Salaried people in India often face the challenge of maintaining a balance between their expenses and income. Although many companies provide their employees with a decent salary, it may not always be sufficient to meet their needs. This is where special allowances come into play. In this article, we will discuss the various special allowances available to salaried people in India and how they can benefit from them.
Various Special Allowances
Here are the various special allowances which are offered to the employees in India.
House Rent Allowance
One of the most common special allowances provided to salaried people in India is the House Rent Allowance (HRA). This allowance is provided to employees who are living in rented accommodation. The HRA is calculated based on the employee’s basic salary and the city of residence. It can be claimed as a tax deduction under Section 10(13A) of the Income Tax Act. This allowance can be a significant relief to salaried people who have to pay a considerable amount of rent every month.
Transport Allowance
Transport Allowance is another common allowance provided to salaried people in India. This allowance is provided to employees to cover their transportation costs to and from work. The amount of transport allowance varies based on the employee’s basic salary and the city of residence. The transport allowance can be claimed as a tax deduction under Section 10(14) of the Income Tax Act. This allowance can be a significant benefit to salaried people who have to travel long distances to get to work.
Medical Allowance
Medical Allowance is an allowance provided to employees to cover their medical expenses. This allowance is generally provided to employees who do not have health insurance. The amount of medical allowance varies based on the employee’s basic salary and the company’s policies. The medical allowance can be claimed as a tax deduction under Section 17(2) of the Income Tax Act. This allowance can be a significant relief to salaried people who have to pay for medical expenses out of their pockets.
Leave Travel Allowance
Leave Travel Allowance (LTA) is an allowance provided to employees to cover their travel expenses when they are on vacation. This allowance is provided to employees twice in a block of four years. The amount of LTA varies based on the employee’s basic salary and the city of residence. The LTA can be claimed as a tax deduction under Section 10(5) of the Income Tax Act. This allowance can be a significant benefit to salaried people who want to go on a vacation but are unable to bear the travel expenses.
Food Allowance
Food Allowance is an allowance provided to employees to cover their food expenses. This allowance is generally provided to employees who work in shifts or have to work overtime. The amount of food allowance varies based on the employee’s basic salary and the company’s policies. The food allowance can be claimed as a tax deduction under Section 10(14) of the Income Tax Act. This allowance can be a significant relief to salaried people who have to spend a considerable amount of money on food every month.
Child Education Allowance
Child Education Allowance is an allowance provided to employees to cover their children’s education expenses. This allowance is generally provided to employees who have children studying in school. The amount of child education allowance varies based on the employee’s basic salary and the company’s policies. The child education allowance can be claimed as a tax deduction under Section 10(14) of the Income Tax Act. This allowance can be a significant benefit to salaried people who have to bear the burden of their children’s education expenses.
Outstation Allowance
Outstation Allowance is an additional allowance provided to salaried employees who travel for work purposes outside of their city of residence. This allowance is given to cover the additional expenses that the employee may incur due to their temporary work-related travel.
The amount of outstation allowance may vary based on the duration of the trip, the location of the travel, and the company’s policies. The purpose of this allowance is to compensate the employee for additional expenses such as travel, accommodation, food, and other miscellaneous expenses that may arise due to the temporary work-related travel.
Outstation allowance is generally provided to employees who travel frequently for work-related purposes, such as sales representatives, consultants, and project managers. The allowance can be a significant benefit for such employees who often have to spend long periods away from home.
Outstation allowance can be claimed as a tax deduction under Section 10(14) of the Income Tax Act, subject to certain conditions. The employee must provide proof of their travel expenses, such as travel tickets, hotel bills, and food bills, to claim this allowance as a tax deduction.
Companies may have different policies regarding the outstation allowance. Some companies may provide a fixed allowance, while others may provide an allowance based on actual expenses incurred by the employee. It is essential for employees to understand their company’s policies regarding the outstation allowance and to keep proper records of their expenses to claim the allowance.
Hostel Allowance
Hostel Allowance is an additional allowance provided to salaried employees who live in a hostel or dormitory. This allowance is given to cover the additional expenses that the employee may incur due to their stay in a hostel.
The amount of hostel allowance may vary based on the location of the hostel or dormitory, the employee’s basic salary, and the company’s policies. The purpose of this allowance is to compensate the employee for additional expenses such as rent, food, and other miscellaneous expenses that may arise due to their stay in a hostel.
Hostel allowance is generally provided to employees who are required to work in a location away from their city of residence or who are pursuing higher education in a different city. The allowance can be a significant benefit for such employees who often have to bear high expenses for their stay in a hostel.
Hostel allowance can be claimed as a tax deduction under Section 10(14) of the Income Tax Act, subject to certain conditions. The employee must provide proof of their hostel expenses, such as rent receipts and food bills, to claim this allowance as a tax deduction.
Companies may have different policies regarding the hostel allowance. Some companies may provide a fixed allowance, while others may provide an allowance based on actual expenses incurred by the employee. It is essential for employees to understand their company’s policies regarding the hostel allowance and to keep proper records of their expenses to claim the allowance.
Here’s a table including all the allowances mentioned above, along with a column for their clause no. and tax applicability:
| Allowance | Clause No. | Tax Applicability |
|---|---|---|
| Dearness Allowance | Section 10(14)(i) | Fully taxable |
| House Rent Allowance | Section 10(13A) | Exempt up to specified limit |
| Transport Allowance | Section 10(14)(ii) | Exempt up to specified limit |
| Medical Allowance | No specific clause | Fully taxable |
| Overtime Allowance | No specific clause | Fully taxable |
| Outstation Allowance | Section 10(14) | Exempt up to specified limit |
| Hostel Allowance | Section 10(14) | Exempt up to specified limit |
Note: The tax applicability mentioned in the table is as per the Income Tax Act in India, and is subject to change based on amendments to the Act. It is important to consult a tax expert for accurate information on tax liabilities.
