Test

An allowance is defined as a fixed amount of money given periodically in addition to the salary for the purpose of meeting some specific requirements connected with the service rendered by the employee or by way of compensation for some unusual conditions of employment. It is taxable on due/accrued basis whether it is paid in addition to the salary or in lieu thereon.

The basic golden rule is that all such allowances are taxable as these are paid because of direct relationship between an employer and employee. However, there are exceptions to this rule. Some of them are given below :-

Clause (14) of Section 10 provides for exemption of the following allowances: -

(a) Any special allowances or benefit granted to an employee to meet the expenses incurred in the performance of his duties.

(b) Any allowance granted to an assessee either to meet his personal expenses at the place of his posting or at the place he ordinarily resides or to compensate him for the increased cost of living.

However, the allowance referred to in (b) above should not be in the nature of a personal allowance granted to the assessee to remunerate or relating to his office or employment unless such allowance is related to his place of posting or residence.

Earlier the exempt allowances were being specified through notifications issued by the Central Government. With effect from 1.7.95, the details of allowances exempt is given in the Income Tax Rules.

The following allowances are exempt to the extent and subject to the conditions indicated in the Rules :-

a) Any allowance for meeting the cost of travel on tour or on transfer.

b) Any allowance, whether granted on tour or for the period of journey in connection with transfer (including any sum paid in connection with transfer, packing and transportation of personal effects on such transfer).

c) Any allowance granted to meet the expenditure incurred on conveyance in performance of duties of an office/employment of profit. Provided free conveyance is not provided by the employer.

d) Any allowance granted to meet the expenditure incurred on a helper where he is engaged for the performance of duties of any Office/employment of profit.

Any allowance granted for encouraging academic research in educational and research institutions.

Any allowance for Purchase or maintenance of uniform for wear during the performance of duties of an office/employment of profit.

Are the above allowances to be actually spent to avail of the exemption?

Yes, certainly. Any allowance (mentioned above) received but not actually spent will be taxable.

Are there any allowances which are only exempt when received at a particular place(s) ;pr area(s)? and do they have any upper ceilings : for exemption?

For the new amended Rules contain other allowances also .which are exempt (subject to ceilings) in particular area(s) only. These special allowances are :-

i) Any special Compensatory Allowance, in the nature of Composite Hill Compensatory allowance or High Altitude, Allowance or Uncongenial Climate Allowance or Snow Bound Area Allowance or Avalanche Allowance;

ii) Any special Compensatory Allowance given which is in the nature of border area allowance or remote area allowance or difficult area allowance or disturbed area allowance;

ii) Tribal Area Allowance;

iii) Allowance granted to an employee working in any transport system to meet his personal expenditure during his duty performed in the course of running of such transport from one place to another place, provided that such employee is not in receipt of daily allowance;

iv) Children Education Allowance;

v) Any allowance granted to an employee to meet the hostel expenditure of his child;

vi) Compensatory Field Area Allowance;

vii) Compensatory Modified Field Area Allowance;

viii) Any Special allowance, in the nature of counter insurgency allowance granted to the members of armed forces operating in areas from their permanent locations for a period of more than 30 days.

Note: It may be noted that the Dearness Allowance and City Compensatory Allowance granted to an employee are not covered by the Amended Rules. So, these allowances will clearly be part of income and will have to be taken into account in the computation of income for the purposes of deduction of tax at source. The reimbursement of tuition fee is also not exempt.