This blog discusses the different types of allowances that can be included in a salary slip, and how they may be taxed. It also provides tips for effective tax planning by understanding the various components of your salary slip. So, if you're looking to wrap your head around salary allowances like LTA, HRA, and others, dive in!
What is a Salary Allowance?
Employers provide salary allowances to give their employees financial benefits. These allowances can be for things like rent, travel, medical expenses, and overtime work. Allowances are based on an employee's basic pay and may be regulated by the government. They are taxed under the 'Income from Salaries' header of the Income Tax Act, 1961, but not all allowances are taxed. So, managing your allowances smartly can help you reduce your tax liabilities.
Types of Allowances in a Salary Slip
Allowances listed on a salary slip can be classed under three broad categories:
- Taxable Allowances
- Partly Taxable Allowances
- Tax Exempt Allowances
Taxable Allowances
- Entertainment Allowance: Fully-taxable for private and public-sector employees. Tax relief can be claimed under Section 16(ii) and is equivalent to the lowest value of the following: one-fifth of the employee's basic salary, 5,000, or actual entertainment allowance.
- Dearness Allowance: fully taxable percentage of base salary
- Overtime Allowance: fully-taxable pay for overtime work
- City Compensatory Allowance: for high costs of living in a big city
- Interim Allowance: fully taxable substitute for final allowance
- Project Allowance: for project-related expenses
- Meals Allowance: taxable allowance for meals/tiffin expenses
- Cash Allowance: for weddings, funerals, holidays, etc.
- Non-Practising Allowance: fully taxable special allowance for doctors
- Warden Allowance: special allowance for educational institution keepers
- Servant Allowance: compensation for domestic help's salary
Partially-Taxable Allowance
House Rent Allowance
House Rent Allowance (HRA) helps employees cover their rent expenses. It is fully taxable for those not living in rented houses.
According to Section 10(13A) of the Income Tax Act, HRA is partially exempt from tax. The exemption is equal to the lowest of:
- Actual HRA received
- Rent paid minus 10% of basic salary
- 40% of salary (basic + DA) for non-metro cities
- 50% of salary (basic + DA) for metro cities
- Medical Allowance: Tax-free up to ₹15,000 per year
- Special Allowance: Covers personal expenses
- Conveyance Allowance: Tax-free up to ₹1,600 per month
- Children Education Allowance: Tax exemption up to ₹100 per child per month (for two children)
- Leave Travel Allowance (LTA): Covers travel expenses when on vacation, but not accommodation or sightseeing expenses. Exemptions subject to limits and conditions.
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Non-Taxable Allowance
- Allowances paid to government servants: Allowances paid to government employees for rendering services abroad are tax-free.
- Sumptuary Allowance Paid to Judges: Sumptuary allowances paid to Supreme and High Court judges are tax-free.
- Compensatory Allowance Paid to Judges: Compensatory allowances paid to Supreme and High Court judges are exempt from taxes under Article 222 (2) of the Indian constitution.
- Allowances Paid to UNO Employees: UNO employees in India receive allowances covered by the United Nations (Privilege and Immunities Act).
Other Tax-Free Allowances
- Academic Allowances
- Daily Allowances
- Helper Allowances
- Uniform Allowances
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Conclusion
In conclusion, understanding the different types of allowances in your salary slip is crucial for effective tax planning. By managing your allowances smartly, you can reduce your tax liabilities and save money. Remember to check if your allowances are taxable, partly taxable, or tax exempt, and take advantage of any exemptions or deductions available to you.
Frequently Asked Questions
1. What do ‘other allowances’ include?
'Other allowances' include medical and conveyance allowances, among others, not mentioned in the salary slip.
2. What are examples of allowances?
Examples of allowances include:
- Entertainment Allowance
- Dearness Allowance
- Overtime Allowance
- House Rent Allowance
- Medical Allowance
- Special Allowance
- Leave Travel Allowance (LTA)
3. Which allowances are exempted from income tax?
Below are some of the allowances expemted from income tax:
- House Rent Allowance
- Standard Deduction
- Leave Travel Allowance (LTA)
- Mobile reimbursement
- Books and Periodicals
- Food coupons
- Relocation allowance
- Children Allowances
4. How much amount is exempted in allowances?
As per Section 10 of the Income Tax Act, individuals below 60 years of age have a maximum exemption limit of ₹2.50 lakhs, while individuals between 60 and 80 years have a limit of ₹3 lakhs. For individuals aged 80 years and above, the limit is ₹5 lakhs. It is important to note that the higher limits of ₹3 lakhs and ₹5 lakhs are only applicable to residents of India.
