Amit is a: (i) Government employee, (ii) non-Government employee.

 

**

 

House rent allowance is given to an employee to meet the expenditure incurred by the employee on account of rent of residential accommodation.

 

As per section 10(13A) and Rule 2A, exemption in respect of HRA is least of the following amounts:

 

        50% of salary, when residential house is situated at Mumbai, Kolkata, Delhi or Chennai and 40% of salary where residential house is situated at any other place.

        HRA actually received by the employee in respect of the period during which rental accommodation is occupied by the employee and rent is incurred by the employee, during the previous year.

        Rent paid in excess of 10% of salary.

 

The above discussed exemption will remain same in the case of a Government employee as well as a non-Government employee. In other words, the method of computation of exemption in respect of house rent allowance will remain same in the case of a Government employee as well as non-Government employee. Based on the above discussed provisions, exemption in respect of house rent allowance will be lower of the following :

 

        40% of salary since residential house is situated at Bhatinda, this will come to Rs. 2,00,000 (See note 1).

        Actual amount of HRA received by the employee for the year Rs. 1,20,000.

        Rent paid in excess of 10% of salary. This will amount to Rs. 94,000 (See note 2).

 

Exemption in respect of HRA will be Rs. 94,000, being least of the above computed amounts. Taxable HRA for the year will be computed as follows :

 

Particulars

(Rs.)

Annual HRA

1,20,000

Less: Exemption in respect of HRA as computed above

(94,000)

Taxable HRA

26,000

 

Note 1:

Salary for the purpose of computation of exemption in respect of house rent allowance will come to Rs. 5,00,000 per annum (Rs. 2,52,000 basic salary and Rs. 2,48,000 dearness allowance). 40% of salary will come to Rs. 2,00,000.

 

Note 2:

Rent paid in excess of 10% of salary will be computed as follows :

 

Particulars

(Rs.)

Annual rent (Rs. 12,000 × 12)

1,44,000

Less : 10% of annual salary of Rs. 5,00,000

(50,000)

Rent in excess of 10% of salary

94,000

 

Illustration (Exemption in case of house rent allowance when the items to be used to compute exemption differ during the year)

Mr. Sunil (place of posting Mumbai) has provided following information regarding his salary structure per month for the year 2012-13:

 

Particulars

April to June

(Rs.)

July to October

(Rs.)

November to December

(Rs.)

January to March

(Rs.)

Basic salary

84,000

90,000

90,000

90,000

Dearness allowance forming part of salary while computing all retirement benefits

16,000

30,000

30,000

30,000

Commission (fixed)

1,000

1,000

1,000

1,000

House rent allowance

8,000

8,000

10,000

10,000

Other allowance (fully taxable)

10,000

10,000

20,000

20,000

Value of perquisites provided by the employer

20,000

20,000

20,000

20,000

Rent paid at Mumbai

20,000

20,000

20,000

25,000

 

From the above information compute the amount of taxable house rent allowance.

**

As per section 10(13A) and Rule 2A, exemption in respect of HRA is least of the following amounts:

 

        50% of salary, when residential house is situated at Mumbai, Kolkata, Delhi or Chennai and 40% of salary where residential house is situated at any other place.

        HRA actually received by the employee in respect of the period during which rental accommodation is occupied by the employee and rent expenditure is incurred by the employee, during the previous year.

        Rent paid in excess of 10% of salary.

 

The exemption is based on following 4 items :

 

        The salary of the employee.

        The amount of house rent allowance.

        The place at which the accommodation is rented.

        The rent of the accommodation.

 

The computation can be clubbed together for a period during which all the above items are same. If any of these items change during the year, then the computation is to be made for different periods. In this case, the above discussed items change and we will bifurcate our computation into following parts :

 

        Computation for April to June period.

        Computation for July to October period

        Computation for November to December period

        Computation for January to March period

 

Based on the above discussed provisions, exemption in respect of house rent allowance will be computed as follows :

 

Particulars

April to June

(Rs.)

July to October

(Rs.)

November to December

(Rs.)

January to March

(Rs.)

