Tax-Free Allowances

An allowance is a set amount paid to an employee regularly. It is usually paid for meeting a specific requirement related to the employee’s services or as compensation for unusual circumstances. Section 10(14) of the Income Tax Act exempts certain allowances known as special allowances from taxation. In this article, we will look at such tax-free allowances as they are paid to employees, as well as the tax implications of the allowances.

Variable Allowances

Variable Allowances are those for which there is no fixed qualifying amount prescribed by the Income Tax Act. As a result, any amount can be claimed as exempt as long as the conditions outlined in the Act are met.

Allowance For Academic/Research

Academic or research allowances are endowed to promote academic and research-related training, education, or professional duties.

Allowance For Conveyance

Employees are given a conveyance allowance to compensate them for the costs incurred while travelling for official duties. However, because it is not considered an official duty, the employer is not compensated for the commute from home to work. The allowance for travel from home to work falls under another category of allowance known as ‘Transport allowance,’ which is not tax-free.

Allowance For Assisting

In unusual circumstances, the employer may permit the employee to hire a helper to assist him in carrying out his official duties. A helper allowance is granted in such cases.

Allowance For Uniform 

A uniform allowance is a stipend provided for the purchase or maintenance of a uniform to be worn while on duty in the office. This allowance could only be used for the specific uniform specified by the organisation. In general, it is not necessary to embellish details of such incurred expenses unless the expense is not commensurate with the salary. In most cases, keeping proof of documents is not required because a simple declaration suffices.

Tax-Free Allowances

Allowances For Fixed Costs

The exemption is only available for this category of allowances up to the monetary ceiling limit specified in the Act. The following is the limit for each of the specified allowances:

Allowance TypeLimit of Allowance Provided under the Act
Compensatory AllowanceIndividuals working in high-altitude or hilly areas are eligible for this type of allowance. This is also known as climate allowance:
HP, UP, J&K, and the North East mountainous areas – Rs.800
Siachen is in J&K and costs Rs.7000 per month.
Any location at or above 1000 meters – Rs.300
Allowance for scheduled, tribal, or agency areasRs. 200 in Karnataka, West Bengal, MP, Assam, Orissa, Tamil Nadu, Bihar, UP, and Tripura.
Allowance for duty in a border or remote area, or any difficult or disturbed areasExempts are allowances varying from Rs.200 to Rs.1300 per month.
Expenses for children’s educationRs.100 per month for each child, with a maximum of two children.
Allowance for personal expenses incurred while working in a transportation system.70% of allowance up to Rs.10,000 per month
Field area allowanceNagaland, J&K, HP, UP, AP, Sikkim, and Manipur – Rs.2600 per month
Allowance for the employee’s children’s hostel costsFor a limited number of children, Rs.300 per month for each child.
Allowance given to armed forces during counter-insurgency operations.Rs.3900 per month
Allowance for transportation to work for physically challenged employees who are on dutyRs.1600 per month
Allowance for transportation between work and homeRs.1600 pm
Duty in a modified field area is compensated by a compensatory allowance.Certain areas in West Bengal, the North Eastern states, Rajasthan, the Union Territories of J&K and Ladakh, Uttar Pradesh, and Himachal Pradesh – Rs.1000 per month
Armed forces in Andaman and Nicobar receive Island Duty Allowance.Rs.3250 per month
Compensation for working in underground minesRs.800 per month
Allowance for compensatory highly active field areaRs.4200 pm
Allowance for armed forces stationed at high altitudes9000-15,000ft – Rs.1060 per month & Above 15,000 feet – Rs.1600 per month

Treatment Of Entertainment Allowance

The Entertainment Allowance received by any employee is added to the gross salary as per Section 16(ii). For employees working in the private sector, the entertainment allowance is fully taxable. This deduction is only available to government employees who are not eligible for any exemption but are subject to a deduction from their gross salary up to a maximum of three limits, which are as follows:

  • Actual entertainment allowance received in the previous fiscal year.
  • 20% of the starting salary
  • The deduction will be Rs.5000.

Even if the Government employee spends the entire entertainment allowance or an amount greater than the entertainment allowance received on official entertainment. The deduction is limited to the amount specified in the preceding provisions.

Fully-Taxable Allowances

Because the general rule of allowances is not specifically covered by fully and partially exempted allowances, some of the following tax-free allowances are fully taxable.

Tax-Free Allowances

  • Allowance for Dearness
  • Allowance for City Compensatory Services
  • Allowance for Tiffin/Lunch
  • Allowance for Overtime
  • Medical Allowance Fixed
  • Allowance for Families
  • Allowance for Non-Practicing
  • Allowance for Wardens
  • Allowance for Servant

Special Allowances

Certain individuals are also entitled to special tax-free allowances under Section 10(14):

  • Allowances for High Court Judges
  • An allowance is given to a UNO employee.
  • Supreme Court and High Court Judges Receive Sumptuary Allowances
  • Allowances are given to government employees who are Indian citizens and work abroad.