BLOG on Income Tax Management for - AY 2022-23 & 2023-24

ALLOWANCES - For Computing ‘Salary’ Income

House Rent Allowance-HRA [Section 10(13A) and Rule 2A]
Prescribed Special Allowances which are Exempt to a certain extent - Section 10(14)
Treatment of Entertainment Allowance
Allowances which are Exempt in case of certain Persons
Allowances which are Fully Taxable

Allowance is a fixed monetary amount paid by the employer to the employee for meeting some particular expenses, whether personal or for the performance of his duties. These allowances are generally taxable and are to be included in the gross salary unless a specific exemption has been provided in respect of any such allowance. Specific exemptions in respect of allowances are provided under the following sections:

(i) House Rent Allowance — Section 10(13A)

(ii) Prescribed Special Allowances — Section 10(14)

The above allowances shall be exempt either in full or upto a certain limit and the balance, if any, shall be taxable and thus included in gross salary.

Entertainment Allowance, however, does not fall under section 10 and therefore it is not subject to any exemption. The entire entertainment allowance received by an employee is first included in gross salary and thereafter a deduction under section 16(ii) is allowed only to a government employee from gross salary on account of such entertainment allowance, already included.

ALLOWANCES - For Computing ‘Salary’ Income

The treatment of some of the allowances is as under:

1. House Rent Allowance-HRA [Section 10(13A) and Rule 2A]

Quantum of Exemption: Minimum of following three limits:

	Mumbai / Kolkata / Delhi / Chennai	Other Cities
(i)	Allowance actually Received	Allowance actually Received
(ii)	Rent Paid in excess of 10% of Salary	Rent Paid in excess of 10% of Salary
(iii)	50% of Salary	40% of Salary

Note :
The exemption in respect of HRA is based upon the following factors:

(1) Salary
(2) Place of residence
(3) Rent paid
(4) HRA received.

Since there is a possibility of change in any of the above factors during the previous year, exemption for HRA should not always be calculated on annual basis. As long as there is no change in any of the above factors it can be calculated together for that period. Whenever there is a change in any of the above factors, it should be separately calculated till the next change.

2. Prescribed Special Allowances which are Exempt to a certain extent - Section 10(14)

(i) Special Allowances for performance of official duties:

These allowances are not in the nature of a perquisite within the meaning of section 17(2) and are specifically granted to meet expenses wholly, necessarily and exclusively incurred in the performance of duties of an office or employment of profit. These allowances will be exempt the extent such expenses are actually incurred for that purpose. [Section 10(14)(i)].

These allowances are:

Travelling allowance:

Any allowance granted to meet the cost of travel on tour or on transfer of duty. "Allowance granted to meet the cost of travel on transfer" includes any sum paid in connection with transfer, packing and transportation of personal effects on such transfer.

Daily allowance:

Any allowance, whether granted on tour or for the period of journey in connection with transfer, to meet the ordinary daily charges incurred by an employee on account of absence from his normal place of duty;

Conveyance allowance:

Any allowance granted to meet the expenditure incurred on conveyance in performance of duties of an office or employment of profit, provided that free conveyance is not provided by the employer. Expenditure incurred on journey from residence to office and back to residence shall not be treated as expenditure incurred on conveyance in performance of official duties;

Helper allowance:

Any allowance, by whatever name called, granted to meet the expenditure incurred on a helper where such helper is engaged for the performance of the duties of an office or employment of profit;

Academic allowance:

Any allowance, by whatever name called, granted for encouraging academic, research and training pursuits in educational and research institutions;

Uniform allowance:

Any allowance, by whatever name called, granted to meet the expenditure incurred on the purchase or maintenance of uniform for wear during the performance of the duties of an office or employment of profit.

The above allowances shall be exempt to the extent of minimum of the following:

Actual allowance received.
Actual amount spent for the purposes of duties of office or employment.

(ii) Allowances to meet Personal Expenses

These allowances can be of the following two types:

1. Allowances which are exempt to the extent of amount received or the limit specified, whichever is less:

Children education allowance:

Exempt upto actual amount received per child or ₹100 p.m. per child upto a maximum of 2 children, whichever is less.

Hostel expenditure allowance:

Exempt upto actual amount received per child or ₹300 p.m. per child upto a maximum of two children, whichever is less.

Tribal area, Scheduled Area/Agency area allowance:

Exempt upto actual amount received or ₹200 per month, whichever is less.

Special compensatory hilly area allowance or high altitude allowance etc.:

Exemption varies from ₹300 to ₹7,000 per month.

