Taxability of Allowances
Upload Date
14/07/2025
Taxability of Allowances
Allowances are additional components of salary that are regularly given to the employees to meet the expenditure for particular purposes. Allowances are generally fixed irrespective of actual expenditure and are taxable. Under the Act, it is taxable under section 15 on a "due" or "accrual" basis, irrespective of whether it is paid in addition to or in lieu of salary. However, some exemptions are allowed by the Income-tax Act.
Types of Allowances
In accordance with the term of employment or condition of the workplace or statutory requirement, every employer may provide various allowances to the employees. The purpose of these allowances is to compensate the employee for working in an uncongenial or challenging workplace or to compensate the employees for the high cost of living.
An allowance is assumed to be taxable under the head 'Salary' unless it is specifically exempted from tax, fully or partly, under the Act. The treatment of popular allowances shall be in accordance with the following provision.
Fully Taxable Allowances
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| Dearness Allowance | Dearness Allowance is provided to an employee to compensate for the effect of rising prices and inflation. |
| Overtime Allowance | Allowance given to employees for working overtime. |
| City Compensatory Allowance | City Compensatory Allowance is paid by employers to their employees to compensate them for the high cost of living in metro cities. |
| Transport Allowance to employee other than blind/deaf and dumb/orthopedically handicapped employee | 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 is fully taxable. However, in the case of blind/deaf and dumb/orthopedically handicapped employees, an exemption of up to Rs. 3,200 per month is provided. |
| Medical Allowance, Tiffin Allowance, Servant Allowance, etc. are also taxable under Section 15. |
Partially Taxable Allowances
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| House Rent Allowance is paid by the employers to the employees to meet the cost of rented house taken by them. [Section 10(13A)] (See Note) |
Minimum of the following three amounts:
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| Transport Allowance granted to an employee working in any transport system to meet his personal expenditure during the performance of his duties for going from one place to another, provided he does not receive the daily allowance | Lower of 70% of such transport allowance or Rs. 10,000 per month. |
| Children Education Allowance – Granted to meet the tuition fees of a maximum of two children. | Up to Rs. 100 per month per child for a maximum of 2 children |
| Hostel Allowance – Granted to meet the hostel expenditure of a maximum of two children | Up to Rs. 300 per month per child for a maximum of 2 children |
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Office Duty Allowances
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These allowances are exempt to the extent of a minimum of actual allowance received or actual amount spent for the purpose of duties of employment. |
| Special Compensatory Allowance (Hilly Areas) | Varies from Rs. 300 per month to Rs. 7,000 per month. |
| Border Area / Remote Locality / Disturbed Area / Difficult Area Allowance | Varies from Rs. 200 per month to Rs. 1,300 per month. |
| Tribal Area / Scheduled Area / Agency Area Allowance | Up to Rs. 200 per month |
| Compensatory Field Area Allowance | Up to Rs. 2,600 per month |
| Compensatory Modified Field Area Allowance | Up to Rs. 1,000 per month |
| Counter Insurgency Allowance | Up to Rs. 3,900 per month |
| Underground Allowance | Up to Rs. 800 per month |
| High Altitude Allowance |
a) Up to Rs. 1,060 per month (9,000–15,000 feet) b) Up to Rs. 1,600 per month (above 15,000 feet) |
| Special Compensatory Highly Active Field Area Allowance | Up to Rs. 4,200 per month |
| Island Duty Allowance (Andaman & Nicobar / Lakshadweep) | Up to Rs. 3,250 per month |
Note: House Rent Allowance
The exemption for House Rent Allowance (HRA) shall be allowed only if residential accommodation occupied by the employee is not owned by him and he actually pays rent in respect of such accommodation.
'Salary' for this purpose shall be the aggregate of basic salary, dearness allowance (if it forms part of salary for retirement benefits) and commission.
The exemption is allowed only for the period during which the rented house is occupied by the employee. If rental expenditure is less than 10% of salary, no exemption shall be allowed.