Companies provide multiple types of benefits to its employees. These benefits are to help the employees with their requirements as house, entertainment, travel and so on. These benefits are termed as allowances and Income tax Act 1961 provides relief to taxpayers if they are part of their salaries. These Personal income tax allowances in India are a key part of Cost to Company otherwise known as CTC. The employer can claim allowances given to employees as an expenditure and as such, these are taxable in the hands of employees. These allowances are not fully taxable and the Income Tax Act, 1961, has given relief to salaried individuals. People can claim an exemption on these allowances to the extent allowed. In this article, we will discuss important income tax allowances in India given to employees and their taxability.
PERSONAL INCOME TAX ALLOWANCES IN INDIA
House Rent Allowance
House Rent Allowance (HRA) is one of the most common personal income tax allowances in India. It is given to employees to meet the cost of renting accommodation. HRA is exempted in the hands of the employee up to the limit specified. The HRA exempted is lower of the following:
- House rent allowance received during the year
- 40% (50%) * of the salary received
- Rent paid during the year reduced by 10% of the salary
Salary to calculate HRA = Basic Salary + Dearness Allowance.
*50% is allowed only for Delhi, Mumbai, Kolkata, Chennai.
It is important to note, the whole HRA will be taxable if the person does not pay any rent or live in his own house.
Entertainment Allowance
The entertainment allowance is an allowance paid to employees for bearing expenses of client hospitality. This is provided only to Central Government employees as part of personal income tax allowances in India. Entertainment allowance is not an allowable deduction to the employees of the private entity. The deduction is lower of the following:
- Actual allowance received; or
- 1/5th of salary (excluding allowances, any perquisites, or benefits); or
- 5,000
Transport Allowance/Commutation Allowance
This allowance is given by the employer to an employee to commute to work from home and vice-versa. This exemption is available to the only handicapped or blind, deaf, or dumb person. The amount allowed as a deduction is Rs. 3200 per month.
Children Education Allowance
This allowance is part of personal income tax allowances in India and given employees for bearing the education expenses of their children. This allowance is exempted up to Rs. 100 per month per child. The maximum benefit a person can take is for 2 children only.
Children Hostel Expenditure Allowance
The employer pays their employees allowances towards bearing hostel expenditure of their children. The allowances are exempted up to Rs. 300 per month per children. Rest of the amount received is taxable in the hands of the employee.
Underground Allowance
Underground allowance is provided by the employer to employees, working in underground conditions or unnatural conditions. This allowance is also applicable in case if an employee is working in mines. Amount exempted under this exemption is up to Rs. 800 per month.
Tribal Area Allowance
It is one of the few personal income tax allowances in India provided by employers to employees giving services in tribal areas. This exemption is valid in the following states:
- Madhya Pradesh
- Tamil Nadu
- Uttar Pradesh
- Karnataka
- Tripura
- Assam
- West Bengal
- Bihar
- Orissa
The amount exempt from tax in this case is Rs. 200 per month. Any excess amount received is directly taxable in the hands of the employee.
Personal Income Tax Allowances in India to Employees working for a Transport entity
Income tax act allows an exemption to the employees of transport undertaking. This exemption is concerning the allowance received from the employer. This deduction is applicable only if the employer is a transport undertaking. In the transport business, the employer pays the employee an amount of covering their expenses. This allowance is given concerning expenses incurred during the business. Amount exempted is lower of the following
- 70% of the Actual amount received; or
- 10,000 per month
Travelling or Tour Allowance
Travelling or tour allowances are such personal income tax allowances in India which are paid by the employer to an employee for incurring travelling and other expenses. This allowance is given when an employee is on a tour or travel due to business duty. Travelling and tour allowances differ from organization to organization. They also depend on the designation of the employee.
Travelling and Tour allowances is a taxable income tax allowances in India. It is exempted to the extent the expenses are incurred.
Conveyance Allowance
Conveyance allowance is again one of the widely used personal income tax allowances in India. It is different from the transport allowance as well as travelling allowance. This allowance is given to employees to bear the expenses incurred while performing official duties. For example, a technician may need to go to various places to discharge his duties. Therefore, the amount granted by the employer to an employee to spend on travelling for business purpose is known as Conveyance Allowances.
Conveyance allowance is a taxable income tax allowance in India. It is exempted to the extent of expenses incurred fully in the hands of the receiver.
Uniform Allowance
The employer gives a uniform allowance to their employees, for the uniform required during the business. This allowance is exempted up to the amount spent.
Daily Allowance
Employers pay their employees a sum of money to meet the expenditure incurred for performing duties. The duties performed are not at a normal place of business. These allowances are given for bearing ordinary expenses. The daily allowance is a taxable income tax allowances in India, it is exempted up to the amount such expenses are incurred.
Helper Allowance
This allowance paid by the employer to an employee for incurring expenditure for hiring any helper. This allowance is exempted income tax allowance in India. It is exempted up to the extent such expenses are paid. It is important to remember; such allowance is exempt for expenses incurred towards the official purpose.
Research Allowance/ Academy Allowance
Sometimes, employers pay allowances to employees to encourage them to research in their field of work. Similarly, these allowances are payable to academicians, for pursuing academicals research in their field. This is one of the few personal income tax allowances in India attributable to any specific profile. Research allowance or Academy Allowance is a taxable income tax allowances in India. It is fully exempt to the extent of expenditure incurred.
FREQUENTLY ASKED QUESTIONS(FAQs) – Personal income tax allowances in India
1. Is house rent allowance part of permissible personal income tax allowances in India?
Yes. House rent allowance is allowed as an exemption in the hands of the employee. It is exempted up to the specified limit.
2. How much amount is exempted for allowance received for working in mines?
Working in mines is covered under the Underground allowance. It is exempted up to Rs. 800 per month.
3. What is the limit of exemption on conveyance allowance a person can avail during the year?
Conveyance allowance is exempted up to the amount such expenditure is incurred. However, you must keep a record of such expenditure incurred.
4. How can one claim the transport allowance?
Transport allowance has been replaced by the standard deduction of Rs. 50,000. Now, transport allowance exemption is available only to the handicapped, blind, deaf, or dumb person.
5. What is the exemption limit of daily allowance a person can avail of?
You can avail any amount spent towards such expenditure, eligible to be claimed as part of the daily allowance. Some employers also require employees to furnish record of any such expenditure incurred.
6. What are the common personal income tax allowances in India?
House Rent Allowance, Entertainment allowance and Conveyance Allowance are some of the common personal income tax allowances in India
7. Can we claim allowances if we file income tax return after due date?
Yes, even late filing of return doesn’t impact your claim on allowances
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