50% of salary (Note 1)

50,000

60,000

60,000

60,000

Actual amount of HRA

8,000

8,000

10,000

10,000

Rent paid in excess of 10% of salary (Note 2)

10,000

8,000

8,000

13,000

Amount of exemption (lower of above amounts) (A)

8,000

8,000

8,000

10,000

HRA for the month (B)

8,000

8,000

10,000

10,000

Taxable HRA (B – A)

Nil

Nil

2,000

Nil

(×) No. of months in period

3

4

2

3

Taxable HRA for the period

Nil

Nil

4,000

Nil

Taxable HRA for the year

4,000

 

Note 1:

 

Particulars

April to June (Rs.)

 

July to October

(Rs.)

November to

December

(Rs.)

January to 

March

(Rs.)

Basic salary per month

84,000

90,000

90,000

90,000

Dearness allowance forming part of salary while computing all retirement benefits

16,000

30,000

30,000

30,000

Monthly salary to be used for computation of exemption

1,00,000

1,20,000

1,20,000

1,20,000

50% of monthly salary

50,000

60,000

60,000

60,000

 

Note 2:

Rent paid in excess of 10% of salary will be computed as follows :

 

Particulars

April to June

(Rs.)

July to October

(Rs.)

November to December

(Rs.)

January to March

(Rs.)

Rent paid per month

20,000

20,000

20,000

25,000

10% of salary

10,000

12,000

12,000

12,000

Rent in excess of 10% of salary

10,000

8,000

8,000

13,000

6.      Points To Be Kept In Mind While Making Practical Implication Of The Provisions Of Computation Of Exemption In Respect Of HRA

Exemption in respect of house rent allowance depends on following four things, viz. :

 

        Salary of the employee

        House rent allowance received by the employee

        Rent of the residential accommodation

        Place of residential accommodation

 

It should be noted that when salary, HRA, rent paid and place where house is taken on rent are same throughout the previous year, then the exemption should be calculated on “annual” basis. However, if there is change in any of them, then exemption shall be computed on a “monthly” basis.

 

Example

Mr. Sunil is employed in Essem Ltd. at a monthly salary of Rs. 84,000. Other details for the year are as follows :

 

        House rent allowance of Rs. 8,000 per month (remained same for the year).

        Rent paid by him amounted to Rs. 15,000 per month (remained same for the year).

        Dearness allowance (i.e., DA) per month amounted to Rs. 16,000 (remained same for the year).

        Throughout the year he was residing in Jaipur.

 

In the above example, all the four things, viz., salary, house rent allowance, monthly rent and place of accommodation remained same throughout the year. Hence, computation can be done on an annual basis as follows :

 

Exemption in respect of house rent allowance will be lower of the following :

 

        40% of salary, since residential house is situated at Jaipur, this will come to Rs. 4,80,000 (See note 1)

        Actual amount of HRA received by the employee for the year. Monthly HRA is Rs. 8,000. Hence, annual HRA will amount to Rs. 96,000.

 

 

        Rent paid in excess of 10% of salary. This will amount to Rs. 60,000 (See note 2)

 

Exemption in respect of HRA will be Rs. 60,000, being least of the above computed amounts. Taxable HRA for the year will be computed as follows :

 

Particulars

(Rs.)

Annual HRA (Rs. 8,000 × 12)

96,000

Less: Exemption in respect of HRA as computed as above

60,000

Taxable HRA

36,000

 

Note 1:

Salary for the purpose of computation of exemption in respect of house rent allowance will come to Rs. 1,00,000 per month (Rs. 84,000 basic salary and Rs. 16,000 dearness allowance). Annual salary will come to Rs. 12,00,000. 40% of salary will come to Rs. 4,80,000.

 

Note 2:

Rent paid in excess of 10% of salary will be computed as follows :

 

Particulars

(Rs.)

Annual rent (Rs. 15,000 × 12)

1,80,000

Less : 10% of annual salary of Rs. 12,00,000

1,20,000

Rent in excess of 10% of salary

60,000

 

Example

Suppose in the above example rent is increased from 1st July to Rs. 21,000 and DA is increased to Rs. 26,000 from 1st December, then annual computation cannot be done and computation will be divided as follows :

 

        Accumulated computation for the period of April to June.

        Accumulated computation for the period of July to November.

        Accumulated computation for the period of December to March.

 
 

   
   
   
   
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