Border area, remote area allowance, disturbed area allowance, etc.: (as per given later):

Exemption varies from ₹200 p.m. to ₹1,300 p.m.

Compensatory field area allowance:

Exempt to the extent of ₹2,600 p.m.

Compensatory, modified field area allowance:

Exempt to the extent of ₹1,000 p.m.

Counter insurgency allowance granted to members of armed forces:

Exempt to the extent of ₹3,900 p.m.

Transport allowance:

Any 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, to the extent of ₹1,600 per month.

However, such transport allowance granted to an employee, who is blind or deaf and dumb or orthopaedically handicapped with disability of lower extremities, is exempt to the extent of ₹3,200 p.m. instead of ₹1,600.

Underground allowance:

Any underground allowance granted to an employee who is working in uncongenial, unnatural climate in underground mines shall be exempt to the extent of ₹800 p.m.

High altitude (uncongenial climate) allowance:

Given to the member of the armed forces for altitude of 9000 ft to 15000 ft ₹1,060 p.m. and for altitude above 15000 ft ₹1,600 p.m.

Special compensatory highly active field area allowance granted to members of armed forces:

Exempt to the extent of ₹4,200 p.m.

Island (duty) allowance:

Given to the member of the armed forces in the Andaman & Nicobar and Lakshadweep Group of Islands exempt to the extent of ₹3,250 p.m.

Note :

(1) Assessee claiming exemption of allowance mentioned under clauses (f) and (g) above shall not be entitled to the exemption in respect of allowance referred to under clause (e) above.

(2) Assessee claiming exemption in respect of the allowance mentioned under clause (h) above shall not be entitled to the exemption in respect of disturbed area allowance mentioned under clause (e) above.

(3) It may be noted that allowances mentioned in para 4.13b above are exempt to the extent of amount received or the limit specified, whichever is less. Actual expenditure in this case has no relevance. E.g. if an employee receives ₹2,000 p.m. as transport allowance for commuting between the place of residence and the place of duty and actually spends ₹1,200 p.m. for this purpose, the exemption, in this case shall be ₹1,600 p.m. although the amount actually spent was ₹1,200 p.m.

2. Allowance which is exempt to the extent of certain percentage of amount received

Allowance allowed to transport employees working in any transport system:

If any fixed allowance is given by the employer to the employee who is 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,

the amount of exemption shall be 70% of such allowance or
₹10,000 p.m.,
- whichever is less.

Note : Exemption will be allowed to the transport employees only when they are not in receipt of daily allowance.

3. Treatment of Entertainment Allowance

This deduction is allowed only to a Government employee. Non-Government employees shall not be eligible for any deduction on account of any entertainment allowance received by them.

In case of entertainment allowance, the ssesse is not entitled to any exemption but he is entitled to a deduction under section 16(ii) from gross salary. Therefore, the entire entertainment allowance received by any employee is added in computation of the gross salary. The Government employee is, then, entitled to deduction from gross salary under section 16(ii) on account of such entertainment allowance to the extent of minimum of the following 3 limits.

Actual entertainment allowance received during the previous year.
20% of his salary exclusive of any allowance, benefit or other perquisite.
₹5,000.

Note :

For purpose of deduction in respect of entertainment allowance, the actual amount spent towards entertainment expenses is irrelevant. Even if the Government employee spends the entire amount of entertainment allowance or even an amount greater than the entertainment allowance received is spent on entertainment for official purposes, the deduction shall be minimum of the above 3 limits.
Amount actually spent out of entertainment allowance is irrelevant for claiming deduction.
Sumptuary allowance has to be treated as an entertainment allowance.

4. Allowances which are Exempt in case of certain Persons

Allowances to a citizen of India, who is a Government employee, rendering services outside India. [Section 10(7)]
Allowances to High Court judges under section 22A(2) of the High Court Judges (Conditions of Service) Act, 1954.
Sumptuary allowance given to High Court and the Supreme Court judges. Sumptuary allowance are in the nature of entertainment allowance.
Allowance received by an employee of United Nations Organisation (UNO) from his employer.

5. Allowances which are Fully Taxable

All other allowances excepting those discussed in preceding paras, are fully taxable. Some of such allowances are enumerated as under:

Dearness Allowance (DA)
City Compensatory Allowance (CCA)
Medical Allowance: Fully taxable, irrespective of whether any amount has been spent on medical treatment or not.
Lunch Allowance/tiffin allowance
Overtime Allowance
Servant Allowance
Warden Allowance
Non-practising Allowance
Family Allowance