Have you ever wondered, are there allowances that are exempt from tax? But, great news to the reader – there are a lot of allowances in salary that are tax free. But, for you to understand how this works, you need to start from scratch. An allowance is a fixed sum that is paid to an employee at a regular interval, and it is typically connected with the compensation for an unusual condition or more. Some allowances are also called special allowances, and these ones are exempt from tax under Section 10(14). Want to know what these special allowances are? Buckle up because we are about to know them all.
But, before that, we need to know the general allowances that are given to an employee.
The General Allowances for Employees that are Taxed
Here is a vast list that will help you in-depth, the type of allowances an employee would get but will come under the tax.
1. Entertainment Allowances: Employees will be allowed the lowest of the declared amount, that is, one-fifth of the basic salary, and the actual amount received as allowance. It is provided to the employees to reimburse the expenses that have been incurred on the hospitality of the customers. Still, the government employees can claim an exemption in the manner provided in Section 16 (ii).
2. Overtime Allowance: Here, the employer could give an overtime allowance to the employees who work over and above the regular time, and it is called an overtime allowance, which is fully taxable.
3. Dearness Allowance: This is the allowance that is paid to the employees as a cost of living adjustment in order to cope with inflation. In order to Calculate DA dearness allowance, it will vary from one employee to another, but when it is paid to an employee, it will be fully taxable.
4. City Compensatory Allowance: This is paid to the employees in an urban center, which may be highly expensive. In order to cope with the inflated living costs in the city, they are provided to the employee, and it is also fully taxed.
5. Project Allowance: This is when an employer may provide an allowance to the employees to meet the expenses of a project, and it is taxable.
6. Interim Allowance: This is when the employer gives any interim allowance in lieu of the final allowance, it will become fully taxable.
7. Meal Allowance: This is when the employer provides food allowances to their employees, and they will be taxed.
8. Cash Allowance: This is when the employer gives a cash allowance, such as wedding allowance, holiday allowance, and more – which is also fully taxable.
9. Warden Allowance: This is when the employer pays the allowance to an employee working as a warden, that is, the keeper of an educational institute; it is also fully taxed.
10. Non-Practicing Allowance: It is when the physicians are attached to clinical centers of different labs or more, or any other non-practicing allowance paid to them, which is also taxed.
11. Servant Allowance: This is when the employer pays the employee to engage services of the servant, such as the allowance being taxable.
12. House Rent Allowance: This is the allowance that an employer pays to his employee to pay off his house rent or stay, and this is partly taxable.
13. Fixed Medical Allowance: Here, the employer pays the employee of his family when fallen sick for the costs of the treatment, and this allowance is partly taxable.
Allowances that are Exempt from Tax
Here is a list of allowances that employees enjoy and are also exempt from tax.
1. Leave Encashment: This is an allowance that is allocated to the employees who did not take any leaves for a year, and they can encash these leave days in the form of encashed leaves.
2. Leave Travel Allowance: This is known to be the most common type of allowance, and it is received by salaried employees. It is the claim when there is leave for travel. It will cover the cost of the travel, and it also has tax exemptions based on some conditions.
3. Pension Income: This is the income of the employees past their service. This is mainly of two types, and that is, commuted pension and non-commuted pension. In this case, only government employees are exempt from the taxes for this allowance.
4. Gratuity: This is payable to the employees after their termination; a minimum of 5 years need to be served, though. In this case, there is tax exemption available to the employees when they receive gratuity under section 10(10) of the Income Tax Act.
5. Transport Allowance: This is a maximum of Rs. Eight hundred for a month, and it is irrespective of the actuals, and it will be exempted from tax.
Now, the taxable allowances will outweigh the allowances that are not taxed, but knowing how they are tied and the details that revolve around them can help you a lot.
You also need to remember that, though taxed, most of the allowances are known to be partially taxed, while the others are fully taxed, and apart from that – there are five types of allowances that are not taxable at all.
Conclusion
With a bigger part of the taxpayers being salaried employees, it is crucial to understand that there are tax-exempt allowances too. As an employee, you would want to be informed and also accountable for informing these sets of information to your employer.