Special Allowance Income tax clause
The tax treatment of special allowances in India is governed by various clauses under the Income Tax Act, 1961. Some of the key clauses related to special allowances are as follows:
- Section 10(14) of the Income Tax Act provides for the exemption of certain allowances, such as House Rent Allowance (HRA), Transport Allowance, and Children Education Allowance, up to a specified limit. The exemption limits may vary based on the city of residence, salary level, and other factors.
- Section 17(2) of the Income Tax Act defines the term ‘salary’ and includes various components, such as special allowances, bonuses, and perquisites. The value of these components is added to the employee’s basic salary and taxed as per the applicable tax slab.
- Section 15 of the Income Tax Act provides for the computation of taxable income and includes the value of special allowances in the employee’s gross salary. The taxable income is then calculated after deducting the allowable deductions and exemptions.
- Section 16 of the Income Tax Act provides for the deduction of certain allowances, such as entertainment allowance and professional tax, from the employee’s gross salary to arrive at the net taxable income.
- Section 192 of the Income Tax Act provides for the deduction of tax at source (TDS) from the employee’s salary, including special allowances, before making the payment to the employee. The TDS rates may vary based on the employee’s salary level and the type of allowance.
It is important for employees to understand these clauses and their implications while filing income tax returns and claiming exemptions on special allowances. Employers must also comply with these clauses while computing the employee’s salary and deducting TDS. Any non-compliance may attract penalties and scrutiny from the authorities.
Tax Calculation on Special Allowances
The tax calculation on special allowances for salaried employees in India varies based on the type of allowance and its tax applicability.
Dearness Allowance, Medical Allowance, and Overtime Allowance are fully taxable, which means that they are subject to income tax as per the employee’s applicable tax slab.
House Rent Allowance (HRA) is exempt up to a specified limit. The exemption on HRA is calculated based on the lowest of the following three amounts:
- Actual HRA received from the employer.
- Rent paid by the employee minus 10% of basic salary.
- 50% or 40% of basic salary, depending on the employee’s city of residence.
The remaining amount of HRA, if any, is added to the employee’s taxable income and is subject to income tax as per the employee’s applicable tax slab.
Transport Allowance is exempt up to a specified limit. The exemption on Transport Allowance is capped at Rs. 1,600 per month, or Rs. 19,200 per annum. Any amount received by the employee above this limit is added to the employee’s taxable income and is subject to income tax as per the employee’s applicable tax slab.
Outstation Allowance and Hostel Allowance are also exempt up to a specified limit. The exemption on these allowances is calculated based on the actual amount incurred by the employee for the specific purpose, such as travel or stay in a hostel. Any amount received by the employee above this limit is added to the employee’s taxable income and is subject to income tax as per the employee’s applicable tax slab.
It is important for salaried employees to keep proper records of their special allowances and the expenses incurred for the specific purpose, such as travel or stay in a hostel, to claim the exemption on these allowances. Proper documentation can also help in case of any tax scrutiny by the authorities.
FAQs on Special Allowances
Basic salary is the fixed amount of money that an employee receives as per their employment contract, while special allowances are additional payments made to employees to cover certain expenses, such as housing, transportation, or medical expenses.
The tax treatment of special allowances varies based on the type of allowance and its tax applicability. Some allowances, such as House Rent Allowance (HRA), Transport Allowance, Outstation Allowance, and Hostel Allowance, may be exempt up to a specified limit, while others, such as Dearness Allowance, Medical Allowance, and Overtime Allowance, are fully taxable.
Some special allowances, such as Outstation Allowance and Hostel Allowance, can be claimed as deductions while filing income tax returns, subject to certain conditions. The employee must provide proof of their expenses incurred for the specific purpose to claim the exemption on these allowances.
As per the Income Tax Act in India, special allowances must be paid through a proper banking channel, such as cheque or electronic transfer, and must be reflected in the employee’s salary slip. Any cash payments made for special allowances may attract penalties and scrutiny from the authorities.
The negotiation of special allowances may depend on the company’s policies and the employee’s job profile. Some companies may have fixed policies regarding special allowances, while others may provide flexibility based on the employee’s performance and position. It is important for employees to understand their company’s policies regarding special allowances and negotiate accordingly.
Employers may have the right to reduce or withdraw special allowances based on the employee’s performance, job profile, or company policies. However, any such decision must be communicated to the employee in writing and must adhere to the terms of the employment contract.
Conclusion
Special allowances play a crucial role in the compensation structure for salaried employees in India. These allowances are provided by employers to cover specific expenses, such as housing, transportation, or medical expenses, and can make a significant impact on an employee’s take-home pay.
The tax treatment of special allowances varies based on the type of allowance and its tax applicability, and it is important for employees to understand the tax implications of these allowances and keep proper records of their expenses to claim the exemption on these allowances.
While negotiating for special allowances with their employers, employees must understand the company’s policies regarding these allowances and negotiate accordingly. Employers may have the right to reduce or withdraw special allowances based on various factors, but any such decision must be communicated to the employee in writing and must adhere to the terms of the employment contract.
Overall, special allowances are an important aspect of the compensation structure for salaried employees, and employees must understand their rights and responsibilities regarding these allowances to ensure fair and just compensation.