Quick Summary
Tax Allowances are payments made by employers to employees for specific purposes. While allowances are part of salary, certain allowances enjoy partial or full tax exemption under specific conditions.
Tax Allowances are specific amounts paid by employers to employees for particular purposes like housing, travel, medical expenses, etc. While allowances form part of the gross salary, many enjoy tax exemptions up to specified limits.
Types of Tax Allowances
1. Fully Exempt Allowances (for specific employees)
- Allowances for UNO employees: Fully exempt
- Allowances to judges of Supreme Court and High Courts: Fully exempt
- Sumptuary allowance to High Court/Supreme Court judges: Fully exempt
2. Partially Exempt Allowances
| Allowance | Exemption |
|---|---|
| House Rent Allowance (HRA) | Least of: Actual HRA, 50%/40% of salary, Rent - 10% salary |
| Leave Travel Concession (LTC/LTA) | Actual travel cost within India (twice in 4 years) |
| Conveyance Allowance | Up to ₹1,600 per month (₹19,200 annually) |
| Medical Allowance | Up to ₹15,000 per year (with bills) |
| Children Education Allowance | ₹100 per month per child (max 2) |
| Hostel Expenditure Allowance | ₹300 per month per child (max 2) |
| Transport Allowance (Disabled) | ₹3,200 per month |
| Special Compensatory Allowance (Hill areas) | ₹300-₹7,000 per month depending on location |
3. Fully Taxable Allowances
- Dearness Allowance (DA)
- City Compensatory Allowance (CCA)
- Entertainment Allowance (except for government employees)
- Medical allowance (without bills)
- Overtime allowance
- Meal allowance (except subsidized meals)
- Interim allowance
Allowance vs Perquisite
| Aspect | Allowance | Perquisite |
|---|---|---|
| Nature | Cash payment for specific purpose | Non-cash benefits/facilities |
| Example | HRA, Conveyance | Car, Accommodation, ESOPs |
Key Points
- Part of salary with specific purposes
- HRA, LTA enjoy partial exemption
- Conveyance allowance up to ₹1,600/month exempt
- DA and CCA are fully taxable
- Must be part of salary structure
- Different from perquisites which are non-cash benefits