ALLOWANCES

An allowance is a fixed amount of money paid regularly in addition to the salary for meeting specific requirements of the employees. As a general rule, any fixed allowance received by an employee forms part of his taxable salary unless specifically exempted. The taxability of various allowances an employee could receive is summarized below:

Allowances prescribed to meet expenses incurred wholly, necessarily and exclusively in the performance of the duties Section 10(14)(i)

Special allowances or benefits, not being in the nature of a perquisite, specifically granted to meet expenses incurred wholly, necessarily and exclusively in the performance of the duties of an office or employment of profit. For the allowances under this category, there is no limit on the amount which the employee can receive from the employer, but whatever amount is received should be fully utilized for the purpose for which it was given to him. These allowances are:        

• Travelling Allowance
• Daily Allowance
• Conveyance Allowance
• Helper Allowance
• Academic Allowance
• Uniform Allowance

Note - An employee, being an assessee, who opts for the provisions of Section 115BAC would be entitled for exemption only in respect of travelling allowance, daily allowance and conveyance allowance mentioned in (a) to (c) above.

Allowances granted to the assessee to meet his personal expenses Section 10(14)(ii)

Special allowances granted to the assessee either to meet his personal expenses at the place where the duties of his office or employment of profit are ordinarily performed by him or at the place where he ordinarily resides or to compensate him for the increased cost of living. For the allowances under this category, there is a limit on the amount which the employee can receive from the employer.

Any amount received by the employee in excess of these specified limits will be taxable in his hands as income from salary for the year. It does not matter whether the amount which is received is actually spent or not by the employee for the purpose for which it was given to him. These allowances are    

• Children Education Allowance
• Hostel Expenditure
• Compensatory Field Area Allowance
• Compensatory Modified Field Area Allowance
• Counter insurgency Allowance
• Transport Allowance
• Underground Allowance
• High Altitude Allowance
• Special compensatory highly active field area Allowance

Note - An employee, being an assessee, who opts for the provisions of section 115BAC would be entitled for exemption only in respect of transport allowance granted to an employee who is blind or deaf and dumb or orthopedically handicapped with disability of the lower extremities of the body to the extent of 3,200 p.m.

House Rent Allowance Section 10(13A)

HRA is a special allowance specifically granted to an employee by his employer towards payment of rent for residence of the employee.

HRA granted to an employee is exempt to the extent of least of the following:

• HRA actually received for the relevant period.
• Rent paid - 10% of salary for the relevant period
• 50% of salary for the relevant period for Metro Cities and 40% of salary in other cities.

[Salary = Basic + Dearness Allowance (if provided by the terms of employment) + commission based on fixed % of turnover].

Exemption shall not be allowed, if the employee resides in a house that is owned by him or if no actual expenditure is incurred by the employee on rent.

Leave Travel Allowance (LTA) Section 10(5)

 Assessee who incurs expenditure for -

• travel for assessee and his family (up to 2 children).
• on leave to any destination in India is eligible for exemption in respect of LTA to the extent of expenses actually incurred for the purpose of such travel subject to the following limits.
• Exemption only in 2 out of a block of 4 years (current block: 1st January 2018 to 31st December 2021) with option to claim exemption for 1 journey (out of the 2) in the calendar year immediately following the end of the block.

Allowance granted to Government Employees outside India Section 10(7)

• Allowances or perquisites paid or allowed as such outside India by the Government to a citizen of India for services rendered outside India are exempt from tax.
  

Death Cum Retirement Gratuity Received Section 10(10)

Its treatment is discussed below -

• Retirement gratuity received under the Pension Code or Regulations applicable to members of the Defence Service is fully exempt.
• Employees of Central Government/ Members of Civil Services/ local authority employees: Any death cum retirement gratuity is fully exempt from tax under section 10(10)(i).
• Gratuity received during the period of service is fully taxable.
  

Other employees

• Covered by the Payment of Gratuity Act, 1972 

Any death-cum-retirement gratuity is exempt from tax to the extent of least of the following  

• 20,00,000
• Gratuity actually received
• 15 days’ salary based on last drawn salary for each completed year of service or part thereof in excess of 6 months.

Note - Salary for this purpose means basic salary and dearness allowance. No. of day in a month for this purpose, shall be taken as 26.

• Not covered by the Payment of Gratuity Act, 1972

Any death cum retirement gratuity received by an employee on his retirement or his becoming incapacitated prior to such retirement or on his termination or any gratuity received by his widow, children or  dependents on his death is exempt from tax to the extent of least of the following- 

• 20,00,000 
• Gratuity actually received
• Half month’s salary (based on last 10 months’ average salary immediately preceding the month of retirement or death) for each completed year of service (fraction to be ignored)

Note - Salary for this purpose means basic salary and dearness allowance, if provided in the terms of employment for retirement benefits, forming part of salary and commission which is expressed as a fixed percentage of turnover.

Where gratuity is received from 2 or more employers in the same previous year then aggregate amount of gratuity exempt from tax cannot exceed 20,00,000.

