Income under the head of Salaries :

Allownaces :

• House Rent Allowance
• Entertainment allowance
• Specified Special Allowances [Sec.10(14)]
• Allowance which are exempt in case of certain persons

Allowances define as a monetary benefit given to the employee in addition to salary. Allowances are taxable under sec.15 of the Income Tax Act unless they are specifically exempt from tax. Allowances are of various types. These are:

House Rent Allowance

House rent allowance received by an employee is taxable under the head Salaries upto the extent it is not exempt u/s 10(13A) of the Income Tax Act. The exemption is denied where the employee lives in his own house or in a house for which he does not pay rent. Otherwise house rent allowance is exempt to the extent of minimum of the following three amounts. The minimum of the following three amounts shall be exempt from tax and the balance shall be taxable and thus included in the gross salary of the employee.

• Actual House Rent Allowance received by the employee in respect of the period during which the rented accommodation is occupied by the employee during the previous year.
• Excess of rent paid (for the accommodation) over 10% of the salary for the relevant period.
• 50% of the salary where the residential house is situated at Mumbai, Calcutta, Delhi or Chennai and 40% of the salary where the house is situated at any other place, for the relevant period.

Salary for the purpose of House rent allowance includes basic salary and dearness allowance if the terms of employment so provide. All other allowances and perquisites shall not be included for calculating the exemption limit. [However, as per Supreme Court decision, commission, if received at a fixed percentage of turnover, achieved by the employee would form part of the salary 117-ITR-1 (SC)]. This salary is to be determined only on due basis and emoluments for the period other than the previous year are not to be considered. Again emoluments of the period during which rental accomodation is not occupied in the previous year are left out of the computation.

Entertainment allowance

Generally the entertainment allowance is not exempt from tax but the employee is entitled to a deduction under sec.16(ii) of the Income Tax Act from his gross salary. The entire entertainment allowance received by an employee is first added to his gross salary and then a deduction from gross salary is given to the employee. For the purpose of deduction of entertainment allowance the employees have been divided into two categories:

1. Government employees are entitled for deduction to the extent of minimum of the following three amounts:
   • Actual entertainment allowance received during the previous year.
   • 20% of basic salary excluding any allowance, benefit or perquisite.
   • Rs.5,000/-.
2. Other employees are entitled for deduction only if they satisfy the basic conditions viz. the employee is in a continuous employment since a date prior to 1st of April, 1955 and he must be receiving entertainment allowance from that employer continuously since a date prior to 1st April, 1955 till the relevant previous year. However, the deduction shall be allowable to the extent of the minimum of the following four amounts:
   • Actual entertainment allowance received during the previous year.
   • 20% of basic salary.
   • Rs.7,500/-.
   • Amount of entertainment allowance received during the financial year 1954-55.

Certain allowances are specifically granted to meet expenses incurred wholly and necessarily in the performance of duties of office or to compensate the employee for increased cost of living and these are exempt from tax to the extent of actual amount received or the amounts spent for the specified purpose for which these were received. If the amount of allowance received is more than the amount spent for the specified purpose the balance is again taxable. Few of such allowances are Traveling allowance, Daily allowance, Conveyance allowance, Helper allowance, Academic allowance and Uniform allowance.

Some allowances granted to the employees are exempt subject to the limit specified.

• Children education allowance: Exempt upto actual amount received per child or Rs.50 p.m. per child upto a maximum of 2 children, whichever is less.
• Hostel expenditure allowance: Exempt upto actual amount received per child or Rs.150 p.m. per child upto a maximum of two children, whichever is less.
• Tribal area allowance: Exempt upto actual amount received or Rs.100 per month, whichever is less.
• Composite hill compensatory allowance or high altitude allowance etc.: Exemption varies from Rs.150 to Rs.1,200 per month depending on area .
• Border area, remote area allowance, disturbed area allowance, etc.: Exemption varies from Rs.100 p.m. to Rs.1,100 p.m depending on the area.
• Compensatory field area allowance: Exempt to the extent of Rs.975 p.m.
• Compensatory, modified field area allowance: exempt to the extent of Rs.375 p.m.
• Counter insurgency allowance: Exempt to the extent of Rs.975 p.m.

Allowances which are exempt in case of certain persons:

• Allowances paid to a citizen of India and who is a government employee for rendering services outside India.
• Allowances paid to High Court Judges are exempt from tax.
• Sumptuary Allowance given to High Court and Supreme Court Judges.
• Allowances received by an employee of UNO from his employer.