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Allowances – Income Tax

Allowances :

Different types of allowances are given to employees by their employers. Generally allowances are given to employees to meet some particular requirements like house rent, expenses on uniform, conveyance etc. Under the Income-tax Act, 1961, allowance is taxable on due or receipt basis, whichever is earlier. Various types of allowances normally in vogue are discussed below:

                                                                                                                           Allowances
          Fully Taxable                        Partly Taxable          Fully Exempt
(i) Entertainment Allowance

(ii) Dearness Allowance

(iii) Overtime Allowance

(iv) Fixed Medical Allowance

(v) City Compensatory Allowance

(vi) Interim Allowance (to meet increased cost of living in cities)

(vii) Servant Allowance

(viii) Project Allowance

(ix) Tiffin/Lunch/Dinner Allowance

(x) Any other cash allowance

(xi) Warden Allowance

(xii) Non-practicing Allowance

(i) House Rent Allowance [u/s 10(13A)

(ii) Special Allowances [u/s 10(14)]

(i) Allowance granted to Government employees outside India.

(ii) Sumptuary allowance granted to High Court or Supreme Court Judges

(iii) Allowance paid by the United Nations Organization.

(iv) Compensatory Allowance received by a judge

Allowances which are fully taxable
(1) City compensatory allowance: City Compensatory Allowance is normally intended to compensate the employees for the higher cost of living in cities. It is taxable irrespective of the fact whether it is given as compensation for performing his duties in a particular place or under special circumstances.

(2) Entertainment allowance: This allowance is given to employees to meet the expenses towards hospitality in receiving customers etc. The Act gives a deduction towards entertainment allowance only to a Government employee. The details of deduction permissible are discussed later on in this Unit.

Allowances which are partially taxable:

(1) House rent allowance [Section 10(13A)] : Refer to Chapter 3 for detailed discussion.

(2) Special allowances [Section 10(14)] : Refer to Chapter 3 for details.

Allowances which are fully exempt:

(1) Allowance to High Court Judges: Any allowance paid to a Judge of a High Court under section 22A(2) of the High Court Judges (Conditions of Service) Act, 1954 is not taxable.

(2) Allowance received from United Nations Organisation (UNO): Allowance paid by the UNO to its employees is not taxable by virtue of section 2 of the United Nations (Privileges and Immunities) Act, 1974.

(3) Compensatory allowance under Article 222(2) of the Constitution: Compensatory allowance received by judge under Article 222(2) of the Constitution is not taxable since it is neither salary not perquisite—Bishamber Dayal v. CIT [1976] 103 ITR 813 (MP).

(4) Sumptuary allowance: Sumptuary allowance given to High Court Judges under section 22C of the High Court Judges (Conditions of Service) Act, 1954 and Supreme Court Judges under section 23B of the Supreme Court Judges (Conditions of Service) Act, 1958 is not chargeable to tax.

Lavish Dey

Lavish Dey

"I would like to electrocute everyone who uses the word 'fair' in connection with income tax policies."
- William F. Buckley, Jr.
Lavish Dey

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