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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.
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