Where gratuity is received in any earlier previous year from former employer and again received from another employer in a later previous year, the limit of 20,00,000 will be reduced by the amount of gratuity exempt earlier.

Exemption under section 10(10) would be available to an assessee irrespective of the regime under which he pays tax.

Leave salary exemption Section 10(10AA) 

If Leave salary encashment is received by any employee while in employment then it is fully taxable in the hands of employee. While if leave encashment is received in case of retirement or superannuation or resignation, then exemption is available upto the following limits.

• In case of Central government or State government employee (excluding employees of a local authority or statutory corporation) – Fully Exempt
• In case of any other employee Least of the following is exempt
  • Actual amount received
  • 25,00,000
  • 10 months average salary
  • Cash equivalent of unavailed leave (Based on last 10 months average salary) to his credit at the time of retirement

Average salary x leaves at the credit of an employee (leaves cannot exceed 30 days for every completed year of service, fraction of a year is to be ignored).

Salary includes basic pay, dearness allowance (if it forms part of the retirement benefits) and percentage wise fixed commission on turnover. Average Salary = Average of salary drawn in the last 10 months immediately preceding the date of retirement.

Note - If leave encashment is received by an employee from more than one employer in the same previous year or in different previous years the aggregate maximum amount exempt from tax on account of leave encashment cannot exceed Rs. 25,00,000.

Note - Leave salary paid to the legal heirs of the assessee, who dies during the employment will not be taxable.

Exemption under section 10(10AA) would be available to an assessee irrespective of the regime under which he pays tax.

Exemption towards commuted value of pension Section 10(10A)

The commuted pension received is exempted under section 10(10A) in the following manner

• The commuted value of pension received by the government employees are fully exempted under this section.
• The commuted value of pension received by any other employees would be exempted in the following manner
  • In case the employees receive any gratuity then amount of exemption would be the commuted value of 1/3rd of the pension which the employee is normally entitled to receive.
  • In any other case amount of exemption would be the commuted value of 1/2 of the pension which the employee is normally entitled to receive.
• The commuted pension received from the pension funds [referred under section 10(23AAB)] set up by the Life Insurance Corporation or any other insurer are fully exempt.

Exemption under section 10(10A) in respect of commuted pension is available to an assessee irrespective of the regime under which he pays tax.

Judges of the Supreme court and High court will be entitled to the exemption of the commuted portion u/s 10(10A)(i).

Exemption towards retrenchment compensation received by workman Section 10(10B)

Retrenchment means the termination of the service, by the employer, of a workman for any reason other than a punishment imposed by way of disciplinary action. Termination of an employee in such a manner is financially compensated by the employer, and such financial compensation is termed as ‘retrenchment compensation’.

Section 10(10B) of the Income Tax Act provides exemption towards such retrenchment compensation received by the workman. Lower of the following amount is available as an exemption under section 10(10B)

• The amount of retrenchment compensation received; or
• The amount specified by the Central Government (i.e. INR 5 Lakhs); or
• An amount equal to 15 days average pay for each completed year of the service or part thereof in excess of 6 months.

However, it should be noted that the above exemption limit is not applicable in respect of the retrenchment compensation received, by the workman, in accordance with any scheme approved by the Central Government.

Exemption under section 10(10B) would be available to an assessee irrespective of the regime under which he pays tax.

Taxability of amount received on Voluntary Retirement Section 10(10C)

Any amount received or receivable by an employee on his voluntary retirement or termination of his service, in accordance with any schemes of voluntary retirement or voluntary separation in the case of a public sector company shall be exempt, to the extent such amount does not exceed 5 lakh rupees. This exemption based upon following conditions-

• The scheme applies to an employee who has either completed 10 years of service or has completed 40 years of age.
• It should be noted that the above criterion doesn’t apply to the amount received by the employee of a public sector company under the voluntary separation scheme framed by the public sector company.
• The scheme should apply to all the employee, which includes workers and executives of a company or a co-operative society or an authority, except directors of a company or a co-operative society.
• The voluntary retirement / voluntary separation scheme should have been drawn to result in an overall drop in the current strength of the employees.
• The vacancy resulted from the voluntary retirement / voluntary separation scheme is not to be filled up.
• The voluntary retiring employee shall not be employed in another company / concern belonging to the same management.
• The amount receivable of the employee under the voluntary retirement / voluntary separation scheme should not exceed.
• The amount equal to 3 months salary for each completed years of service; or
• The amount equal to salary at the time of retirement X balance months of service left before the date of retirement/ superannuation.

Exemption under section 10(10C) would be available to an assessee irrespective of the regime under which he pays tax.

Tax on Perquisites Section 10(10CC) 

An individual can receive income in the nature of a perquisite not by way of monetary payment. This perquisite income is taxable in the hands on the employee as a part of the salary. But the employer may choose to pay the tax on the behalf of the employee. In such a case the tax is exempt in the hands on the employee.

It is very important to make a note here that exemption under section 10(10CC) of the Income Tax Act is available against any income tax paid by the employer on the ‘non-monetary perquisite’ (the exemption doesn’t include tax paid on monetary perquisite).