Allowance

An allowance is a fixed amount paid by an employer on top of basic salary to cover specific expenses or compensate for particular working conditions. Overtime pay is a straightforward example. Other common allowances cover things like housing, travel, meals, and medical costs.

In India, allowances fall into three tax categories: taxable, partially taxable, and non-taxable.

Taxable allowances

These are added to income and taxed in full. They include dearness allowance, entertainment allowance, overtime allowance, city compensatory allowance, medical allowance, interim allowance, project allowance, meal and tiffin allowances, uniform allowance, cash allowance, non-practicing allowance, warden allowance, and servant allowance.

Partially taxable allowances

These allowances have exemptions up to a defined limit. Anything above that limit is taxable.

House Rent Allowance (HRA) is the most significant. The exempt portion is the lowest of three figures: the actual HRA received, the rent paid minus 10% of basic salary plus dearness allowance, or 50% of basic salary for metro cities and 40% for non-metros.

Leave Travel Allowance (LTA) covers travel costs within India and is exempt subject to conditions on frequency and travel mode.

Children’s Education Allowance and Hostel Expenditure Allowance are partially exempt up to specified limits per child.

Fixed medical allowance is taxable in full, unlike reimbursement-based medical benefits.

Conveyance allowance above ₹19,200 per annum is taxable under Section 10(14)(ii) of the Income Tax Act.

Entertainment allowance for government employees gets a deduction of one-fifth of salary or ₹5,000, whichever is lower, under Section 16(ii).

Non-taxable allowances

These are fully exempt from income tax. They include conveyance allowance up to ₹1,600 per month (₹19,200 annually), books and periodicals allowances, gadgets provided for work, gifts in kind, recreational and medical facilities, and allowances for UN employees. Sumptuary and compensatory allowances paid to Supreme Court and High Court judges are also fully exempt, as are payments to government employees posted abroad.